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(Alison Frankel writes the On the Case blog for Thomson ReutersNews & Insight http://newsandinsight.com. The views expressedare her own.)
By Alison Frankel
NEW YORK, April 1 (Reuters) - Make no mistake: A 161-pageruling late Friday by the federal judge overseeing privatelitigation stemming from manipulation of the benchmark LondonInterbank Offered Rate (Libor) has devastated investor claimsthat they were the victims of artificially suppressed Liborrates.
U.S. District Judge Naomi Reice Buchwald in New York ruledthat owners of fixed and floating-rate securities do not havestanding to bring antitrust claims against the banks thatparticipated in the Libor rate-setting process, even though someof those banks have admitted to collusion in megabuckssettlements with regulators. If that result, which Buchwaldherself called "incongruous," weren't bad enough, the judge alsocut off an alternative route to treble damages for supposedLibor victims when she held that federal racketeering claims offraud by the panel banks are precluded under two differentdefense theories.
Buchwald's opinion didn't address every Libor case that'sbeen filed, since she only ruled on bank motions to dismiss twoclass actions (one by owners of Libor-pegged securities and theother by derivatives traders) and individual claims by CharlesSchwab entities. She held, moreover, that some claims based onthe banks' supposed violations of the Commodity Exchange Act maygo forward, although she also said she had doubts thatEurodollar contract traders would ultimately be able to tielosses to misconduct by the Libor banks. But unless and untilthe 2nd Circuit Court of Appeals reverses Buchwald, Liborantitrust and RICO claims in federal court seem to me to bedead.
That's because Buchwald's ruling is based on herinterpretation of the law, not on facts. The judge saidinvestors simply couldn't show that any injury they receivedfrom manipulation of the Libor process was the result ofanticompetitive behavior by panel banks because the rate-settingprocess was collaborative, not competitive. (In that process, 12or so banks would report their own interbank borrowing rate toThomson Reuters, which would calculate the daily mean rate to bedisseminated by the British Bankers' Association.) And thoughplaintiffs argued that the banks colluded to suppress Libor inorder to lower the interest rates they would have to pay onsecurities pegged to the interbank rate, Buchwald said that themanipulation was not designed to hamper competition between thebanks, which she said was a necessary element of antitruststanding.
"Even if we were to credit plaintiffs' allegations thatdefendants subverted this cooperative process by conspiring tosubmit artificial estimates instead of estimates made in goodfaith, it would not follow that plaintiffs have sufferedantitrust injury," she wrote. "Plaintiffs' injury would haveresulted from defendants' misrepresentation, not from harm tocompetition."
As for RICO claims (which were only asserted by Schwab andnot by the classes), the judge said in a broad holding that theyare barred both under the federal law precluding investors fromtransforming securities fraud allegations into racketeeringsuits and under the U.S. Supreme Court's ruling in Morrison v.National Australia Bank that U.S. laws don't apply outside ofour borders unless Congress so specified. Buchwald rejectedarguments by Schwab's lawyers at Lieff Cabraser Heimann &Bernstein that the banks' misrepresentations were directed atinvestors and that not all of them related to securities. Andeven if that were true, Buchwald held, the RICO case would beimpermissible under Morrison, which has been read by courts inthe 2nd Circuit to preclude racketeering cases in which theillegal enterprise was based overseas. In Libor, the judge said,rate-reporting decisions were made by banks all over the world,but the center of the enterprise was London, where the BritishBankers' Association is located.
Buchwald didn't dismiss the antitrust or RICO counts withprejudice, but I don't think there's much chance that the claimscan be revived through an amended complaint with additionalfacts because Buchwald didn't even dig into investors' specificallegations. I doubt the classes will waste their time with anamended complaint. Instead, the plaintiffs may file a motion forreconsideration, arguing that the judge misapplied the law onhorizontal price-fixing. Buchwald said that even if the classescan show a price-fixing conspiracy among competitors - aso-called "per se" violation of antitrust laws - investors mustseparately show that their injury was due to the defendants'anticompetitive behavior. Class action lawyers, on the otherhand, had contended that because collusion by competitors isinherently illegal under federal antitrust laws, they havestanding to sue regardless of whether their injury was due todampened competition or simply to rate-rigging. If lead counselfrom Hausfeld and Susman Godfrey, which represent the broadestclass of investors, don't persuade Buchwald to change her mind(or if they decide not to bring a motion for reconsideration),you can expect their argument at the 2nd Circuit to turn on thetrial judge's interpretation of standing to sue for injuries ina horizontal price-fixing conspiracy.
Meanwhile, the other Libor cases in federal court are likelyto remain on hold. Under the rules for multidistrict litigation,the federal judges who oversee such cases have transferred everycase filed in federal court (as of mid-February) to Buchwald forpretrial proceedings. Last August she said she would stay all ofthe other suits until she ruled on the banks' motions to dismissthe class actions since her analysis of those motions wouldaffect the other Libor cases. Some plaintiffs whose cases havebeen transferred to Buchwald have since filed motions contendingthat they're not covered by the class actions, usually becausethey've brought state-law and federal racketeering claims inaddition to the federal antitrust claims asserted by theclasses. Buchwald has not said how she'll handle the additionalsuits now that she has tossed federal antitrust causes of action(as well as California state-law antitrust claims), and twoplaintiffs' lawyers in the follow-up cases told me they're stilltrying to figure out what to do. The simplest solution would befor the other cases before Buchwald to remain stayed untilthere's a more definitive finding from the 2nd Circuit on theantitrust standing question.
Plaintiffs whose cases haven't yet been transferred toBuchwald - such as the Federal Home Loan Mortgage Corp, which sued Libor banks in March in federal court inVirginia - may fight transfer to her court, but the MDL rulesare pretty clear that Libor suits in federal court go to her.
But for all of the doors closed by Buchwald's ruling onFriday, there are a couple left open, albeit only a crack. I'vementioned that the judge left alive some claims under theCommodity Exchange Act, whose statute of limitations gets athorough 40-page going-over by the judge. (I'm not kidding: 40pages.) Securities investors have a more favorable cutoff datefor claims than derivatives investors under the Supreme Court's2010 ruling in Merck v. Reynolds. So even if buyers and sellersof Libor-pegged securities can't bring antitrust claims, theymay still be able to sue panel banks for securities fraud underthe federal Securities Act or under state common laws, saidDaniel Brockett of Quinn Emanuel Urquhart & Sullivan. (Caveatemptor: Quinn Emanuel, which has been pushing its Liborsecurities fraud theory since February, seems to be eager torepresent clients with Libor securities claims.)
As Brockett pointed out in an interview with me on Monday,Buchwald's opinion strongly implies that the facts alleged byLibor plaintiffs are better suited to fraud andmisrepresentation suits than to antitrust claims. "There was afraud here," he said. "Fraud claims are viable as long as thestatute hasn't run." So too, he said, are claims that individualbanks on the Libor panel breached swaps contracts withindividual investors. (In the Virginia suit filed last month,Freddie Mac brought such breach-of-contract claims against Bankof America, Barclays, Citigroup and several other banks.)Depending on choice-of-law clauses in the contracts, investorscould have up to six years (under New York state law) to bringcommon-law fraud or contract cases against banks that sold themLibor-pegged securities.
There's a catch, of course, in that these cases would haveto be filed by individual investors who can show that theyrelied on misrepresentations about Libor's legitimacy. (If therewere a viable securities class action on behalf of owners ofLibor-pegged securities, which aren't traded on stock exchanges,you can bet that it would already have been filed.) Onlyinvestors with enormous holdings, in other words, have aneconomic rationale for pursuing fraud or contract claims againstparticular panel banks. But Quinn Emanuel and at least one otherbig securities fraud firm I talked to believe such investors areout there.
If the 2nd Circuit upholds Buchwald, the Libor litigationmay end up resembling securities litigation over mortgage-backedsecurities. After federal courts narrowed the standing of leadplaintiffs, MBS class actions ended up being much smaller thaninvestors' lawyers originally expected. The 2nd Circuitsubsequently expanded standing for lead plaintiffs in MBS classactions, but in the meantime individual investors inmortgage-backed notes, including German banks that held tens ofbillions of dollars of MBS, brought their own suits in state andfederal courts. We're still waiting to see how profitable thosecases turn out to be. (Reporting by Alison Frankel; Editing by Ted Botha)
