Judge Naomi Reice Buchwald of Federal District Court in Manhattan, in a 161-page decision, has given the multinational banks being investigated for manipulating the London interbank offered rate, or Libor, a dose of good news for once.
On Friday, the judge dismissed the bulk of the claims filed against the banks by private plaintiffs, most important the antitrust and Racketeer Influenced and Corrupt Organizations counts that bring with them triple damages and attorneys’ fees for any violation.
The banks can certainly celebrate a major victory in the district court, but they should not get too far ahead of themselves. Like most such decisions, this one is just a way station on the road to the United States Court of Appeals for the Second Circuit for further review, and there is no guarantee that the appellate judges will agree with Judge Buchwald’s analysis.
Given the stakes involved, this could even be the type of case that draws the interest of the Supreme Court. That means the threat to the banks will linger until the appeals process is played out over the next year or two.
Her decision might have seemed surprising given that three banks - Barclays, UBS and Royal Bank of Scotland - have already settled cases with the government that cost them more than $2.5 billion in penalties. Each admitted to submitting false interest-rate information to the British Bankers Association used to establish Libor, a benchmark for loans and securities issued throughout the world.
UBS and Royal Bank of Scotland even had their Japanese brokerage subsidiaries enter a guilty plea in the United States, something unheard-of in bank prosecutions for years. More banks are likely to reach settlements with the government in the coming months, including admissions of wrongdoing, as they seek to put the Libor investigation behind them.
Indeed, the judge acknowledged in her opinion that the dismissal might be “unexpected†in light of the settlements that brought large fines and admissions of wrongdoing. But she made it clear that this seeming incongruity was a result of the “many requirements that private plaintiffs must satisfy, but which government agencies need not.â€
Her decision came on a motion to dismiss filed by the banks arguing that the plaintiffs could not prove a violation of the law even if it could be shown that interest-rate manipulation caused them financial harm.
The cases before Judge Buchwald represent a raft of class actions seeking billions of dollars in damages that were consolidated into a single proceeding.
A major focus is on the claim that the banks colluded to artificially depress Libor, costing investors in swaps and issuers of securities billions of dollars because interest rates tied to the benchmark did not reflect the true market. Under the antitrust laws, it is illegal for competitors to take concerted action that affects the price of goods and services for their own benefit.
The key to Judge Buchwald’s decision is her finding that the banks were not acting as competitors but instead were cooperating when submitting interest-rate information to the British Bankers Association, which in turn set Libor based on that data. To prove an antitrust violation, any financial harm suffered by private plaintiffs must be traceable to the negative effect on competition from the collusion. Thus, she concluded, the “injury would have resulted from defendants’ misrepresentation, not from harm to competition.â€
This reflects the approach taken by the Justice Department in the settlements reached thus far with the three banks over Libor manipulation. Those cases involved admissions of violating the federal wire fraud statute from the submission of false information designed to manipulate Libor, not a violation of the antitrust laws.
Judge Buchwald also found that Libor did not fall under the antitrust laws because it was designed to be only a point of information reflecting what banks would charge one another for loans, not a product subject to price-fixing. Whether banks colluded in their submissions or acted individually, the effect on investors would be the same so that there was no harm to competition, even if it caused financial losses.
In addition to the antitrust claims, some plaintiffs claimed the Libor manipulation violated the commodities laws and the racketeering statute, commonly known as RICO. Judge Buchwald threw out the RICO action, but did allow a portion of the commodities claims to proceed.
The discount broker Charles Schwab based its claim of a RICO violation on the banks’ having engaged in a pattern of racketeering activity involving mail, wire and bank fraud in manipulating Libor.
The judge dismissed that claim on two grounds: first, because RICO cannot be used in cases involving securities, based on a provision of the Private Securities Litigation Reform Act adopted in 1995 to curb abusive lawsuits.
Second, she concluded that RICO only reached a domestic enterprise affected by the misconduct, not a foreign one. Because the focal point of the manipulation was Libor as set by the British Bankers Association in London, she ruled, the violations fell outside the jurisdiction of a United States court.
The commodities claims were brought by traders in Eurodollar futures contracts who claimed that artificially lowering Libor effectively drove up the cost of their contracts. Judge Buchwald allowed some claims to proceed if the plaintiffs could show that the two-year statute of limitations did not require dismissal.
The claims by investors over some Eurodollar futures contracts will move forward, and the amounts involved in that case could be significant, even if much less than the broad antitrust claims.
Yet the banks face other significant legal challenges. There are lawsuits from the Libor manipulation that were not directly affected by the ruling. For example, Freddie Mac recently filed a lawsuit against them for antitrust violations, breach of contract and fraud. The potential damages are $5 billion. There is no guarantee the judge in that case, which was filed in Virginia, will adopt the view of the antitrust laws taken by Judge Buchwald.
And for those banks that have not yet reached settlements with regulators, there is the prospect of large monetary penalties and perhaps a guilty plea by a foreign subsidiary. As we have seen in the first three settlements, the government usually releases a set of embarrassing e-mails and text messages that put the bank in a rather bad light.
Still, there is no question that a win is a win, and the banks have every reason to be heartened by Judge Buchwald’s decision because it gives the plaintiffs much less leverage in seeking any settlement. There is, however, still a long way to go.
Judge Naomi Reice Buchwald's ruling
