Members of the British Bankers Association (BBA) are under investigation and facing a multiple of lawsuits for allegedly manipulating the London Interbank Offered Rate (LIBOR) in an attempt to profit or hide financial weaknesses. The BBA member banks that report their interest rates daily to the BBA include Barclays, Bank of America, JPMorgan Chase, UBS, HSBC, Royal Bank of Scotland, Credit Suisse, Lloyds, Bank of Tokyo-Mitsubishi, Deutsche Bank and others. LIBOR is published daily for ten currencies and fifteen distinct borrowing periods and forms the benchmark for short-term interest rates around the world affecting trillions of dollars in transactions.
A published chronology from the recent Barclays settlement with British and U.S. regulators suggests that LIBOR may have been manipulated upward as early as 2005 or otherwise adjusted to fit the needs of traders in swaps and derivative transactions. Following the 2008 financial crisis, LIBOR took on new significance as a measure of bank health, with higher rates suggesting financial ill-health. Various media reports and lawsuits have accused the BBA member banks of conspiring to manipulate their rates downward to appear healthier than they might have been. The scheme is alleged to have been widely discussed among traders and unraveled when The Wall Street Journal and others identified divergence between LIBOR and other benchmark rates.
So far, Barclays is the only bank that has been fined for manipulating LIBOR. The Commodity Futures Trading Commission (CFTC), Department of Justice and U.K. Financial Services Authority have ordered Barclays to pay U.S.$200 million, U.S.$160 million and £59.5 million in fines, respectively, for attempted manipulation and false reporting of LIBOR. It is widely reported that a settlement between the Royal Bank of Scotland and British regulators may be impending. As the LIBOR scandal grows, lawsuits are mounting against the world's biggest banks, and it is anticipated additional regulatory and criminal settlements with admissions of wrongdoing will be announced. The admissions will provide important evidence of liability for future civil lawsuits by those victimized.
Numerous lawsuits have been filed already on behalf of companies, individuals and proposed groups of potential victims, alleging violations of the Sherman Act, Commodity Exchange Act and common law torts. Many of these cases have been consolidated for pre-trial proceedings in the U.S. District Court for the Southern District of New York. In the case of losses by banks and institutions, their unique situations may preclude class certifications or lead the institutions to opt out of a class action and pursue individual claims.
ARE YOU EXPOSED TO CLAIMS OR DO YOU HAVE A CLAIM?
The CFTC estimates that LIBOR is the benchmark rate used for over $800 trillion of financial instruments and derivatives. The participants in these transactions appear to have participated in a rigged market. LIBOR is used worldwide as the predominant base rate in setting variable interest rates for financial instruments, including (1) corporate debt, (2) interest rate, total return and credit default swaps, (3) syndicated loans, (4) floating rate notes and other bonds, (5) institutional certificates of deposit, commercial paper and other money market instruments, (6) preferred stock, hybrid capital and auction rate instruments, (7) forward rate agreements, (8) exchange-traded interest rate futures and options, (9) consumer loans, and (10) commercial and retail mortgages. These instruments are sold, purchased and resold in transactions between parties, traded on exchanges and executed over the counter. According to The New York Times, 45 percent of adjustable-rate prime mortgages, 80 percent of adjustable-rate subprime mortgages and half of variable rate private student loans are based on LIBOR.
The LIBOR scandal is unique in breadth and scope affecting businesses in virtually every industry. Almost any company borrowing, lending or hedging financial risk could be affected. Any for-profit or not-for-profit enterprise or governmental entity that invests cash, holds short or long term securities or hedges financial risk, including any industrial, health care, energy, pharmaceutical, real estate, insurance, utility, investment, or media company, or pension fund, endowment, foundation or charity could be a victim of the LIBOR scandal.
Some businesses, particularly financial institutions, may have a claim while at the same time be exposed to claims if they have purchased or sold (or recommended the purchase or sale of a LIBOR based financial products, or borrowed or lent money under terms linked to LIBOR. Customers of non-BBA financial institutions who entered into contracts based on fraudulent interest rates may have claims for rescission and damages. Lenders or counterparties who innocently entered into those contracts may find they have claims for contribution or other compensation from the BBA banks participating in this fraud. Regulatory investigations will be broad ranging and will take years to complete. To cope with the potential exposure, companies and financial institutions will need to undertake comprehensive internal investigations.
WHAT WE CAN DO FOR YOU: The Right Experience
BakerHostetler has extensive experience in market manipulation and complex financial fraud cases. Our partners have served as lead counsel in landmark conspiracy and price-fixing cases:
- Counsel to the SIPA Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC, who has to date recovered more than $9.1 billion for BLMIS customers with approved claims in the largest Ponzi scheme in history;
- Successful at trial against Nelson Bunker Hunt and others for conspiring to corner worldwide silver markets, one of the largest price manipulation cases in history; and
- Prosecuting the "milk" cases involving allegations of widespread price fixing in the U.S. dairy markets.
BakerHostetler's International Disputes, White Collar Defense and Corporate Investigations Practices provide international litigation, arbitration, mediation and strategic advice to multinationals, foreign states, international organizations and private investors in civil and criminal proceedings and investigations. Our attorneys regularly represent clients in complex cross-border business disputes in U.S. and foreign courts, and major arbitration forums. We have preeminent skill handling disputes involving complex commercial issues, banking, antitrust, RICO, securities, trade, tax, business crimes and class actions. Our attorneys have well over a century of combined experience, coming to BakerHostetler from distinguished careers in government as Assistant United States Attorneys, Assistant District Attorneys and SEC enforcement attorneys. We are well versed in strategizing the complex issues surrounding parallel civil and criminal proceedings.
In prosecuting or defending litigation relating to the LIBOR scandal, management and coordination of discovery will be critical. As a MarketWatch article notes, "internal bank emails may prove to be key evidence." BakerHostetler's E-Discovery and Technology Team manages financial records in connection with more than 1,000 different lawsuits and consists of lawyers, litigation support professionals and paralegals with deep knowledge in complex litigation and investigations.
OBTAINING U.S. DISCOVERY IN AID OF FOREIGN PROCEEDINGS
Discovery in the United States is well known for its broad scope and transparency. The United States Code provides powerful tools for using U.S.-style discovery in connection with foreign proceedings.
Section 1782 of Title 28 of the US Code (28 U.S.C. § 1782) allows an "interested person" to utilize the full force of US discovery rules to collect information in the United States in connection with foreign "proceedings."
The statutory purpose behind Section 1782 is to provide an efficient means of assistance to participants, both direct and indirect, in foreign litigation, and to encourage reciprocity abroad. Section 1782 is extraordinary for the breadth of its application. The term "interested person" has been liberally construed by US courts to include persons beyond the parties to a proceeding. Any person or entity who can demonstrate a legitimate interest in a foreign proceeding can have standing to pursue Section 1782 discovery.
The term "foreign proceeding" has also been liberally construed to include not just foreign lawsuits, but also regulatory proceedings, criminal investigations, arbitrations and even reasonable contemplation of a future action.
WHY THIS MATTERS
Section 1782 may become an essential tool for protecting interests in the highly publicized LIBOR scandal. Already the subject of foreign regulatory and criminal investigations, the LIBOR scandal threatens to engulf the global financial sector in years of litigation, both civil and regulatory. Section 1782 could be a powerful tool for those affected by the scandal to better understand their potential claims and exposures. The discovery obtained via a Section 1782 petition could be used to formulate a cause of action or by a potential target of future litigation to gird itself against a lawsuit. Given the potential scope of the LIBOR scandal, it would certainly be a wise course of action for those with a stake in the proceedings to learn as much as possible about the transactions and events that led to the scandal.