Lawsuits cast darker shadow over banks than Libor fines

By Kirstin Ridley and Steve Slater LONDON, Dec 21 (Reuters) - While banks appear to be brushingoff record fines for rigging interbank interest rates, investorsare starting to worry about a rising tide of civil lawsuits fromdisgruntled customers. UBS shares touched 18 month highs after U.S.,Swiss and British regulators on Wednesday fined the bank a nearrecord $1.5 billion for fiddling interest rates, the second regulatory fine for manipulating the London interbank offeredrate (Libor) and its euro equivalent Euribor. But the "big unknown" cost of repairing the damage caused bythe fixing of rates used as a benchmark for pricing trillions ofdollars worth of financial contracts is civil litigation, saidParas Anand, European equities head at Fidelity WorldwideInvestment. "That is one thing at the back of our minds that we have tobe cognisant of," Anand said. Fidelity Worldwide holds around1.2 percent of UBS stock. An early indication of the possible cost to the bankingindustry came hours after UBS was fined when the U.S. federalwatchdog estimated mortgage lenders Fannie Mae andFreddie Mac, which had to be bailed out during the2007/08 financial crisis, could have lost more than $3 billionas a result of Libor manipulation. The watchdog urged the regulator to consider whether thelosses warranted a lawsuit against the banks that set Libor. Since June, when the first fine for manipulation was leviedon Britain's Barclays, there have been a series of U.S.Libor-related claims. Claims have come from large investors, local governmentslike the city of Baltimore, home owners claiming rate riggingmade their mortgages more expensive, and small U.S. banks thathave filed lawsuits accusing their big cousins of collusion. In August, New York lawyer Brian Murray filed a lawsuit onbehalf of investors in Alaska - as well as investors in Wyoming,North Dakota and about 20 other states - accusing banks ofrigging Libor. In Britain, the Financial Services Authority (FSA) has saidLibor fiddling could have caused "serious harm" to other marketparticipants. Lawyers, who are starting to circulate guides toLibor litigation, say potential claims are trickling in. "I think there are going to be a large number of claims -and, more importantly, a small number of those will beincredibly high-value claims," said Ali Akram, senior lawyer atUK firm Lex Law. LONG ROAD The manipulation of Libor casts doubt on every contract thathas used it as a reference point, including commercial borrowerswith loans linked to Libor, parties to interest rate derivativessuch as swaps, investors holding portfolios of floating ratesecurities, guarantors of borrowing linked to Libor and saversbeing paid a rate of interest referencing Libor. There are also potential claims by shareholders for anyfalls in stock prices as the scandal escalates. Lawyers believe Libor manipulation has caused extensivelosses to investors and borrowers worldwide. The scale ofpayouts could run into tens of billions of dollars, analystsestimate. But as Libor rates are calculated by averaging out banksubmissions and stripping out the highest and lowers outliers, calculating losses and proving individual bank conduct caused aloss can be complex. "We're at the beginning of a long road," said Stephen Rosen,a lawyer for UK firm Collyer Bristow, which has a handful ofclients eyeing Libor-related claims. To date, just one case has been brought in Britain againstBarclays by Guardian Care Homes, a residential care homeoperator. It is suing for up to 37 million pounds ($60 million)over the alleged mis-selling of interest rate hedging productsthat were based on Libor rates. ECONOMIC SPILLOVER But the scandal is escalating. Britain's RBS is also expecting to be fined by nextFebruary, while more than a dozen banks such as Deutsche Bank, Citigroup, J.P. Morgan and HSBC remain under the spotlight as authorities in Europe,Japan and North America probe the Libor scandal. Barclays, Citi, J.P. Morgan, Deutsche Bank, HSBC, Lloyds,Rabobank and RBS have all said in previous releases that theyare subject to civil or private lawsuits filed in the UnitedStates over Libor. Barclays said the first class action lawsuit filed was inApril 2011, and the complaints are similar and seek anunspecified amount of damages. Regulators and politicians are mindful of the impact oflawsuits on economic recovery and stability, some experts say,coming on top of the fines. While UBS was fined three times morethan Barclays, fears of spiralling settlements could be overdoneas authorities seek to balance the fallout. "There will be a round of going through pain beforepoliticians get scared and step in ... At some time politiciansand regulators will wake up and see that it will hit theeconomy," said Chirantan Barua, a senior banks analyst atBernstein Research. Baruna estimated about 15-20 banks could be implicated inthe Libor manipulation once global investigations are completed,which could give claimants plenty of fodder for lawsuits.