This issue of the Credit Crunch Digest focuses on recent developments in Libor-related cases; Credit Suisse’s challenge to the New York Attorney General’s mortgage-backed securities case; Bank of America’s settlement in a mortgage-backed securities case; the ongoing financial crisis-related dispute between Assured Guaranty and Credit Suisse; and passage of the Volcker Rule by financial regulators.
Traders Deny Libor Charges
Several traders have denied charges that they conspired to manipulate Libor rates. Tom Hayes, a former Citibank and UBS employee, pleaded not guilty to charges against him in a London court. Hayes was charged with eight counts for conspiring with employees from other leading banks to manipulate Libor, including employees at Deutsche Bank, UBS, JPMorgan Chase, Royal Bank of Scotland Group and HSBC. Hayes traded in products tied to yen-dominated Libor from August 2006 to September 2010. His trial is not expected to commence until sometime in 2015. Other defendants have also denied conspiracy charges.
To date, Barclays, Royal Bank of Scotland, UBS and Rabobank have been fined approximately $3.6 billion by U.S. and British regulators for alleged manipulation of LIBOR. (“Trader Denies Rate Rigging in London LIBOR Case,” Washington Post, December 17, 2013)
Litigation and Regulation Investigations
Credit Suisse Challenges RMBS Claims on Timeliness Grounds
Credit Suisse has opposed the statutory fraud claims brought by the New York Attorney General in connection with the bank’s sales of securities backed with substandard residential mortgage loans. In the lawsuit pending in New York state court, Credit Suisse asserted that the claims made by the New York Attorney General based on the Martin Act are based on conduct that took place at the height of the financial crisis, and are thus time-barred. Specifically, the Swiss bank argued that because it allegedly assembled the deficient mortgage-backed securities in 2006 and 2007, the claims are beyond the three-year statute of limitations available under the act, as opposed to the six years offered for common law fraud.
Notably, New York’s Martin Act differs from common law fraud because it does not require a showing of scienter and reliance. The New York Attorney General has challenged Credit Suisse’s interpretation, arguing that case law supports a six-year statute of limitations for claims under the Martin Act. In fact, the New York Attorney General used the same act to assert claims against JPMorgan Chase, which recently led to a massive $13 billion settlement.
In addition to the statute of limitations arguments, Credit Suisse asserted that the lawsuit was also barred by a prior $417 million settlement with the U.S. Securities and Exchange Commission (SEC). It argued that the SEC is "in privity" with the New York Attorney General, as the bank claims both are members of the Residential Mortgage-Backed Securities Working Group of the federal-state Financial Fraud Enforcement Task Force. The Attorney General has rejected the assertion that the SEC settlement has an impact on this lawsuit because the New York authorities did not negotiate that agreement. (“Credit Suisse Says NY AG's Suit Over RMBS Came Too Late,” Law360.com, December 11, 2013)
Bank of America Settles Countrywide Investor Class Action
In early December, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California approved a settlement agreement in the amount of $500 million between Bank of America and Countrywide investors. This resolves one of the first mortgage-backed securities lawsuits filed as a result of the financial crisis in 2008. The lawsuit alleged that Countrywide misled investors and convinced them to purchase risky mortgage-backed securities. The settlement puts to rest approximately 65 percent-70 percent of the bank’s mortgage-backed securities matters.
The Federal Deposit Insurance Corporation (FDIC), acting as receiver for 19 banks as well as other entities, objected to the terms of the settlement, arguing that the agreement was unfair and inadequate. Judge Pfaelzer rejected those arguments, ruling that the objections lacked both facts and legal foundation to support the FDIC’s arguments. She also noted that the settlement agreement should be approved, “[g]iven the risk and uncertainty of continued litigation in the hopes of obtaining a larger recovery.” (“Judge Approves $500m BofA Mortgage Deal,” Financial Times, December 7, 2013)
Assured Guaranty Seeking Consequential Damages From Credit Suisse
On December 12, 2013, Assured Guaranty Corp. argued to the Supreme Court of the State of New York, Appellate Division, that it should be able to recover consequential damages from Credit Suisse in connection with its alleged lies regarding the quality of loans for approximately $1.8 billion in mortgage-backed securities. The lower court denied Assured Guaranty from seeking consequential damages, and it has now appealed the ruling to a five-judge panel.
The main issue in contention is whether affording a third-party beneficiary, such as Assured Guaranty, to recover consequential damages would grant the beneficiary greater rights than the certificate holders who invested in the loans. Assured Guaranty argues that contractual rights of insurers are much greater than the rights of investors, while Credit Suisse requests the appellate court to uphold the lower court’s October 22, 2013 ruling, which found that an insurer cannot have greater rights than the investors who actually purchased the securities. The Supreme Court of New York is now considering these arguments and should issue a ruling in the upcoming months. (Insurer Contests Damages Limit In $1.8B Credit Suisse Row,” Law360.com, December 12, 2013)
Government and Regulatory Intervention
Volcker Rule Approved by Regulators
On December 10, 2013, regulators from five financial regulatory agencies approved the so-called “Volcker Rule.” Named after former Federal Reserve chair Paul Volcker, the rule is part of the Dodd-Frank financial reforms and is intended to restrict banks’ ability to bet with their own capital. The Volcker Rule requires banks to separate trading done on behalf of clients versus the banks’ proprietary trading. Critics of the Volcker Rule argue that proprietary trading is not the reason for the financial crisis, and that banks need to have the flexibility to engage in proprietary trading to hedge risk. According to reports, JPMorgan Chase’s “London Whale” fiasco in 2012 helped push momentum in the regulator’s favor after it was revealed that the bank lost more than $6.2 billion as a result of trades from within a unit of the bank that was supposed to help manage the bank’s risk level.
The Volcker Rule goes into effect on April 1, 2014. However, observers have noted that the effect of the law ultimately depends on how regulators choose to interpret and enforce the complex regulation. (“Volcker Rule Challenges Wall Street, The Wall Street Journal, December 10, 2013)