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Posted: July 6, 2018

LIBOR Got a Little Bit of Class

In our June 6, 2018, post, we gave an overview of the general factual allegations made in In Re: Libor-Based Financial Instruments Antitrust Litigation, 11-MD-02262 (In re Libor), the multi-district litigation in the Southern District of New York where many civil cases relating to manipulation of LIBOR or the London Interbank Offered Rate for the U.S. dollar have been transferred. In this post, we discuss class certification of the various plaintiff-groups in In re Libor.

On February 28, 2018, in a Memorandum and Order available here, U.S. District Judge Naomi Reice Buchwald ruled on motions for class certification for all three plaintiff groups. This post only highlights certain rulings from that nearly 400 page decision. Much of the decision, for example, rules on Daubert motions challenging whether expert opinions offered in support of class certification are reliable such that they can be considered by the Court. That discussion is not covered here.

Class Certification

The main issues surrounding the various proposed classes’ certifications were whether each had Article III standing under the U.S. Constitution, had satisfied the prerequisites for class certification under Fed. R. Civ. P. 23, and whether the class definitions were objective such that identification of particular members would be feasible (the ascertainability requirement).

Fed. R. Civ. P. 23(a) only allows a member of a class to sue on behalf of the other members of a class if “(1) the class is so numerous that joinder of all members is impracticable [numerosity]; (2) there are questions of law or fact common to the class [commonality]; (3) the claims . . . of the representative parties are typical of the claims . . . of the class [typicality]; and (4) the representative parties will fairly and adequately protect the interests of the class [adequacy of representation].” Fed. R. Civ. P. 23(b) additionally requires that one of three categories be met. All three proposed classes sought certification under 23(b)(3), which requires that the Court find that “the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”

Exchange Based Plaintiffs

The exchange-based plaintiffs sought certification of a class defined as:

All persons, corporations and other legal entities (other than Defendants, their employees, affiliates, parents, subsidiaries, and co-conspirators) (“Eligible Persons”) that transacted in Eurodollar futures and options on Eurodollar futures on the Chicago Mercantile Exchange between January 1, 2005 and May 17, 2010 (the “Class Period”) and that were harmed or satisfy one or more of “A,” “B,” or “C” below.

SUBPART A. Eligible Persons that sold a Eurodollar futures contract, or bought a put option or sold a call option on Eurodollar futures before August 7, 2007 and purchased all or part of this short position back at the final expiration formula price of a Eurodollar futures contract expiring after August 7, 2007 and before May 17, 2010.

SUBPART B. Eligible Persons that (1) purchased Eurodollar futures contract(s) or call options on Eurodollar futures on the following dates: April 7, 2006, August 17, 2006, October 26, 2006, and December 22, 2006; or (2) sold Eurodollar futures contracts or purchased put options on Eurodollar futures on the following dates: September 29, 2005, November 28, 2005, June 30, 2006, September 1, 2006, November 29, 2006, February 28, 2007, March 1, 2007, July 30, 2007, and August 6, 2007; or (3) purchased or sold Eurodollar futures contracts (or options) and that were harmed between January 1, 2005 and August 6, 2007 inclusive.

SUBPART C. Eligible Persons that initiated a Eurodollar futures contract or options position on or after April 15, 2009 and on or before May 17, 2010 (“Period 3”), and who satisfy “1” or “2” below.

1. Eligible Persons included in “C” are those that purchased or sold a Eurodollar futures or options contract to initiate a position during Period 3 that were harmed.
2. Eligible Persons included in “C” are also those that purchased a Eurodollar futures contract (including Eurodollar futures contracts the expiration for which was less than 365 calendar days after the date of such purchase) to initiate a long position during Period 3, and continued to hold all or part of such long position until liquidating the position after Period 3.

The Court analyzed class certification for the Exchange-Based plaintiffs by treating them as two separate subclasses: one based on those seeking claims under a trader-based manipulation theory (the “Trader-Based Subclass”) and those seeking claims under a persistent suppression theory (the “Persistent Suppression Subclass”).

The Trader-Based Subclass consists of Eurodollars futures traders who held certain Eurodollar future positions on dates specified in subparts B.1 and B.2 of the class definition and traders who “were harmed” as a result of trader-based manipulation during the Class Period (January 1, 2005 to May 17, 2010). It was found to have Article III standing, and to have met the numerosity and commonality requirements of Rule 23(a) and the ascertainability requirement. However, the Court found that the Trader-Based Subclass failed to meet the typicality and adequacy of representation requirements of Rule 23(a) and the predominance and superiority requirements of Rule 23(b)(3). Trader-based claims were found to be too “day-to-day” and “episodic” in nature to be considered to have all arisen from the “same events and conduct” and thus could not meet the typicality requirement under Rule 23(a). The class members were also found to have heightened conflicts between them such that the adequacy of representation requirement could not be met. Specifically, since members had different net trading positions on Eurodollar futures contracts on different days, members have differing incentives in establishing the existence of and magnitude of manipulation on different days.

The Court also found that there were too many individual questions concerning one of the defendants’ intent to manipulate Eurodollar futures prices, the extent of LIBOR manipulation, the impact of manipulation of Eurodollar futures, and the damages of individual class members to find Rule 23(b)(3) predominance requirement to have been met.

Thus, the Court denied class certification for the Trader-Based Subclass.

The Persistent Suppression Subclass consists of those who 1) purchased a Eurodollars futures contract when prices were artificially inflated; 2) sold a Eurodollars futures contract when prices were artificially depressed; 3) purchased a Eurodollars futures call option or sold a Eurodollars futures put option when Eurodollars prices were artificially inflated; or 4) sold a Eurodollars futures put option or purchased a Eurodollars call option when Eurodollar futures prices were artificially depressed.

The Court found that the persistent suppression subclass to have met the ascertainability requirement and all four Rule 23(a) requirements. However, the Court found that the persistent suppression subclass did not meet the Rule 23(b)(3)’s predominance and superiority requirements. There were too many individualized questions of specific intent to manipulate Eurodollar futures prices through reputation-motivated suppression of LIBOR, the existence and causation of artificial Eurodollar futures prices, and damages for common question to sufficiently predominate. For the same reasons, the Court also found that a class action would not be superior to other to other available methods for fairly and efficiently adjudicating the controversy.

Thus, the Court denied class certification for the Persistent Suppression Subclass.

Lender Plaintiffs

Berkshire Bank (“Berkshire”), the sole Lender Plaintiff remaining, sought certification for a class defined as:

All lending institutions headquartered in the United States, including its fifty (50) states and United States territories, that originated loans, held loans, purchased whole loans, purchased interests in loans or sold loans with interest rates tied to USD LIBOR, which rates adjusted at any time between August 1, 2007 and May 31, 2010.

The Court found that Berkshire met Rule 23(a)’s numerosity, commonality, and typicality requirements, and had also met the ascertainability requirement. However, Berkshire failed to show adequacy of representation. The Lender Defendants brought to the Court’s attention that interim class counsel agreed to pay Berkshire’s CEO’s son, an attorney, 15% of the net fees received in exchange for responsibility and work done on the litigation. There is not a per se rule against there being a familial or business relationship between class counsel and a class representative; it is rather a fact-sensitive inquiry. Since the relationship was not disclosed by the plaintiff, Berkshire CEO’s son had a limited role in the litigation (he had not even filed a notice of appearance or signed any papers, but merely reviewed filings and provided comments to class counsel), and would likely receive more in fees than Berkshire stood to receive in discovery, the Court found that in this instance that relationship was close enough to render Berkshire inadequate as a class representative.

Although the Court could have denied class certification of a class with Berkshire as its representative on that basis alone, it went on to analyze whether questions of law or fact common to class members predominate over any questions affecting only individual members, and whether a class action for the Lender Plaintiffs would be superior to other available methods for fairly and efficiently adjudicating the controversy

Regarding predominance, the Court found that there were too many individual questions concerning reliance, damages, affirmative defenses, and variations in state law for the common question of misrepresentation to dominate. For example, because different lenders have different exposure to LIBOR, different reasons for issuing loans, different understanding of what LIBOR represents, and different knowledge of whether LIBOR was being manipulated, issues regarding the reliance element of Berkshire’s common law fraud claim were all individual. The issue of damages was also considered to be individualized, since related questions such as what alternative rate a plaintiff would have used, what the but-for spread on each loans what have been, the other terms a loan contained, and other instruments taken into account in the netting calculation were all individual issues. This lack of predominance and the variation in state law regarding the Lender Plaintiff’s claims also created manageability problems that led the Court to conclude that a class action would not be superior to individual actions.

Thus, the Court denied class certification for the Lender Plaintiff class.

Over-the-Counter (“OTC”) Plaintiffs

The OTC Plaintiffs sought certification of a class defined as:

All persons or entities residing in the United States that purchased, directly from a Panel Bank (or a Panel Bank’s subsidiaries or affiliates), a LIBOR-Based Instrument that paid interest indexed to a U.S. dollar LIBOR rate set any time during the period August 2007 through August 2009 (“Class Period”) regardless of when the LIBOR-Based Instrument was purchased.

“LIBOR-Based Instrument” was defined as:

LIBOR-Based Instrument” means an interest rate swap or bond/floating rate note that includes any term, provision, obligation or right for the purchaser or counterparty to be paid interest by a Panel Bank (or a Panel Bank’s subsidiaries or affiliates) based upon the 1 month or 3 month U.S. dollar LIBOR rate. For the avoidance of doubt, the term LIBOR-Based Instrument does not include instruments on which a Panel Bank (or a Panel Bank’s subsidiaries or affiliates) does not pay interest, such as bonds/floating rate notes issued by entities other than Panel Banks (or Panel Banks’ subsidiaries or affiliates). Nor does the term include instruments that include only a term, provision, or obligation requiring the purchaser or counterparty to pay interest, such as business, home, student or car loans, or credit cards.

The Court granted the OTC plaintiffs’ motion for class certification in part and denied it in part.

First, the OTC defendants challenged the proposed class’ Article III and class standing by arguing that since the remaining OTC plaintiffs only allege that they purchased LIBOR interest-rate swaps, and not bonds, they cannot assert claims on behalf of bondholders. The Court agreed with the OTC plaintiffs that the difference between the types of financial instruments did not deprive the proposed class of Article III standing, since plaintiffs only have to show that the purchase of each type of instrument can be traced to some type of injury-in-fact, not the same injury-in-fact. Similarly, because the purchase of interest rate swaps concerned the same set of concerns related to defendants’ conduct, the OTC plaintiffs were also found to have class standing to represent bondholders.

The OTC plaintiffs were also found to have met Rule 23(a)’s numerosity and commonality requirements. The Court could not find the breach of implied covenant of good faith and unjust enrichment claims of named OTC plaintiff Bucks County Water and Sewer Authority (“Bucks County”) against the Royal Bank of Canada (“RBC”) to be typical, however, since RBC asserted that Bucks County released those claims in a 2012 agreement with RBS, a unique defense that threatened to become a central focus of the litigation since Bucks County was the only plaintiff still asserting claims against RBC. Class certification against RBC was therefore denied. The OTC Defendants also disputed whether the entire class could meet Rule 23(a)’s typicality requirement, arguing that the defense of whether plaintiffs suffered any injury at all was so individualized and economically complex that it was unique for each plaintiff. The Court rejected this argument, however, and ruled that the fact that damages would have to be calculated on an individual basis did not defeat typicality. The typicality requirement was found to have been met, therefore, for all claims, except for those against RBC.

THE OTC Defendants also argued that plaintiffs could not meet the adequacy of representation requirement, as each class member would have an incentive to establish lower amounts of suppression at the time it entered into a swap and greater suppression thereafter, in order to minimize the extent to which absorption will reduce its damages. Although the Court did acknowledge that there are conflicts created by differing incentives among plaintiffs to show lower amounts of suppression, such conflicts were not fundamental, since the one-directional nature of suppression would constrain the conflict.

For purposes of addressing whether questions of law or fact common to the OTC plaintiffs predominate over any questions affecting only individual members, the Court analyzed the OTC plaintiffs’ antitrust claims separately from their state-law implied covenant and unjust enrichment claims. The Court found that common questions predominated the OTC plaintiffs’ antitrust claims, since evidence of defendants’ alleged price-fixing conspiracy would be subject to common proof and the only individualized questions related to individual damages, which was not enough to find against predominance. However, the Court found that common questions did not sufficiently predominate over various state law claims. Claims regarding the implied covenant of good faith would have to be determined by various transaction-specific agreements which did not uniformly designate the same forum for choice-of-law. Similarly, the unjust enrichment claim would be governed by the law of the state in which the class member resides or has a principal place of business. Since the class definition extends to all 50 states, the variation in state law precluded class certification for that claim.

For similar reasons, the Court found that a class action is superior to other available methods for adjudicating the antitrust claims, but not for the state law claims.

Conclusion

In summary, the Court certified a class for the OTC plaintiffs as to the antirust claims against Bank of America and JPMorgan Chase only, but did not certify a class for state-law claims.

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