On Monday, Manhattan federal judge Naomi Reice Buchwald opened her courtroom doors to 18 class actions from around the country that allege international banks artificially depressed a critical lending rate in the teeth of the economic crisis. The judicial panel on multidistrict litigation ordered the cases consolidated before Judge Buchwald on Friday, agreeing with the bank defendants and one group of plaintiffs lawyers that the cases should be litigated in New York. The MDL panel's decision rejected arguments by other plaintiffs lawyers who called for the litigation to be based in Chicago, New Jersey, and (improbably) Minnesota. It also sets up a fight for control of litigation that could be worth billions, although we're a long, long way from there.
The class actions, which claim damages under federal antitrust laws and the Commodities Exchange Act, involve the London Interbank Offered Rate, which is often used as an alternative to the U.S. prime rate to peg adjustable interest rates. The U.S. dollar LIBOR is set by the private British Bankers Association, in a self-reporting process. Every workday, 16 international banks inform the BBA of the interest rate at which they can borrow U.S. dollars. The top four and bottom four reported rates are discarded and the other eight are averaged to produce the daily LIBOR. (The BBA recently increased the number of reporting banks from 16 to 20, but the allegations in the litigation predate that change.)
The relative value of LIBOR-indexed financial instruments-from simple loans to the most arcane Eurodollar futures contracts, derivates, and swaps-can change quite dramatically based on where the rate is pegged. Trillions of dollars in financial instruments are LIBOR-indexed, so the potential damages, if what the plaintiffs lawyers claim is true, could be eye-goggling indeed.
There are two different sorts of allegations in the class actions that have been filed so far. One is that as the world economy began to wobble in 2007, banks were afraid to admit that it was costing them more to borrow dollars in London. Banks were worried that they'd appear to be in trouble, this theory goes, so they lied to the BBA about the interest rates they were being charged. The more sinister (and less plausible) theory is that a group of banks conspired to depress the LIBOR in order to profit from trading in derivatives and swaps that were affected by the artificially low index rate.
The Wall Street Journal first disclosed what appeared to be anomalies in reported LIBOR rates in 2008, with a landmark article that concluded banks' reported LIBOR rates did not align with their credit risk. After the Journal story, economists conducted analyses that backed up the Journal's finding: The global banks that comprise the LIBOR panel clustered together in their reports of the borrowing rates they were charged, even though they differed widely in credit-worthiness. In March 2011, the Journal reported that U.S. regulators are investigating possible LIBOR manipulation. In June, the newspaper said UBS is cooperating with theregulatory probe.
Predictably, plaintiffs lawyers began filing class actions after news of the probes broke. How could they not? The defendants are 16 of the biggest banks in the world. Kirby McInerney and Motley Rice struck first with a 25-page complaint in Manhattan federal court on April 15. Lowey Dannenberg filed the first suit in Chicago federal court a couple of days later, noting that many LIBOR-indexed instruments trade on the Chicago Mercantile Exchange. By the end of June, after word got out that UBS is cooperating, more than a dozen plaintiffs firms had piled on, including some of the biggest names in the antitrust class action bar: Cohen Milstein Sellers & Toll; Susman Godfrey; Hagens Berman Sobol Shapiro; and Grant & Eisenhofer.
Grant & Eisenhofer's Linda Nussbaum moved the MDL panel to consolidate the cases in May. No one on the plaintiffs or defense side opposed the MDL, but not everyone wanted it to be in New York. Nussbaum and Andrew Stern of Sidley Austin, on behalf of all the defendants, argued successfully for a transfer to New York at the July 28 hearing before the MDL panel.
Now comes the fun part. "The next step," said David Kovel of Kirby McInerney, "is for the court to organize the case in terms of scheduling and leadership on the plaintiffs side. Those two things will start over the course of the next few weeks." There's no template for consolidated antitrust class actions so Judge Buchwald can make her own model. But she's likely to select a steering committee of plaintiffs lawyers, or ask the plaintiffs lawyers to agree on their own leadership committee. From what I hear, the plaintiffs lawyers are already conducting informal talks on who should be in charge.
The defendants are also coordinating efforts. Quite a list of law firms registered appearances with the MDL panel: Sidley (for Norinchukin Bank): Simpson Thacher & Bartlett (for JPMorgan Chase); Gibson, Dunn & Crutcher (for UBS); Sullivan & Cromwell (for Barclays and Bank of Tokyo); Paul, Weiss, Rifkind, Wharton & Garrison (for Deutsche Bank); Davis Polk & Wardwell (for Bank of America); Shearman & Sterling (for Credit Suisse); Clifford Chance (for Royal Bank of Scotland); HoganLovells (for HBOS and Lloyds Banking Group); Hughes Hubbard & Reed (for WestLB); and Milbank Tweed Hadley & McCloy (for Cooperatieve Centrale Raiffeisen Boerenleenbank).
Count on the defense to argue that it doesn't make sense for the banks to conspire to keep LIBOR low, since, as lenders, they have as much motive to welcome high rates as they do to look for low rates as borrowers. But a lot of lawyers are going to bill a lot of hours before this one's over.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
Follow us on Twitter: @ReutersLegal