To plaintiffs firms, there are financial scandals, and then there is Libor.
Libor, the London interbank offered rate, is a benchmark interest rate that serves as a foundation for trillions of dollars of financial products worldwide. Suspicions that banks involved in setting the rate were manipulating it spurred investors to file suits beginning in 2011. Now, a growing number of plaintiffs firms are joining the fray in light of news this summer that at least one bank, Barclays Bank PLC, admitted to misconduct.
Lawyers say the Libor scandal is not only unprecedented in its reach, but also in its potential for litigation. “Often with a financial crisis or with a big instance of fraud occurring within a company, there’s one category of litigation. There are many, many antitrust claims brought, but they’re all antitrust claims,” says Hannah Buxbaum, interim dean of Indiana University Maurer School of Law – Bloomington. “Here, we’re seeing antitrust claims, securities claims, [racketeering] claims. It’s striking.”
More than two dozen firms have been representing plaintiffs in multidistrict litigation pending in the U.S. District Court for the Southern District of New York since last August. Since the Barclays announcement, at least a half-dozen more firms have filed new lawsuits, and others are investigating possible claims.
“As Libor is front square center of the news cycle, people who haven’t been involved are trying to do anything they can to get involved,” says Susman Godfrey partner Bill Carmody, a co-lead counsel for a group of plaintiffs in the multidistrict litigation. “People are running out to get a plaintiff and get a claim so they can get a dog in this fight.”
Barclays spokesman Michael O’Looney declines to comment. Representatives of the U.S.-based banks involved — Bank of America Corp., Citibank N.A. and JPMorgan Chase & Co. — likewise decline to answer questions or did not return interview requests. A representative from Sullivan & Cromwell, which is representing Barclays in the multidistrict litigation, did not return a request for comment.
Milberg partner Andrei Rado says the Libor scandal bears some similarities to financial scandals of the recent past, such as the subprime mortgage crisis. “It’s similar to them in the sense that it involves a multitude of banks, a multitude of instruments and
. . . relatively diverse potential plaintiffs,” he says. But Libor is in a category of its own when it comes to its influence on the global economy, he says, calling it “staggering.”
To set the daily Libor rate for the U.S. dollar, a panel of 16 banks set by the British Bankers’ Association submit information on the rates they could borrow funds. Thomson Reuters calculates Libor and its European counterpart, the Euro interbank offered rate, or Euribor, for the association.
On June 27, Barclays admitted to trying to manipulate Libor and Euribor to benefit its own derivative traders and protect its reputation by submitting false information. By submitting artificially low numbers, regulators alleged, Barclays gave a false impression of its financial health.
The Barclays settlement “really heightened the financial world’s consciousness of Libor manipulation and put it on a front burner,” says Quinn Emanuel Urquhart & Sullivan partner William Urquhart, in an email interview. He says his firm has been hired by several companies to investigate potential Libor claims but the firm has not filed any Libor-related actions to date.
The most common Libor-related claims filed so far are for violations of antitrust law, with plaintiffs accusing the Libor-setting banks of conspiring with each other to manipulate the rate.
Before the Barclays announcement, plaintiffs were primarily investors who bought financial instruments from banks involved in setting Libor. The mayor and city council of Baltimore, for instance, lead plaintiffs for one of the groups in the multidistrict litigation, purchased several hundred million dollars in interest-rate swaps from at least one of the banks with a rate of return that was tied to Libor. By artificially depressing Libor, Baltimore alleged, they were deprived income.
Other groups of plaintiffs include investors who traded Eurodollar futures tied to Libor through public exchanges; individuals who owned debt securities and were paid interest based on Libor; and financial institutions, notably Charles Schwab Bank N.A., which bought financial instruments from banks involved in setting Libor.
Carmody, who is a co-lead counsel for Baltimore and related plaintiffs, says he’s expecting more firms to file “tag-along suits,” although he warns that the window to join is closing as the cases move forward. Buxbaum says interest seems to be growing among municipalities that, like Baltimore, bought financial instruments tied to Libor. “That would be a very significant potential group of plaintiffs,” she says.
The Barclays revelation opened the door to new securities fraud claims by investors in the Libor-setting banks, says Avi Josefson, a partner in Bernstein Litowitz Berger & Grossmann. If Barclays got the best deal by agreeing to come forward first, he says, settlements for other banks could be even larger. “That’s another wave of litigation,” he says. His firm has been fielding inquiries from clients trying to understand the effect of Libor but is not involved in any current litigation.
New cases filed since the Barclays revelation have run the gamut.
On July 10, plaintiffs who bought American depositary receipts — negotiable certificates representing foreign stocks that are traded on U.S. exchanges — in Barclays filed a class action against the bank for securities violations. They’re represented by New York’s Wolf Haldenstein Adler Freeman & Herz. A group of New York banks, represented by New York’s Pomerantz Haudek Grossman & Gross, sued the Libor-setting banks on July 25, claiming that the alleged manipulation of Libor cost them income because they set lower interest rates on loans.
Libor’s reach and complexity may make it fertile ground for plaintiffs firms, but lawyers warn that it can also complicate litigation. Urquhart says that if U.S. regulators do settle with other banks, for instance, some financial institutions may choose to opt out of any class action settlement to try and pursue claims on their own. Carmody says it’s too early to consider how plaintiffs might respond to a settlement, but he defends class actions as a more efficient way to prosecute these types of cases.
Milberg’s Rado says defendants likely will argue that the courts should limit any possible liability to plaintiffs who had direct interactions with the banks, as opposed to anyone with a connection to a financial instrument that was tied to Libor. “The breadth of these cases could be a challenge,” he says. He says his firm has received inquiries from clients but isn’t involved in any litigation so far.
Buxbaum says plaintiffs lawyers will also need to pay attention to geography, especially when it comes to banks that aren’t based in the United States. U.S. courts have been moving toward limiting the application of American regulatory laws to activity overseas, she says, so plaintiffs will need to be clear about where they bought the financial instruments at issue.
Still, Buxbaum says, the Barclays settlement gave a significant boost to both new and existing cases. “These claims are obviously more difficult to bring and more difficult to sustain against motions to dismiss unless you have evidence of the collusion that you’re trying to argue,” she says.
Hausfeld partner William Butterfield, co-lead counsel with Carmody in the multidistrict litigation, agrees. “The story is being told every day, little by little,” he says. “We were pleased to see that there was information disclosed through the Barclays orders and hope that regulators continue to pursue action and disclose additional information.”