In re LIBOR-Based Financial Instruments Antitrust Litigation: A Long Road Ahead

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In a self-described “unexpected” ruling for the defendants in the consolidated LIBOR proceedings, Judge Naomi Reice Buchwald has dismissed the private plaintiffs’ antitrust and Racketeer Influenced and Corrupt Organizations Act (RICO) claims and significantly narrowed the scope of the Commodity and Exchange Act (CEA) claim. While some of the plaintiffs have since been granted a limited right to move to amend the complaint, many impacted investors may now be faced with the decision to either await the likely appeal of the court’s ruling or, alternatively, proceed with narrower class actions or individual opt-outs aimed at the core allegations of misrepresentation and fraud.  However, as another court’s ruling earlier this week indicates, the plaintiffs face a long road ahead.

The LIBOR Scandal

LIBOR, or the London Interbank Offered Rate, is the most widely used benchmark for interest rates on commercial and consumer loans. The rate is set for various currencies and terms and is intended to reflect the average rate that banks on the LIBOR panel would charge one another for short-term loans. United States and foreign governmental investigations have revealed that certain members of the panel banks submitted false information in an effort to manipulate the rate lower, or higher, for purposes of enhancing their credit profiles or their own trading positions.

As regulatory agencies around the globe have continued to investigate the LIBOR price-fixing claims, the panel banks have been under increasing scrutiny, and three of the panel banks have agreed to pay almost $2.5 billion in fines and penalties. Yet, in the face of this successful regulatory effort, the panel banks have recently obtained a significant victory in the ancillary private actions.

The Private Litigation

The investigations spawned a series of class action complaints that were consolidated along with certain individual complaints before Judge Buchwald in the U.S. District Court for the Southern District of New York. Lead plaintiffs were named to represent three distinct classes:

  • Over-the-Counter Plaintiffs (OTC Plaintiffs), i.e., individuals and entities that purchased LIBOR-based instruments (e.g., interest rate swaps) directly from the panel banks;
  • Exchange-Based Plaintiffs, i.e., individuals and entities that transacted in Eurodollar futures contracts and options on futures contracts on the Chicago Mercantile Exchange; and
  • Bondholder Plaintiffs, i.e., individuals and entities that owned a U.S. dollar-denominated debt security on which interest was payable based on LIBOR.

Each of the class action complaints asserted a Section 1 price-fixing claim under the Sherman Antitrust Act and included various state law claims. The Exchange-Based Plaintiffs included a claim under the CEA.

Separately, Barclay’s and certain of its executives were sued in a class action complaint alleging under Section 10(b)-5 of the Securities Exchange Act of 1934 that the manipulation of LIBOR resulted in damages to purchasers of Barclay’s American Depository Shares (ADS) (the ADS Litigation).  The price of Barclay’s ADS declined 12 percent on the day that Barclay’s settlement was announced..  

The Consolidated Motion to Dismiss Ruling

On April 1, 2013, the court granted the defendants’ motion to dismiss in significant part. The court dismissed the antitrust claim for lack of antitrust injury, stating that the factual allegations may give rise to misrepresentation or fraud allegations, but they do not appropriately allege a failure to compete and thus do not harm competition. In its ruling on the CEA claims, the court found that the plaintiffs stated a claim for manipulation of the price of the Eurodollar on futures contracts, but not for manipulation of LIBOR as the commodity underlies the futures contracts. It further found that, under the CEA, claims based on contracts purchased between August 2007 and May 29, 2008 were barred, claims on contracts purchased between April 14, 2009 and May 2010 were not barred, and claims based on contracts purchased in the intervening period may or may not be barred.

In its ruling, the court recognized that the result might be seen as unexpected in view of the significant penalties already assessed by governmental agencies.  In an effort to reconcile this result, the court pointed to the higher standards required of a private plaintiff, but not the government, with respect to the specific statutes at issue in the ruling.

Having declined to exert supplemental jurisdiction over the remaining state law claims, the court’s ruling appeared largely to have eviscerated the OTC Plaintiffs’ and Bondholder Plaintiffs’ current claims while leaving the Exchange-Based Plaintiffs with a path forward. The OTC Plaintiffs and the Bondholder Plaintiffs have recently been given leave to file a motion to amend to address the antitrust injury issue, but the court has expressed skepticism that it will be granted.  It thus would appear likely that at least certain of the plaintiffs may ultimately file an appeal to the Second Circuit. 

One of the individual plaintiffs has taken a different approach and, on April 29, 2013, filed a complaint in California state court alleging federal securities law claims and various state law claims. 

On May 13, 2013, the ADS Litigation was dismissed.  In its ruling the court noted that Barclay’s general assurances regarding its business practices and integrity were not actionable and, assuming that the LIBOR submissions at issue between 2007 and 2009 were themselves actionable, they could not have caused the damages that was alleged to have occurred in 2012 when the Barclay’s settlement was announced.  

The Broader Picture

In recent months, several other class actions and opt-out claims have been filed.  Notable class actions include a class of non-panel banks headquartered in, or doing the majority of their business in, New York, and an indirect claim filed against the panel banks by a class of investors who purchased LIBOR-based investments from specifically identified non-panel banks. Significant opt-out cases include complaints filed by Freddie Mac and several California municipalities and utilities.  While most complaints assert general losses from the lower rates, one opt-out claim by a large real estate developer asserted losses from manipulation of the LIBOR rate higher, rather than lower.  The plaintiff had used its bond portfolio as collateral on a $450-million loan.  When the portfolio value declined as a result of the panel banks’ manipulation of higher LIBOR rates over a five-day period in 2008, the decline triggered a loan default, ultimately causing the plaintiff to sell the portfolio at a significant loss. 

What’s Next?

The next few weeks (or months) will provide further clarity on whether the cases will proceed with the antitrust claims intact or whether the parties will pursue an appeal. In the interim, while the court may have barred the door to a treble damages antitrust verdict, the court’s ruling left open a path to pursue claims on fraud, misrepresentation or other theories, such as breach of contract.  But moving forward will not be easy.  While the ADS Litigation asserted a different theory of harm than that which  has or would be asserted on behalf of the broader class of injured plaintiffs, it is yet another reminder of the difficulties faced by plaintiffs.  Key hurdles include class certification (made significantly more difficult by recent Supreme Court decisions) and defendants’ statute of limitations defense.   

Fraud and misrepresentation theories are often not amenable to certification as a nationwide class action, and it is likely that plaintiffs’ counsel will seek to pursue narrower state-specific class actions. This would likely leave many investors without coverage for all or most of their impacted investments.  Additionally, fraud and misrepresentation theories often have short statutes of limitation (sometimes only one to three years).  The courts’ decisions in both recent LIBOR rulings reflect concern about plaintiffs’ alleged delay in filing suit.  And, it is not clear that the statute of limitations for later-filed state law fraud and misrepresentation claims will, in all instances, be tolled during the pendency of the class actions.  Regardless, the courts’ rulings indicate that, at least for some plaintiffs and claims, the statute of limitations may well begin to run again within the next year and investors with significant potential damages should consult with legal counsel.