The fallout from the alleged manipulation of LIBOR and other interbank offered rates continues to accumulate. In the wake of Barclays’ record fines, the regulatory investigation continues, and authorities reportedly have also launched criminal investigations. Along with the governmental investigatory and enforcement activity has also come civil litigation activity as well.
The latest suit to be filed is an antirust action filed I on July 6, 2012 in the Southern District of New York. The complaint, which can be found here, alleges that Barclays, several Barclays entities, and several other banks, conspired to artificially manipulate the reported European Interbank Offered Rates (“EURIBOR”), which, the complaint alleges is “the baseline interest rate used in the valuation of more than $200 trillion in derivative financial products.”
The complaint, which purports to be filed on behalf of a class of persons or entities in the United States who purchased EURIBOR-related financial instruments between January 1, 2005 and December 31, 2009, relies heavily on documents, emails and other materials and information amassed as part of the governmental investigations. The complaint alleges that the defendants entered an agreement in restraint of trade, in violation of Section 1 of the Sherman Act. The complaint also alleges violation of the Commodity Exchange Act. The plaintiff’s lawyers’ July 6, 2012 press release about the EURIBOR antitrust suit can be found here.
Allison Frankel has a thorough overview of the Euribor antitrust lawsuit in a July 9, 2012 post on her On the Case blog (here).
The recent EURIBOR antitrust action is far from the only civil action to follow in the wake of the governmental investigation. According to a May 2012 PLUS Journal article by Eric Scheiner and Jennifer Quinn Broda of the Sedgwick, Detert, Moran & Arnold law firm entitled “Move Over Subprime? Financial Institutions and Brokers Face Increasing Concerns Over Allegation of Improper Libor Manipulation” (here), in 2011, at least 21 class action lawsuits were filed I n various U.S. federal courts against numerous Libor member banks. These lawsuits were instituted by institutional investors who purchased interest rate swaps tied to Libor and who claim they lost millions through the alleged manipulation of the interbank rate or who lost money on other interest-rate sensitive investments and instruments. Further background about these antitrust suits, which have now been consolidated, can be found here.
Nor are these institutional investor lawsuits the only suits to emerge. According to a June 27, 2012 memo from the Kennedys law firm (here), there have also already been at least two shareholders derivative lawsuits filed, one brought by a Bank of America shareholder and another by a Citigroup shareholder, against former and current directors and officers of those firms, alleging breaches of fiduciary duty “regarding lack of oversight relating to the bank’s purported manipulation and suppression of LIBOR as early as 2006.”
The ultimate scope of the Libor scandal remains to be seen, but the stakes involved are clearly enormous. To date, only Barclays has paid regulatory fines, but many other banks, perhaps dozens of banks are likely to become involved. The costs involved – both for defense expenses and for fines and penalties – will be massive. How massive remains to be seen, as we clearly are still just at the outset of this unfolding scandal.
What all of this may mean from an insurance perspective also remains to be seen. The regulatory fines and penalties are not likely to be covered. The companies’ costs incurred in the regulatory investigations also are not likely to be covered, as the typical D&O policy provides little coverage for entity related investigative costs, particularly outside of the securities law context.
The D&O insurance implications of the civil litigation are not entirely clear. The antitrust lawsuits primarily target the company defendants. There have been no individual defendants named in the antitrust suits. The typical public company D&O insurance policy provides entity coverage only for securities claims, which do not appear to be involved in the antitrust suits. In addition, private company D&O insurance policies often have antitrust exclusions. The derivative lawsuits may represent an entirely different matter. The derivative suits name individuals as defendants and alleged breaches of fiduciary duties, not antitrust violations. The derivative claims would be far more likely to be covered under the typical D&O policy.
The ultimate consequences for the companies involved and their insurers will only emerge over the coming months and years as this scandal continues to unfold. It does seem likely that the related civil litigation will continue to accumulate. To the extent additional derivative claims are filed, or if shareholders of target banks file securities claims, the follow-on civil litigation could develop into a significant event for the D&O insurance industry. At this point, the one thing that is clear is that it will pay to watch closely as the investigation unfolds and the follow-on civil litigation continues to emerge.
A July 2012 memo about the Libor investigation and possible insurance implications from my friend Nilam Sharma of the Ince & Co. law firm and her colleague Simon Cooper can be found here.
Special thanks to the several loyal readers who sent me copies of the EURIBOR antitrust complaint. Edvard Pattersson’s July 7, 2012 Bloomberg article about the EURIBOR antitrust suit can be found here.