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In a victory for banks, a federal appeals court yesterday upheld the dismissal of a class action RICO and antitrust suit that accused 12 of the nation’s largest banks of cheating consumers by conspiring to manipulate published prime rate indexes in order to fix and artificially inflate their prime rates, and by making misleading statements about loans offered at “prime plus” interest rates. In Lum v. Bank of America, et al., a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals found that both the RICO and antitrust claims were premised on allegations of fraud but that the plaintiffs failed to satisfy Federal Rule of Civil Procedure 9(b), which requires that fraud be pled with specificity. The suit, filed in 2000 in U.S. District Court in New Jersey, alleged that the banks gave false information about their “prime rate” both to consumers who were seeking credit and to leading financial publications, such as The New York Times and The Wall Street Journal, which publish independent indexes of the prime rate. The scheme worked, the suit alleged, because the prime rate indexes had been incorporated into many financial instruments. “Control of the prime rate published in the outside indexes would enable the banks to effectively raise interest rates unilaterally on these credit instruments and in so doing increase their income and profits by millions, if not billions of dollars on an annual basis,” the suit alleged. The suit also alleged that the top banks had conspired to misrepresent that “prime rate” is the lowest rate available to their most creditworthy borrowers, when in fact they have offered some large borrowers financing at interest rates below prime rate. In addition to Bank of America, the suit named as defendants: Citibank; Chase Manhattan Bank; Morgan Guaranty Trust Co.; First Union National Bank; Wells Fargo Bank; Fleet Bank; PNC Bank; The Bank of New York; Key Bank; Bank One; and U.S. Bank. U.S. District Judge Faith S. Hochberg dismissed the suit in 2001, finding that the fraud alleged in both the RICO and antitrust claims lacked specificity. Now the 3rd Circuit has upheld Hochberg’s decision and rejected the plaintiffs’ argument that they had established a case of “conscious parallelism.” “Plaintiffs have failed to satisfy the requirements of Rule 9(b) with regard to their theory that defendants misrepresented that the prime rate would be the lowest rate available to their most creditworthy customers,” U.S. Circuit Judge Jane R. Roth wrote in an opinion joined by Judges Dolores K. Sloviter and Samuel A. Alito Jr. “They have also failed to particularize how false information on their ‘prime rate’ was sent to the financial publications for inclusion in the independent indices. They have not set out who sent what information to whom or when it was sent. Nor have they particularized by how many points the prime rate was falsely reported or whether there was any consistency among the defendant banks in the amount by which the prime rate was falsely reported,” Roth wrote. Although antitrust claims generally are not subject to the heightened pleading requirement of Rule 9(b), Roth found that “fraud must be pled with particularity in all claims based on fraud.” The Sherman Act claim against the banks was clearly premised on fraud allegations, Roth found, since it alleged that the banks “fraudulently and artificially inflate[d] the ‘prime rate’ published in the outside indexes by falsely reporting the bank’s individual prime rates to the various publications . . . the ‘prime rate’ published by the outside indexes remained artificially high and the prime plus interest rates on the consumer credit instruments were fraudulently inflated.” Roth found that the RICO claim, too, was premised on fraud allegations but that the plaintiffs’ “general allegations of fraud do not comply with Rule 9(b) and their specific allegations regarding particular transactions do not amount to fraud.” Rule 9(b)’s specificity requirement is satisfied, Roth said, by pleading the “date, place or time” of the fraud, or through “alternative means of injecting precision and some measure of substantiation into their allegations of fraud.” The plaintiff also must allege “who made a misrepresentation to whom and the general content of the misrepresentation,” Roth said. Roth found that Hochberg properly rejected the entire suit for lack of specificity. “These conclusory allegations do not satisfy Rule 9(b). They do not indicate the date, time, or place of any misrepresentation; nor do they provide an alternative means of injecting precision and some measure of substantiation into the fraud allegations because they do not identify particular fraudulent financial transactions,” Roth wrote. Plaintiffs’ attorney G. Martin Meyers of Denville, N.J., argued that the fraud was accomplished by omissions. Meyers argued that the term “prime rate” is so generally understood to mean the lowest rate available to a bank’s most creditworthy borrowers that the failure to disclose that some borrowers obtain loans with interest rates below the prime rate constitutes fraud. Roth disagreed, saying that the meaning of the term “prime rate” is so unclear that the plaintiffs cannot claim to have relied on it. “More than 20 years ago, a congressional committee, in a staff report, described ‘prime rate’ as a ‘murky, ill-defined term that rarely reflects the lowest rates available to corporate customers.’ . . . This lack of precision in the term ‘prime rate’ has also been recognized by the courts,” Roth wrote. “It is therefore unreasonable to infer that defendants’ use of the equivocal term ‘prime rate’ was reasonably calculated to deceive persons of ordinary prudence and comprehension into believing that no borrower obtained an interest rate below the prime rate,” Roth wrote. Roth found that the plaintiffs’ claim “boils down to a disagreement about the meaning of the term ‘prime rate.’ This disagreement does not rise to the level of fraud; at most, it alleges a contract dispute.” (Copies of the 20-page opinion in Lum v. Bank of America, et al. , PICS No. 04-0352, are available from The Legal Intelligencer . Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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