Well, dear readers, this post is going to be a bit outside the usual realm for the Manipulation Monitor. But, in light of my colleague John Whelan’s recent post on the class action settlement in In Re: Libor-Based Financial Instruments Antitrust Litigation, 11-MD-02262 (“In re Libor“), I thought it might be fun to provide a bit of color (or colour) on a related LIBOR action currently proceeding in the Chancery Division of the High Court of Justice of England and Wales.
In 2017, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for a collection of thirty-nine US-based institutions (referred to in the filings as the “Closed Banks,” they are victims of the 2008/09 financial crisis), brought a series of claims against nine “Bank Defendants” (including Barclays Bank PLC, Bank of Scotland PLC, Cooperatieve Rabobank UA, Deutsche Bank AG, Lloyds Banking Group, Lloyds Bank PLC, The Royal Bank of Scotland Group, and UBS AG) and three British Bankers’ Association parties (the BBA itself, BBA Enterprises Ltd., and BBA Trent Ltd.).
FDIC’s “particulars of claim” takes issue with the process of “setting” the USD LIBOR, wherein the BBA required USD Panel Banks (i.e. the Bank Defendants, and others similarly situated) to make daily submissions of the “rates at which the honestly perceived that they could borrow USD funds.” The BBA would then exclude the upper and lower quartiles of the submission (the “trimming” process) and publish as USD LIBOR the mean average of the two central quartiles of the submissions made by the Panel Banks. As expected, the FDIC alleges that the Panel Banks, including the Bank Defendants, manipulated the USD LIBOR through knowingly false rate submissions to the BBA. The claim makes specific reference to information gleaned through the many regulatory findings and criminal trials arising out of the LIBOR manipulation, and agues that the Closed Banks for which FDIC is receiver relied on the representations made by the Bank Defendants to the BBA with respect to LIBOR, and that the Closed Banks suffered losses as a result. Specifically, the FCIC identifies four markets – the lending market, the non-sale lending market, the mortgage market, and the on-sale mortgage market – in which the Closed Banks “would have realised higher prices (and/or would have calculated and received higher interest on), and thus made greater returns.” The FDIC also claims that the BBA was aware that the USD LIBOR rate was skewed, and continued to do business with the rate notwithstanding their knowledge.
While I won’t try to go through three years of history in a single post, it is worth noting that, this summer, the FDIC prevailed on a motion brought by Defendant UBS to strike the claim or for summary judgment on the basis that the claims were time barred. UBS argued that there had been sufficient facts in the public domain prior to 2011 which FDIC could have discovered through reasonable due diligence, and, thus, FDIC would not be able to satisfy the requirements of section 32(1)(b) of the UK’s Limitation Act 1980 (a statute which provides, where relevant facts have been deliberately concealed from the claimant by the defendant, the period of limitation shall not begin to run until the claimant has discovered the concealment or could with reasonable diligence have discovered it.) The High Court of Justice, however, held for the FDIC (see decision here), finding that the critical evidence the “tipped the balance and enabled it to properly plead” its allegations of collusion did not come to light until after regulatory findings made in 2012 with respect to UBS and Barclays. Those findings, the Court found, showed “for the first time, and very strikingly,” that there had been “widespread and systematic misconduct by employees at two leading banks, together with their network of contacts at other Panel Banks, to manipulate many of the benchmarks upon which much of the world’s financial system relied.” (Decision at ¶108.)
UBS isn’t one to step back without a fight, though, and in late September they filed a new defense. Now, UBS argues that the FDIC has failed to identify evidence of collusion between themselves and the other Bank Defendants to suppress the LIBOR rates they reported to the BBA. UBS describes the FDIC’s case as an “inferential one, based on unproven collective incentives to suppress the reported LIBOR rates. As the defense argues, “[i]t is not implausible that there could have been parallelism on the part of panel banks that did not wish to be outliers” (referring to the concern of the Defendant Banks, as alleged by the FDIC, that appearing as an “outliner” in terms of borrowing rates would damage the banks’ respective reputations and borrowing power.) UBS also argued that Panel Banks with stronger balance sheets actually had an inverse incentive to that which FDIC claimed – far from being incentivized to collaborate, UBS says, there was “an incentive not to collude with weaker banks to reduce the spreads between their respective Libor submissions,” as “smaller spreads would have diminished any competitive advantage stemming from being perceived as a relatively stronger bank.” The filing also touched on the concept of mitigation, insisting that the Closed Banks now represented by the FDIC should have taken greater steps to prevent loses.
The FDIC’s recently-filed reply objects to the above characterization, of course, arguing that – with respect to UBS’s argument that it had no reason to collude with weaker banks – UBS and all of the other Panel Banks would “profit from the suppression” of the USD LIBOR. The agency also pushed back against UBS’s mitigation arguments, stating that “[t]he concept of mitigation is dependent on the victim being aware that they suffered loss as a result of the wrongdoer’s wrongful conduct and thus was able to take steps to mitigate that loss[.]” The Closed Banks, of course, “were not so aware.”
As we’re still awaiting a decision on this most recent motion, that brings us up to the present day in the London LIBOR action, but if you’re interested in hearing more about this – or any other – manipulation cases in foreign courts, drop us a line and let us know!
This post was written by Alexandra M.C. Douglas.
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