In May 2012, three different sets of plaintiffs filed amended complaints in federal court in Manhattan alleging banks around the world colluded to misreport interbank borrowing rates, which are averaged to produce the LIBOR every day. In turn, LIBOR rates (which are currently determined for ten currencies) are used as the primary benchmark for short-term interest rates worldwide. The complaints alleged “LIBOR thus affects the pricing of trillions of dollars’ worth of financial transactions.”
In addition, a class of investors in exchange-traded, LIBOR-based securities have filed suit, as has Charles Schwab. Those complaints are filled with charts and economic analysis purporting to show that the LIBOR panel banks deliberately reported lower borrowing rates than they were actually charged, with the apparent motive of making themselves look healthier than they were and of setting artificially low interest rates on LIBOR-based securities. The complaints track LIBOR rates against other metrics, like the banks’ probability of default, Eurodollar deposit rates, and credit default swap spreads, to conclude that the rates banks reported every day to the unregulated LIBOR-setting body couldn’t be truthful.
Regulators around the world suspect the same thing, as the amended complaints point out. No fewer than nine enforcement and criminal agencies are investigating alleged LIBOR manipulation, including the U.S. Department of Justice, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. All of the new filings cite juicy disclosures in the Singapore and Canada proceedings. In Canada, affidavits from an official in the criminal antitrust department revealed that one bank – later reported to be UBS – is actively cooperating with investigators and has provided records and testimony in the conspiracy probe. The Canadian affidavits include some of the detailed allegations of collusion between traders at different banks that can make or break an antitrust case. Similarly, in the Singapore wrongful termination case, a former Royal Bank of Scotland trader claims that he was scapegoated for manipulating LIBOR rates, when the bank itself condoned and encouraged the practice. The complaints also point to news stories about investigations of LIBOR collusion by officials in Japan and the European Union, among other places.
But those are the only detailed and specific allegations of an actual conspiracy in the complaints – thanks to the banks’ successful effort to block the private antitrust plaintiffs from getting their hands on evidence the banks have turned over to U.S. investigators. The evidence was the subject of a quick but furious exchange of letter briefs to U.S. District Judge Naomi Reice Buchwald in Feburary. All of the plaintiffs’ lawyers made a joint pitch to Buchwald to order the banks to provide them “the documents they have already produced to U.S. regulators investigating the alleged manipulation of LIBOR.” If the judge ordered the production before the plaintiffs filed their amended complaints, the lawyers argued, there would be no need to waste time with subsequent pleadings when the government’s evidence eventually came to light.
The banks’ lawyers countered that the plaintiffs’ “extraordinary and unduly burdensome” demand was improper unless and until the plaintiffs filed amended complaints and got past defense motions to dismiss. We’ll never know how much stronger the LIBOR plaintiffs’ amended complaints might have been with the government’s evidence because Buchwald sided with the banks and denied the production request.
It’s not easy to survive a motion to dismiss in antitrust litigation after the U.S. Supreme Court decision in Bell Atlantic v. Twombly. There are billows of thick smoke in the new LIBOR complaints. We’ll have to wait and see if the judge believes there’s enough fire as well.