The latest development in the LIBOR (London Interbank Offered Rate) manipulation scandal is one step forward for the banks and one large step backward for private claimants. On 29 May 2013, the Federal District Court of Manhattan dismissed a substantial portion of private plaintiffs' claims against the banks – despite the fact that several defendants have already settled cases with, and paid billions of dollars of penalties to, the U.S. government. This was put down to the broad differences between the requirements that a private plaintiff must satisfy that government agencies do not.
The case dealt with whether the conduct by the defendant banks was of an anti-competitive nature, whether the conduct could satisfy the territorial and time constraints of the Commodity Exchange Act 2006 and dismissed any class action claims under the Racketeer Influenced and Corrupt Organizations Act 2006. This proceeding will no doubt be appealed to the 2nd U.S. Circuit Court of Appeals and, due to government-led action and settlements, the story for the banks as defendants is unlikely over.
Some of the claims were brought under the Sherman Act 1890 (Sherman Act), which is similar in operation to the restrictions on anti-competitive behaviour set out in New Zealand's Commerce Act 1986 (Commerce Act). Section 1 of the Sherman Act broadly provides that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” However, it was held that the defendants' prolonged actions in manipulating LIBOR led to the plaintiff's suffering injury:
"the process by which banks submit LIBOR quotes to the [British Bankers' Association (BBA)] is not itself competitive, and plaintiffs have not alleged that defendants' conduct had an anticompetitive effect in any market in which defendants compete." (In re Libor-Based Financial Instruments Antitrust Litigation, U.S. Southern District of New York, No. 11-md-2262 (In re Libor) at p 157).
In effect, it was held that as the process of setting LIBOR was "never intended to be competitive" (see In re Libor at p 31), the harm caused to the plaintiffs did not have its origins in anti-competitive behaviour, but instead misrepresentation or possibly fraud. This is relevant in a New Zealand context due to the classification of the behaviour as 'non-competitive' and more of a 'cooperative' venture. If something similar were to occur in New Zealand then the approach taken in this case could be indicative of whether such conduct could fall under the scope of the Commerce Act (if, in the likely event that the decision is appealed, the reasoning is upheld in higher courts).
The Commodity Exchange Act 2006
The plaintiffs also attempted to claim that the banks' conduct violated the Commodity Exchange Act 2006 (CEA). While the court upheld that the CEA does not apply extraterritorially, the plaintiffs successfully maintained that while the conduct occurred in London, the nature of the futures contracts that were traded on the U.S. domestic market meant that the manipulation in London had a direct effect on the price of futures contracts traded on domestic exchanges in the U.S.
However, some of these potential claims were time barred as the CEA states that action must be brought no later than two years after the date the cause of action arises. Part of this reasoning was based on the fact that media began reporting about various issues with LIBOR back in 2008:
"Faced with this information, and especially in light of the fact that it was reported by five separate institutions, a person of ordinary intelligence would clearly have been on notice that LIBOR was probably being set at artificial levels and, consequently, that Eurodollar futures contract prices had also been artificial." (In re Libor at p 73)
The Racketeer Influenced and Corrupt Organizations Act 2006
The claim brought under the Racketeer Influenced and Corrupt Organizations Act 2006 (RICO) was described as one "whose siren song of treble damages apparently proved irresistible" (In re Libor at p.133). If successful, it had the potential to allow for multibillions in damages.
The claim failed on two counts. Firstly, the court concluded that as the misrepresentations made by the defendant banks to the BBA could be subject to securities fraud action by the U.S. Securities and Exchange Commission (SEC), the ability to bring a private claim was barred by the Private Securities Litigation Reform Act 1995. Secondly, the claim was also barred due to the fact that RICO cannot be applied extraterritorially. It was held that the "enterprise" on which the RICO claim relied was based in London, and thus was barred from consideration under the RICO.
The New Zealand position
The New Zealand Financial Markets Association (NZFMA) has expressed its commitment to ensuring all current and future New Zealand data reference rates and pricing pages are an accurate and transparent reflection of the New Zealand market. The New Zealand Bank Bill Rate is set differently to the way in which the Libor rates previously operated.
For increased market transparency, the NZFMA now publishes the New Zealand Bank Bill Daily Rate Set Transaction Report (which lists trades occurring during the two minute trading window prior to the BKBM rate set) and regularly reviews the New Zealand data service with a view to enhancing this service with new reference rates and pricing pages to ensure that the service remains at the forefront of data processing and delivery to national and global subscribers.