The recent onslaught of LIBOR litigation raises two important issues for potential plaintiffs considering individual lawsuits outside the existing class actions. The first relates to remedy. The recent settlements (and those likely forthcoming) have made it easier for plaintiffs to plead LIBOR manipulation claims. However, what is the appropriate remedy for this manipulation? Given that no one can recreate with certainty what LIBOR (London Interbank Offered Rate) would have been absent the panel bank’s manipulation, how can damages be determined? Moreover, while affected transactions may total in the hundreds of trillions, many experts estimate that the manipulation’s effect on an individual transaction may be modest, begging the question that, even if damages are measurable, is it worthwhile for individual plaintiffs to file suit?
One potential answer to these difficulties that seems to have gone largely untried in the lawsuits filed thus far is the equitable remedy of rescission. While it presents challenges, rescission provides some unique advantages, and it may be particularly well-suited to a situation where damages are uncertain as a direct result of defendants’ intentional wrongdoing.
The second issue relates to statutes of limitations. Although certain claims will be tolled while the class actions are pending, at least as to putative class members seeking to assert the same claims, it is important for potential plaintiffs to explore their options now, lest they lose the opportunity to try claims more unique than those currently articulated in the existing class actions.
LIBOR hit the headlines in June 2012, when the Department of Justice, Commodity Futures Trading Commission (CFTC) and the UK’s Financial Services Authority (FSA) announced settlements with Barclays for its role in a variety of activities aimed at manipulating LIBOR.
In December 2012, UBS settled with U.S., UK and Swiss regulators and agreed to pay fines totaling $1.5 billion. In connection with that settlement, UBS admitted wrongdoing that was much more pervasive and widespread than that of Barclays. That wrongdoing, dating from 2005, potentially encompassed every version of LIBOR in which UBS was involved and included collusion with other panel banks; criminal charges have been filed against individual UBS bankers. More importantly, UBS’s efforts at manipulation appear to have been successful. Most recently, on Feb. 6, Royal Bank of Scotland (RBS) reached a settlement with the CFTC, FSA and the Justice Department to pay fines totaling $615 million for its role in the manipulation of LIBOR. RBS admitted, among other things, colluding with other banks and brokers. RBS’s Japanese subsidiary pled guilty to wire fraud, and RBS entered into a deferred prosecution agreement for antitrust violations and wire fraud relating to Yen LIBOR and Swiss Franc LIBOR.
Given the settling banks’ admissions that they frequently acted in concert with other (as of yet unnamed) panel banks, it seems virtually certain that additional banks will be named as a result of the ongoing investigations by U.S. and foreign authorities. The potential litigation exposure in connection with these revelations is staggering. Leaving aside the myriad of affected consumer transactions, it is estimated that over $300 trillion in derivatives products alone are based on LIBOR.
Moreover, these revelations (and those likely to come) should make it easier to plead, and eventually support, claims against the settling banks and their partners in LIBOR manipulation. However, one issue has consistently dogged plaintiffs in the lawsuits filed thus far: What is the remedy?
A Challenging Determination
The determination of damages for these claims presents a number of challenges. First, the obvious: Because of the nature of LIBOR calculation, no one can determine what LIBOR should have been absent the manipulation. Other issues arise as well. Did the manipulation occur on a date that affected plaintiff’s transaction? Did it help or hurt plaintiff overall? LIBOR manipulation allegedly occurred not only to improve the outcome of certain trades for the panel banks but also, perhaps primarily, to make the banks look less vulnerable in a declining credit environment. As a result, the amount of interest paid by counterparties may actually have been lower than absent the manipulation. Although recent settlements leave plaintiffs well-positioned to plead claims under a variety of theories, even with the treble damages offered by antitrust claims, it may not be economically worthwhile for an individual plaintiff to bring suit.
Even where a party can show damages from LIBOR manipulation, there is no clear answer on how to calculate damages. Typical calculations would award the aggrieved party the difference between what LIBOR was, as manipulated, and what it should have been, absent manipulation. However, the nature of LIBOR’s calculation makes that straightforward method unavailable. Between 2005 and 2010, LIBOR was set by 16 panel banks, based on daily submissions about those banks’ beliefs about their hypothetical borrowing costs. It is impossible now to go back and determine what those banks’ beliefs truly were, absent the taint of manipulation. As a result, experts vary dramatically on the scope and financial consequences of the manipulation.
One potential solution to this great difficulty is rescission. Rescission is an equitable remedy employed in contract cases and a variety of other contexts where money damages are inappropriate or inadequate. Rescission is designed to restore parties to the status quo ante­—the position they occupied prior to entering their deal. Sometimes this is easy, and the parties can be returned without complication to their respective positions prior to the contract. A real estate sale is often cited as the model candidate for rescission. When the sale is rescinded, one party gives back the property, and the other party gives back the purchase price, as if the transaction never happened.
With derivatives, it can be more complicated. Even the simplest plain vanilla swap, where a fixed interest rate is exchanged for a floating interest rate, raises troubling issues, because both parties will likely have changed positions in reliance on the existence of the swap. For example, a panel bank, as a floating rate payer, will likely have hedged its exposure on this particular swap by entering into another, but opposite, swap or swaps. The bank’s customer, as the fixed rate payer, may be entering the swap to hedge its floating interest rate exposure in connection with a financing transaction. If the swap is rescinded, the bank will be naked on its offsetting swaps, resulting in losses. Depending on the size of the original swap, those losses could be substantial.
For the bank’s counterparty, on the other hand, rescission could result in a windfall if, as was commonly the case, the floating interest rate was ultimately lower than what that counterparty contracted to pay under the swap. Given the scale of the panel banks’ exposure in these litigations, this may make courts reluctant to grant rescission.
However, rescission also has potential on a case-by-case basis as a flexible remedy where traditional damages are difficult or impossible to quantify­—especially where, as here, the difficulty in calculating damages is a direct result of defendant’s wrongdoing. Indeed, courts will tolerate some inequity to the defendant in such cases, on the theory that having created the difficulty through its own intentional misconduct, the wrongdoer may not benefit from its obfuscation. Moreover, because it is an equitable remedy, courts can modify a particularly harsh result associated with rescission.
A variety of theories of liability have been held to support rescission, including fraud, negligent misrepresentation and intentional breach of contract. These theories would likely require a showing that the banks fraudulently concealed the LIBOR manipulation from their counterparties. Plaintiffs would also need to bring their claims within a reasonable amount of time and avoid affirming or otherwise ratifying the contract by completing performance after learning of the fraud.
While courts have termed rescission an "extraordinary remedy," it seems likely that it might be a solution for at least a subset of the LIBOR litigation where it can be shown that plaintiff was damaged but the amount of damages is uncertain. Given the magnitude of the potential litigation exposure, it seems likely that courts will need to employ creative solutions. Indeed, absent a less conventional approach to calculating damages, the clear wrongdoing of banks such as Barclays, UBS and RBS could be irremediable. However, because rescission requires that it must be feasible to return parties to their pre-transaction positions, potential plaintiffs should not lose any time in exploring this potential remedy.
Statute of Limitations
Another potentially urgent issue relating to LIBOR manipulation is statutes of limitations. In the motions to dismiss pending in the consolidated MDL action, In re LIBOR, pending in the Southern District of New York, the panel banks have argued that some statutes of limitations began running in the spring of 2008, when The Wall Street Journal published articles raising questions about LIBOR’s integrity. Statutes of limitations are generally considered to involve mixed questions of fact and law that complicate their disposition on motions to dismiss or even for summary judgment, especially in a case as complex as this. However, given last year’s settlements and the multiplicity of suits filed starting in 2011, it would be very difficult to argue now that the statutes of limitations have not started to run on claims against Barclays, UBS, RBS, and even the non-settling panel banks.
This consideration is particularly important for some claims that support rescission, such as fraud and negligent representation, particularly when looking at transactions dating from the beginning of the manipulation time period. In New York, for example, the law that governs many of the affected transactions, negligent representation, has a three-year statute of limitations. Uniquely, fraud claims have a statutory "discovery rule" built in to the six-year statute of limitations, under CPLR §213. Under the discovery rule, the statute of limitations for a fraud claim runs for the greater of six years or two years from the date the fraud was actually discovered or could have been discovered by a plaintiff exercising reasonable diligence. The discovery rule acts to preserve claims where the fraud was concealed, or where the facts underlying the fraud went undetected and could not reasonably have been discovered.
Although new facts continue to come to light as a result of the ongoing regulatory investigations in the United States and abroad, the LIBOR scandal has arguably been full blown since 2011. While equitable and statutory tolling provisions should help plaintiffs bring common law claims on which the statute of limitations would otherwise already have run by 2011, the extended window provided by such tolling is rapidly drawing to a close, especially with respect to the earliest transactions.
The existing LIBOR class actions provide one potential saving grace for such plaintiffs with respect to statutes of limitations issues. Under American Pipe & Construction v. Utah, 414 U.S. 538 (1974), in the U.S. Court of Appeals for the Second Circuit, filing of a class action based on federal claims in federal court tolls the statutes of limitations for the same or similar claims until the party is no longer a class member. For state law claims filed in federal court, however, the Second Circuit looks to the applicable state law to determine whether the filing of a class action tolls those claims for putative class members. New York follows federal law, so with respect to state claims governed by New York law in the Second Circuit, the filing of a class action tolls the statutes of limitations for putative class members for the same or similar claims.
However, potential plaintiffs need to examine carefully their potential claims and the existing class actions to make sure that their claims are likely to be preserved. Although the claims need not be identical, class action tolling only applies to complaints asserting causes of action similar to the original class action complaint. The law of the applicable forum and the law governing any possible common law claims must also be considered.
A potential plaintiff may be considering other claims (or remedies) that are not currently part of any class action in which that plaintiff is a putative class member. Those claims will not be preserved. Depending on the unique aspects of plaintiff’s transaction, claims or remedies, a plaintiff could risk a future court ruling that its claims were not closely related enough to be preserved by a similar class action. Given the stakes, if you are a potential plaintiff, these are risks worth exploring right away.
Michael C. Miller is a partner in the New York office of Steptoe & Johnson. Lara Romansic is of counsel in the New York and Washington, D.C. offices of the firm.