This issue of the Credit Crunch Digest focuses on Barclays’ settlement of two important U.K. Libor lawsuits; the reversal of a Libor-related securities action dismissal by the Second Circuit Court of Appeals; a former Tullett Prebon employee’s wrongful termination lawsuit involving allegations of Libor manipulation; settlements by Citigroup and Bank of America in large mortgage-backed securities lawsuits; SAC Capital’s insider trading guilty plea; Swiss regulators investigations into FOREX manipulation by major banks; and Dodd-Frank whistleblower claims.
Libor and Foreign Exchange Litigation
Second Circuit Overturns Barclays Securities Case Dismissal
On April 25, 2014, the Second Circuit Court of Appeals reversed a lower court decision dismissing a purported shareholder securities class action against Barclays. In the underlying lawsuit, Carpenters Pension Trust Fund of St. Louis, et al. vs. Barclays Plc, et. al, the plaintiffs allege the price of Barclays American depositary shares dropped as a result of misrepresentations from the bank and several of its officials.
The stock drop came shortly after Barclays announced that it had agreed to pay approximately $453 million in settlements with U.K. and U.S. regulators related to Libor manipulation. The case will now presumably proceed to discovery back in New York district court.(“Barclays Must Face U.S. Lawsuit Over Libor, Court Rules,” Reuters, April 25, 2014).
Barclays Settles U.K. Libor Litigation
On April 7, 2014, with a trial date looming, Barclays opted to settle with Graiseley Properties, Ltd., a nursing home provider in the United Kingdom that filed the first U.K. lawsuit against the bank involving allegations of Libor manipulation. If Barclays went forward with the trial, past executives, including former CEO Bob Diamond, would likely have had to testify with respect to their knowledge of any Libor manipulation schemes that occurred. As part of the settlement, Barclays agreed to a debt restructuring for Graiseley.
Certain analysts believe that Barclays may now face new lawsuits from other individuals who may have been affected by Libor manipulation, as this case could have set a precedent that Barclays will settle matters rather than face trial to avoid internal emails being made public. As an example, Graiseley introduced an email at a hearing last month from Barclay’s former COO where he described Libor as a “fantasy.” While Graiseley alleged damages of approximately £12 million pounds, it has settled the matter for an unreported amount. (“Barclays Settles U.K. Libor Case Weeks Before Start of Trial,” Bloomberg, April 8, 2014).
Shortly after settling with Graiseley Properties, Barclays settled a second case involving Libor manipulation with a Portuguese construction firm. No specific terms regarding the settlement were disclosed, but the construction firm was also reportedly alleging wrongful conduct with regard to the selling of certain financial products connected to Libor. (“Barclays settles second Libor-linked UK court case,” Reuters, April 11, 2014).
Fired Tullett Broker Denies Libor Rigging
Noel Cryan, a broker who was fired from Tullett Prebon Plc, argues that he never attempted to manipulate Libor. Tullett terminated Cryan in September 2013, citing gross misconduct in connection with communications between him and a UBS AG banker allegedly related to Libor rigging. Cryan alleges that the selected messages are misleading, and that he never actually requested anybody at Tullett to manipulate Libor. Rather, Cryan states that he only gave the impression to the UBS banker that he would aid in Libor rigging in order to retain business from UBS, and that his manages knew about the practice.
According to Cryan, his managers actually encouraged Cryan to conduct wash-trades, which would allow for parties to enter into multiple matching trades that would cancel each other out, but generate revenue for Tullett. Cryan has not been criminally charged with any misconduct and has filed a wrongful termination suit against the company. The company stated that Cryan’s allegations lack merit and has countersued Cryan for the £160,000 pounds in bonus money he received while working for the company. (“Ex-Tullett Broker Says He Never Acted on Libor-Rigging Messages,” Bloomberg, April 7, 2014).
Litigation and Regulatory Investigations
Bank of America Settles Mortgage-Backed Securities Lawsuit With Allstate
On April 8, 2014, Bank of America and Allstate filed a joint stipulation of dismissal with prejudice in the U.S. District Court for the Central District of California. The lawsuit at issue was centered on $700 million in devalued mortgage-backed securities. Allstate filed the lawsuit in December 2010 alleging federal securities claims, as well as state law fraud claims, and alleging that Countrywide (acquired by Bank of America in 2008) failed to inform investors that the loans backing the mortgage-backed securities did not abide by the home lender’s underwriting standards.
The lawsuit, although first filed in New York, was subsequently transferred to California federal court where Judge Mariana Pfaelzer has been overseeing the consolidated Countrywide securities claims since 2007. After Judge Pfaelzer dismissed Allstate’s federal securities claims, thus trimming down the scope of the action, the parties subsequently entered into a settlement agreement for an undisclosed amount. This agreement follows Bank of America’s $9.5 billion settlement with Fannie Mae and Freddie Mac last month. (“BofA, Allstate End $700 Million Mortgage Securities Suit,” Bloomberg, April 8, 2014).
Citigroup Agrees to Pay More Than $1 Billion to Settle RMBS Claims
On April 7, 2014, Citigroup announced that it will pay in excess of $1 billion to resolve demands by several institutional investors seeking that the bank repurchase faulty mortgage loans it sold into various trusts established by Citigroup from 2005 to 2008. Specifically, Citigroup has agreed to extend the offer to the trustees of 68 residential mortgage-backed securities trusts sponsored by the bank that issued approximately $60 billion in RMBS.
The institutional investors supporting the agreement include BlackRock Financial Management Inc. and Goldman Sachs Asset Management LP – both companies have asked the trustees to accept the deal. If the agreement is accepted, it would release Citigroup from repurchasing mortgage loans sold into the trusts. The agreement would also release outstanding or potential claims for breaches of representations and warranties on the loans. According to the bank, the agreement does not cover several other securities, including the mortgage loans sold through private-label securitization trusts through Citigroup's consumer mortgage business.
The deal is similar to others by large banks concerning misleading mortgage-backed securities issues and other home loan-related practices, including those by JPMorgan Chase & Co., ($4.5 billion) and Bank of America Corp. ($8.5 billion). (“Citigroup Reaches $1B RMBS Deal With Investors,” Law360.com, April 7, 2014).
SAC Capital’s Insider Trading Plea Receives Court Approval
A federal court has granted approval of SAC Capital Advisors’ $1.2 billion criminal settlement related to allegations of insider trading. The settlement included a guilty plea to fraud charges and a $900 million fine. SAC Capital has agreed to pay a combined total of $1.8 billion to resolve criminal and civil investigations of insider trading, including a previous $900 million judgment in connection with a civil forfeiture case. SAC Capital also consented to five years probation and the hiring of a former federal prosecutor as a compliance consultant.
The July 2013 indictment alleged insider trading at the hedge fund giant from 1999 through 2010, which has resulted in the conviction or guilty pleas of eight SAC employees. SAC itself agreed in November to plead guilty to securities and wire fraud.
SAC Capital renamed itself “Point72 Asset Management” in early April; the newly named company will focus its efforts on the management of Steven Cohen’s private assets. Cohen has not been charged in any criminal action, but the SEC has pursued administrative actions against him seeking a bar from the securities industry for his alleged role in failing to supervise those charged with insider trading. ("U.S. judge accepts SAC guilty plea, OK's $1.2 billion deal,” Reuters, April 10, 2014).
Swiss Regulators Probe Banks in FOREX Investigation
Competition authorities in Switzerland have commenced an investigation of possible collusion in the foreign exchange trading desks at eight international banks. The targeted banks include Credit Suisse AG, UBS AG and Citigroup Inc., Zürcher Kantonalbank, Julius Bäer & Co. AG, Barclays PLC, the Royal Bank of Scotland PLC and JPMorgan Chase & Co. The Swiss Competition Commission joins a growing group of regulators examining allegations surrounding manipulation of foreign exchange markets. The Commission stated it received “indications” of potentially collusive arrangements in setting currency rates by traders at the banks. The currencies at issue were described by the Commission as being “some of the most important currencies.” ("Swiss Target Credit Suisse, UBS In Global Forex Probe,” Law360.com, March 31, 2014).
Litigation Government and Regulatory Intervention
SEC Denies Dodd-Frank Whistleblower Claims
The SEC recently rejected two whistleblower claims because the individuals failed to abide by the strict requirements under the Dodd-Frank Act. In one case, the attempted whistleblower submitted a claim regarding a 2008 stock inflation at Anscott Industries Inc., and sought partial recovery of the $21 million in penalties ordered against Anscott. The SEC cited the individual’s failure to submit a claim for award within 90 days, as well as the failure to provide original information to the SEC as a basis to deny the whistleblower’s claim.
In the other case, involving Countrywide’s actions during the 2008 financial crisis, the SEC alleged that an individual did not provide original information to the SEC because the information was actually first provided to other regulatory agencies, such as HUD or the FBI. Analysts suggest that the SEC will continue to strictly follow the Dodd-Frank guidelines in order to determine if an individual is eligible for whistleblower awards. (“SEC Rejects Whistleblower Claims For Failing to Follow Dodd-Frank Rules,” Inside Counsel, April 3, 2014).