Barclays Bank PLC made international headlines on June 27, 2012 when the investment banking giant announced that it had entered into a $450 million settlement with government regulators for its role in manipulating the London Interbank Offered Rate (LIBOR). The magnitude of the scandal is enormous because LIBOR is an important index that affects more than $350 trillion in financial transactions, ranging from complex derivative swaps to simple consumer home loans. John Waggoner, "Libor Scandal Explained and What Rate-Rigging Means To You," USA Today, July 18, 2012. In the last year, government investigations have commenced and a frenzy of private antitrust lawsuits have been filed on behalf of various institutional investors. To date, government investigators and private litigants have accused at least 12 international banks of colluding to manipulate LIBOR.
LIBOR is one of several benchmarks that banking institutions use to set the interest rates for lending on countless financial transactions. LIBOR is set and overseen by the British Bankers’ Association (BBA), an industry group in London. See BBALIBOR – The Basics, http://www.bbalibor.com/bbalibor-explained. Every weekday, leading banks around the world each submit a figure to the BBA based on the rate at which they estimate they could borrow funds from other banks. The BBA throws out the high and low submissions and averages the remaining submissions into one rate – this is LIBOR. Id. Then, LIBOR is calculated for 10 different currencies and 15 borrowing periods (maturity dates). After LIBOR is calculated, it is published on a daily basis by Thomson Reuters. Id.
LIBOR is an important number because it is used by the financial industry to set interest rates in trillions of dollars worth of loans and investments. LIBOR is often used to price financial instruments, such as interest rate swap transactions and futures contracts. Banks allegedly conspired to submit low rates to the BBA in order to artificially suppress LIBOR during the financial crisis because high rates would have indicated banks were financially weak. As a consequence, banks may have also robbed investors of billions of dollars in returns on investments by keeping LIBOR artificially low.
Impact on Investors
Large public and private institutional investors, such as municipalities and pension funds, are likely to be the biggest victims of the LIBOR rate-fixing scandal. Stephen Gandel, "Wall Street’s Latest Sucker: Your Hometown," CNNMoney, July 11, 2012. Institutional investors have been among the first to claim losses from the alleged rate-fixing because the bond market relies heavily on LIBOR. In addition, institutional investors are significantly exposed to investment losses through the purchase of interest rate swaps, which are oftentimes also tied to LIBOR. Id. Institutional investors use swaps when they want to issue a bond at a floating interest rate but protect themselves from future swings in rates. In a standard swap, the investor exchanges the floating interest rate promised to bond investors for a fixed rate, making future budgets more predictable. The problem for institutional investors is that while they paid fixed rates to their banks, the floating rates they received in return were tied to LIBOR. Thus, if LIBOR was suppressed by banks, then investment returns for institutional investors in these swap transactions would be diminished. Institutional investors are still calculating their losses, which could be significant on large investments. For example, the North Carolina Department of State Treasurer, which oversees the state’s public pension plans, reportedly made two major swaps tied to $1.3 billion of bonds at a time LIBOR was suspected of being manipulated. Nathaniel Popper, "Banks Face Suits as States Weigh Libor Losses," N.Y. Times, Sept. 4, 2012. By one calculation, that could have meant losses for North Carolina of around $10 million on those two swaps. Id.
Over the last year, a multitude of antitrust class action lawsuits have been filed by institutional investors alleging that banks participating in LIBOR manipulation allegedly conspired together to suppress LIBOR. For bond holders and other investors whose investments were based on LIBOR, their return on investment was lower than it would have been if the banks had not suppressed LIBOR. Those antitrust lawsuits, and other types of lawsuits based on LIBOR manipulation, have been consolidated for multi-district litigation in United States District Court, Southern District of New York. See In re LIBOR-Based Financial Instruments Litigation, No. 1:11-md-2262 (S.D.N.Y., Consolidated Amended Complaint filed Apr. 30, 2012). On March 29, 2013, Judge Buchwald, the judge overseeing the multi-district litigation, dismissed the antitrust and RICO claims, ruling that the investors could not show an antitrust injury and did not have standing. Although this ruling is a major victory for the banks accused of LIBOR manipulation, they may nonetheless face civil liability on other types of claims. For example, Judge Buchwald’s ruling implies that the facts alleged by LIBOR plaintiffs are better suited for fraud and misrepresentation claims, not antitrust claims. In addition, claims that individual LIBOR-participating banks breached swap agreements with individual investors are still viable.
Despite Judge Buchwald’s dismissal of the antitrust claims in the LIBOR multi-district litigation, LIBOR litigation is likely to grow as institutional investors with potentially large claims decide to file individual lawsuits. Indeed, common-law fraud and contract claims against banks that sold LIBOR-pegged securities may have a greater chance of success. In the meantime, the class action plaintiffs in the LIBOR multi-district will likely appeal Judge Buchwald’s decision to the Second Circuit Court of Appeals.
Tim Lendino is an attorney with Smith Moore Leatherwood LLP in Charlotte, North Carolina. Prior to joining Smith Moore Leatherwood LLP, Tim clerked for the Honorable John R. Jolly, Jr. of the North Carolina Business Court. Tim practices primarily in the area of complex business litigation.