The early returns in the Libor-scandal related litigation have not been favorable for the claimants. As noted here, on March 29, 2013, Southern District of New York Judge Naomi Reice Buchwald substantially granted the motion to dismiss in the consolidated Libor-scandal antitrust litigation, and as discussed here, on May 13, 2013, Southern District of New York Judge Shira Scheindlin granted the motion to dismiss in the Libor-related securities class action lawsuit filed against Barclays.
Notwithstanding these setbacks for claimants seeking to recover damages from the Libor benchmark rate-setting banks, on May 20, 2013, certain claimants filed yet another Libor scandal-related lawsuit against the banks. The latest lawsuit, which was filed in the New York (New York County) Supreme Court, is filed as an individual action, not a class action, and may represent a new approach calculated to overcome some of the hurdles that the prior claimants have faced.
Alison Frankel has an interesting May 21, 2013 post about this latest Libor-scandal related lawsuit in her On the Case blog , here.
The latest complaint, a copy of which can be found here, was filed on behalf of two investment firms and two investment failed funds that they represent. In late 2007 and early 2008, the funds had entered into a type of complex financial transaction called a corporate bond basis package. One of the critical components of the transaction was an interest rate swap that, among other things, was designed to provide a floating-rate interest payment to the funds. The plaintiffs investment strategy assumed that as the banking crisis worsened, the Libor rate would increase, as (it was assumed) the crisis would force the rate-setting banks themselves to pay higher interest rates. The investment was designed to provide increased interest payments as the Libor benchmark increased.
Instead of making money as the Libor benchmark increased, the funds lost money, and actually had to make increased levels of collateral commitment, as the benchmark stayed basically level. Ultimately the funds were forced to unwind the transactions on very unfavorable terms, including, among other things, locking in artificially suppressed levels of Libor for the remaining periods of the swap transactions. Ultimately, the funds failed as a result of these problems. It was only later, when the details of the manipulation of the Libor benchmark rates emerged, that the plaintiffs understood that the investment performed so poorly because the Libor benchmark had been suppressed, as the participating banks sought to mask their true financial condition. Many of the Libor rate-setting banks that are accused of manipulating the benchmark rates were parties in the financial transactions that are the basis of the lawsuit.
Against the six banks with whom the plaintiffs had a direct financial relationship with the now-defunct funds , the plaintiffs have filed claims for breach of contract; breach of the implied covenant of good faith and fair dealing; and unjust enrichment. Against all of the rate-setting banks, the plaintiffs have filed claims for common law fraud; aiding and abetting fraud; tortious interference with contract; tortious interference with prospective business advantage; and civil conspiracy. The plaintiffs claim damages of $250 million.
By asserting common law claims, the claimants in this action avoid the statutory defenses that have led to setbacks for the claimants in the Libor-scandal antitrust and securities lawsuits. And while the assertion of these claimants of common law fraud claims will require the claimants to establish reliance, the nature of the relationship that these claimants had with the banks as a result of the transactions increases the likelihood that they will be able to establish reliance.
There have been prior Libor scandal-related cases asserting common law fraud claims (refer for example here). Nevertheless, this latest lawsuit may represent something of a new front in the Libor-scandal litigation wars, and may suggest a way for prospective Libor-scandal related to circumvent some of the obstacles that prior claimants have faced. That is, the claimants may avoid the problems prior claimants have confronted by proceeding individually rather than in the form of a class action, and by asserting common law claims rather than federal statutory claims.
The question is whether other prospective claimants individually have sufficient damages to warrant proceeding individually, and in addition whether the prospective claimants had sufficient direct contact with the Libor benchmark rate-setting banks in order to be able to try to substantiate the common law claims — for example, to allow the claimants to satisfy “reliance” requirements. According to comments from the counsel for these claimants that Frankel quoted in her blog post, there “are lots and lots of investors who dealt directly with the banks “ and that have sufficient damages to warrant individual claims.
It may be, as these claimants’ counsel is quoted as saying in Frankel’s blog post, that “this is where the future of Libor litigation exists, if it exists.” While the Libor claimants may have hit some early setbacks in the prior cases, there may be future cases that avoid the hurdles that the prior claimants faced and that prove to be more productive for the claimants.
It is far to early if this alternative approach to Libor litigation will bear fruit, but there is at least the suggestion that Libor litigation still has much further to go. Despite the early setbacks, it may be a while yet before we can assess overall how claimants are faring in this litigation.
In Defense of “No Admit” Settlements: For some time now, settlements of SEC enforcement actions in which the defendants neither admit nor deny wrongdoing have been under attack. These kinds of settlements were first and most publicly attacked by Southern District of New York Judge Jed Rakoff, who, in a November 2011 order, questioned the SEC’s no admit settlement with Citigroup. (That ruling is currently on appeal to the Second Circuit.) More recently, on May 14, 2013, Senator Elizabeth Warren sent the heads of several federal agencies, including the SEC, a letter questioning the practice of entering into settlements without an admission of guilt.
There clearly will continue to be debate on this issue. I have long thought that if the SEC is prohibited from entering into “no admit” settlements, among the possible consequences would be that fewer cases would settle, more cases would go to trial, and the SEC’s resources would be stretched, meaning even less enforcement in the end.
In a May 21, 2013 op-ed piece in the Wall Street Journal entitled “Why the SEC needs ‘No-Admit’ Settlements” (here), former SEC Enforcement head and current King & Spaulding partner Russell G. Ryan adds some additional concerns that might arise if the SEC were barred from entering into “no admit” settlements.
First, Ryan notes that an obvious alternative for the SEC, rather than pursuing civil enforcement actions in which it would be barred from entering into “no admit” settlements, the SEC would logically seek to pursue more cases through its administrative process, which requires no oversight by the courts. The administrative proceedings are viewed as less severe that federal court enforcement proceedings. In addition, because of the absence of judicial scrutiny, cases in the administrative process “invite the potential for reduced transparency and accountability when compared with settlements that require the imprimatur of an independent federal judge.”
Second, Ryan argues that if the agency were barred from entering “no admit” settlements, the outcome would be “weaker settlements overall.” Ryan points out that settlements are the result of protracted negotiations characterized by give and take by both parties. Ryan notes that:
Among many terms negotiated in an SEC settlement, the no-admit clause is one of the most important to the defense. A policy change requiring an admission of wrongdoing would, in essence, take this settlement term off the table. It would therefore force the SEC to compromise elsewhere in the bargain to maintain the fragile equilibrium that would have prevailed without the admission.
It is “naïve” to think that the SEC would be able to bargain for the exact same settlements as they are now if the SEC is not able to offer the possibility of a “no admit” provision in the bargain. Ryan contends that “the inevitable end result” if an admission of wrongdoing is required would be “lighter overall sanctions in a less accountable venue.”