NCUA Files Libor Manipulatoin Antitrust Suit: Even though the federal judge presiding over the consolidated Libor antitrust litigation has granted the defendants’ motion to dismiss the antitrust claims, the federal credit union regulatory agency has filed a new action against Libor rate-setting banks alleging violation of the Sherman Act. As described in the National Credit Union Administration’s press release (here), on September 23, 2013, the agency filed an action in the District of Kansas in its capacity as receiver for five failed corporate credit unions alleging that thirteen Libor rate-setting banks manipulated the Libor benchmark rate, costing the failed credit unions millions in lost interest. The NCUA’s complaint can be found here.
The arguably surprising thing about the NCUA’s complaint is that it alleges only antitrust claims. As discussed here, in March, Southern District of New York Judge Naomi Reece Buchwald ruled in the consolidated Libor antitrust action that the claimants lack antitrust standing because the defendants’ alleged actions did not affect competition, as the rate-setting banks were not in competition with one another with respect to Libor rate-setting. Judge Buchwald said ““the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.”
The claimants in the consolidated antitrust action had sought to amend their complaints, but as Alison Frankel discusses in a September 24, 2013 post on her On the Case blog (here), in August, Judge Buchwald refused to allow the claimants to file their second amended complaint and confirmed her previous finding that the class does not have standing to assert antitrust claims because the claimants have failed to allege that defendant banks were in competition with respect to Libor rate-setting.
In the wake of Judge Buchwald’s decision, other claimants have opted to file their Libor manipulation claims in state court, alleging state law claims (as shown for example here), or to try to proceed on other legal theories – for example, under the federal securities laws. However, the NCUA did not attempt to pursue any of these alternative approaches; instead, its complaint alleges only antitrust law violations. This approach is all the more puzzling as the NCUA case almost certainly will wind up be consolidated before Judge Buchwald for pre-trial purposes, even though the agency filed the action in Kansas. Moreover, the agency has not raised any additional allegations that would establish that the rate-setting banks were in competition with respect to the Libor rate-setting, as Frankel discusses in her blog post.
Based on appearances, it would seem that the agency believes that Judge Buchwald’s antitrust analysis is incorrect and will be overturned. According to Frankel, some of the claimants in the consolidated action have already filed a notice of appeal. There is of course a possibility that the Second Circuit will overturn Judge Buchwald’s ruling. On the other hand, the Second Circuit could also affirm Judge Buchwald. You would think that NCUA would have hedged its best by seeking relief on alternative grounds or at least based on different theories other than an alleged antitrust violation. Just the same, as Frankel points out, “there are billions riding on this appeal.”
Prosecutors Use of FIRREA to Pursue Banks Gets a Another Boost: As I discussed in a recent post, regulators and prosecutors have resurrected a statute from the S&L crisis era to pursue financial fraud claims related to the financial crisis. FIRREA allows the government to seek recoveries for violations “affecting federally insured financial institutions.” Using this statute, the federal government has recently filed a number of actions against banks alleging that the defendant banks engaged in fraudulent activity and harmed themselves. The government has relied on this theory to bring claims against Bank of America, JP Morgan Chase and BNY Mellon. The government also relied on claims under FIRREA in the civil action it filed against Moody’s and its Standard & Poor’s unit in connection with the unit’s credit rating activities (as discussed here).
The banks have tried to argue that in order for the statute to apply the affected institution must be the victim or an innocent bystander to the alleged fraud, and that the statute was not meant to apply to the type of “self-affecting” claims the government has raised. Several courts have rejected these defense arguments, and on September 24, 2013, the government’s attempts to rely on this theory got another boost when Southern District of New York Judge Jesse Furman denied Wells Fargo’s motion to dismiss in an action the DoJ brought alleging that the bank had defrauded the government by knowing certifying to federal regulators that thousands of mortgages were eligible for Federal Housing Administration insurance.
In his opinion (here), Judge Furman said that Wells Fargo’s theory that FIRREA was not meant to apply to the type of “self-affecting” claim the government asserted against it “is unsupported by the text of the statute which does not exempt from the relevant affected financial institutions those that perpetrate fraud on themselves.”
The government’s success in establishing its ability to rely on FIRREA to bring fraud claims against banks could be even more important going forward, as prosecutors continue to try to assert financial crisis related claims. Even though the crisis retreats further into the past each day, FIRREA has a ten-year statute of limitations, which, now that the government has established that it can use the statute to pursue claims that banks managed to harm themselves for their own fraudulent activity, allows prosecutors plenty of time to continue to assert claims related to the financial crisis.
As detailed in a September 24, 2013 Bloomberg article (here), even though the statute is a “relic” of the S&L crisis, it has become “the weapon of choice for federal prosecutors investigating the root causes of the financial crisis.” In additional to the extended limitations period, the statute provides a lower burden of proof that is required in a criminal case, and it allows the government to extract hefty penalties. The extended timeline that FIRREA affords makes the statute a formidable weapon for the government as it continues to pursue financial crisis-related claims.
Plaintiffs’ Lawyers Continue to Target U.S.-Listed Chinese Companies: As has been well-noted (on this site and elsewhere), in 2011 and 2012, plaintiffs’ lawyers filed a host of securities class action lawsuits against U.S.-listed Chinese companies. But the number of these lawsuit filings declined in 2012 (when there were 18) compared to 2011 (when there were 40) and it seemed that these kinds of filings would dwindle in 2013. However, as evidenced by an action filed earlier this week in the Southern District of New York, plaintiffs lawyer are still continuing to file lawsuits against U.S.-listed Chinese companies.
According to their September 23, 2013 press release (here), plaintiffs’ lawyers have filed an action against L&L Energy and certain of its directors and officers alleging that the defendants misled investors by misrepresenting or failing to disclose that “(1) the Company improperly accounted substantial revenue from operations that were already shut down; (2) the Company claimed acquisitions and divestitures of various properties through swap transactions that never occurred through the exchange of assets it never owned in the first place; (3) the Company lacked adequate internal and financial controls.” Through subsidiaries, L&L Energy mines, process and distributes coal in China.
The complaint (which can be found here) relies heavily on a report from short-seller GeoInvesting that appeared on Saving Alpha on September 19, 2013. The complaint alleges that:
that the Company has been “defrauding investors by booking substantial revenue from operations that have been idled for quite some time.” Specifically, GeoInvesting stated that the Company’s numerous acquisitions and divestitures through the years have amounted "to a bait and switch shell game" by utilizing "swap transactions that never occurred." Moreover, the article concluded "that revenue of $77.6 million disclosed in LLEN’s 2013 10K, generated from its Hong Xing coal washing factory, was actually close to zero, if it is not actually zero" as the factory "has been shut down since 2012."
This latest complaint has many features in common with many of the actions that plaintiffs’ lawyers filed during 2011 and 2012, including the assertion of misrepresentations of assets and accounting fraud, as well as the appearance of the allegations in an online article written by a short-seller.
L&L Energy itself has its own set of links to the wave of lawsuits filed during 2011 and 2012, in that the company itself was sued in 2011 in a securities class action lawsuit filed in the Western District of Washington.. As detailed here, the prior lawsuit, which raised a different set of allegations against the company, has been dismissed without prejudice, and the plaintiffs in that case have filed a further amended complaint.
Though the securities suit filings against U.S.-listed Chinese companies are down significantly from the high water mark in 2011, the fact is that plaintiffs’ lawyers are still continuing the file suits against the Chinese companies. Of the roughly 118 securities class action lawsuits filed so far this year, 19 (or bout 16%) have involved non-U.S. companies. Of the 19 non-U.S. companies, 6 (or about 5% of all 2013 filings YTD) have involved companies organized or headquartered in China or with their principal place of business in China. (Yet another complaint involves a company from Taiwan.) .
These factors have been more pronounced so far during the year’s second haff. Of the roughtly 42 new securities lawsuits that have been filed since July 1, 2013, nine (or about 21%) have invoved non-U.S. companies. Of the nine non-U.S. companies, three have been from China, representing about 7% of all second half filings.
A recent post detailed how corruptoin allegations have led to the filing of a securities lawsuit against a U.S.-listed Chinese company can be found here.