NEW YORK, July 12 (Reuters Breakingviews) - The loud legal
barking over the Libor deception portends a costly bite. It's
unclear who got hurt in the rate-rigging mess, but the growing
chatter about lawsuits means the banks behind it will shell out
big bucks just fighting mounting lawsuits.
Investors and others claiming harm first sued over a year
ago, shortly after U.S. regulators announced investigations. The
lawsuits contend that more than a dozen banks started reporting
artificially low rates in 2007 to understate their borrowing
costs and look healthier in a shaky economy. The suits also
claim the banks manipulated rates to goose profits from trades
in Libor-pegged derivatives and swaps.
The evidence was largely circumstantial until last month,
when Barclays and regulators on both sides of the Atlantic
reached a $453 million settlement that included making public a
slew of smoking-gun emails. New class actions and other lawsuits
have been piling up since.
So far, they involve four types of alleged victims. One is
firms that held Libor-linked bonds and other securities issued
by banks involved in the rate-setting process. Another is public
fund managers, like the city of Baltimore, that bought
interest-rate swaps with returns based on Libor. A third is
investment funds that traded financial instruments like
Eurodollar futures tied to Libor. And finally there are
investors who lost money on Barclays shares after the bank
revealed its wrongdoing.
The lawsuits rely on essentially three legal theories:
The most popular seems to be that the banks colluded to
manipulate Libor in violation of U.S. antitrust laws. But as the
banks argued earlier this month, there seems to be no evidence
they agreed to do so and, in any event, merely reporting a false
interest rate doesn't hurt competition in any market for a
product, an element necessary to prove a legal violation. So
far, the antitrust argument seems a stretch.
But a lawsuit filed on July 6 takes a different tack. It
claims seven banks that help set Euribor, the European interbank
offered rate, did collude, and asserts there's proof. The
Barclays settlement includes evidence that one of the bank's
former traders spoke regularly with traders at other financial
institutions about manipulating Euribor to benefit their
respective derivatives positions. That could mean trouble,
especially since damages are tripled in antitrust cases.
In the lawsuit it filed last year, Charles Schwab accused 16
banks of violating not only antitrust laws but also the U.S.
Racketeer Influenced and Corrupt Organizations Act, or RICO.
Designed to fight organized crime, the law requires a "pattern
of racketeering" such as repeatedly committing certain federal
crimes like wire fraud. The banks' behavior may qualify.
If they lied about Libor, they may have committed wire fraud
by sending Schwab and other customers information about the
phony rate or, as Barclays did, emailing internally about
manipulating the benchmark figure. And if they even remotely
coordinated their activities, they may have formed the "criminal
enterprise" necessary for a RICO violation.
In addition to triple damages, RICO winners can get legal
fees and the losers' property. A RICO action seems the most
likely to succeed against the banks - and the most effective way
to force a hefty settlement.
Barclays investors sued the bank on Tuesday for manipulating
Libor to make itself look healthier than it was and for lying
about being a "model corporate citizen." When the truth came
out, it wiped some $6 billion off the value of Barclays'
American Depository Receipts in two days. Shares of other
Libor-setting banks also fell and could fall further if any are
implicated in the scandal, offering other targets for lawsuits.
It's a typical stock-drop suit that faces the usual
challenges, like proving the wrongdoing actually caused the
investors' losses. It may also run into trouble under a recent
Supreme Court decision that at least one federal court has ruled
makes securities-fraud laws inapplicable to "predominantly a
foreign transaction" like buying ADRs.
But the banks' legal troubles don't end there. On Wednesday,
the attorneys general of Florida, Massachusetts and several
other U.S states said they are determining whether they have
jurisdiction over the banks and, if so, whether any residents or
agencies of their states lost money because of Libor
fudging. Federal criminal investigations are also in the works,
with prosecutions of bank executives possible, especially with
the public still lusting for rolling heads after the financial
How much all this may ultimately cost the banks is anyone's
guess. Libor-linked securities and other holdings that investors
could claim were affected run to at least $360 trillion.
Analysts at Nomura, Morgan Stanley and elsewhere have come up
with guesses that range into the billions of dollars for each
bank. But proving that one, or even a handful, of false Libor
submissions corrupted pricing based on amalgamating 16 different
banks' quotes is no quick or easy task. Investors will have to
decide whether they can stomach the legal limbo.
- Attorneys general for Florida, Massachusetts and several
other U.S. states announced on July 11 that they are considering
filing claims on behalf of their states' residents against
Barclays and other banks that may have illegally manipulated
Libor, a benchmark interest rate for global lending. Dozens of
municipalities, pension funds and other investors have already
sued the banks, claiming losses on a variety of financial
instruments linked to Libor.
- On June 27, Barclays announced that it had agreed to pay
$453 million to settle criminal and civil charges that it helped
rig Libor. Other banks involved in the process of determining
Libor are also under investigation in the United States, the UK
and other countries.
(Reporting by Reynolds Holding, a Reuters Breakingviews
columnist. The opinions expressed are his own.)
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