News in Libor litigation means banks should think settlement

25 May 2016. By Richard Vanderford.

With a massive appellate reversal Monday and a major settlement Wednesday, banks accused of manipulating the Libor interest-rate benchmark face renewed reason to settle a complicated antitrust suit brought against them by investors.

After years of decisions assuring them that alleged manipulations of the London Interbank Offered Rate didn’t fall under antitrust law, a decision by the US Court of Appeals for the Second Circuit published Monday has given 16 of the world’s biggest banks a new headache.

The banks’ chief argument on why they shouldn’t face antitrust liability — that setting Libor wasn’t a competitive process — was “immaterial,” US Circuit Judge Dennis Jacobs said in an opinion on behalf of a three-judge panel (see here).

In a nod to the dire financial implications of the reopening of claims brought by aggrieved investors, Jacobs warned that the potential damages the court’s decision resurrected could “bankrupt 16 of the world’s most important financial institutions.”

That was Monday.

On Wednesday, as if to remind banks that regulators hadn’t forgotten about Libor, the US Commodity Futures Trading Commission announced that it had reached a $175 million settlement with Citibank and two affiliates over their alleged manipulation of various Libor rates from 2008 to 2010.

Libor remains the centerpiece of a broad scandal involving large banks’ alleged gaming supposedly objective financial benchmarks they had a hand in setting, a bid to prop up their own books. The rate, set using submissions from a group of banks on their estimated interbank borrowing costs, underpins trillions of dollars in financial transactions.

Investors on the other side sued in New York to recover losses stemming from the supposed tinkering. The banks, though, found an ally in US District Judge Naomi Reice Buchwald, who ruled that since they were by definition supposed to cooperate to set the rate, the rate-setting process wasn’t a competitive one covered by antitrust law.

The decision by the Second Circuit throws out that thinking, and with it the sturdy bulwark that banks had against the potentially ruinous treble damages allowed under antitrust law.

Citigroup in February entered into a $23 million “icebreaker” settlement to resolve claims from investors in a related Libor case before a different judge. Barclays in November agreed to a $120 million settlement in the case before Buchwald and agreed to cooperate with lawyers for the investors.

With the Second Circuit having put itself in the investors’ corner, banks looking to settle now almost certainly won’t get that sweet a deal, but pursuing a bargain makes sense despite some of the problems with the investors’ case against them.

Though the investors’ key theory has been vindicated, they are far from a total win. Leaving aside the possibility that banks might ask for, and get, a rehearing by the full Second Circuit, dressing up benchmark manipulation claims in antitrust law has always been a rough fit.

The case is far from a typical one of producers conspiring to hose consumers with higher prices. Jacobs himself acknowledged as much, saying intuitively it doesn’t make sense that banks, which borrow and lend, would push an interest rate to benefit one department at the expense of another.

The investor class action also, perhaps paradoxically, could suffer from its breadth. The tens of thousands of daily transactions that aggregate to form the trillions of dollars in Libor-denominated instruments are a dense thicket for legal teams to wade through.

Lawyers for the City of Baltimore, one of the investors behind the case, said Wednesday that the banks have made it clear that they wouldn’t be able to turn over transaction data in time to come close to meeting a schedule Buchwald laid down even before the Second Circuit had revived the case’s antitrust claims. (The judge had allowed claims such as fraud to move forward).

The Second Circuit said Buchwald should consider, in light of some of the difficulties, whether the plaintiffs are “efficient enforcers” for the antitrust claims they brought. Jacobs’ comments on bankrupting the big banks, far from a sop to Occupy Wall Street-types, were a warning on the dangers of letting the antitrust suit explode into a vehicle for pinning every ill possibly linked to Libor on the banks themselves.

Despite these core issues with the investors’ case, and the positive reception they might receive from the so-far sympathetic Buchwald, settlement remains a good option for the banks in the suit, a group that includes Deutsche Bank, HSBC, JPMorgan Chase and others.

An irony of the some of the alleged Libor manipulation, noted by the CFTC Wednesday, was that it was meant to shield banks from reputational risk — Citigroup, for example, allegedly didn’t want leery market watchers to know how much it would actually cost the bank to borrow money as the financial crisis unfolded in 2008.

Guilty or not, Citigroup and others have endured years of reputational harm as the Libor investigation has unfolded.

It and other banks have shown a willingness to settle, with the government at least, over Libor and other benchmark manipulation. Five banks agreed to plead guilty to felony charges last March over alleged manipulation of the foreign exchange market. UBS at the same time agreed to plead guilty to manipulating Libor, followed by Deutsche Bank last April. Rabobank and Lloyds Banking Group, the Royal Bank of Scotland and Barclays have also reached resolutions of one kind or another with US Justice Department prosecutors.

Though Citigroup hasn’t entered any deal with the Justice Department, it on Wednesday said its deal was “a significant step for Citi in resolving its legacy benchmark rate investigations.” The bank also provided a powerful illustration of how banks’ shareholders value certainty now over the potential of courtroom wins in the future.

After the announcement of its $175 million CFTC settlement Wednesday morning, the Citigroup’s shares closed up 2.33 percent on the day, adding about $3 billion to the bank’s already hefty market capitalization.

When “losing” is that lucrative, the decision on whether to fold should be an easy one.

	Eliot Gao