Investment banks alerted to antitrust litigation risk after UK class lawsuit

02 Apr 2020 12:44 pm by Simon Zekaria

Another week, another pitch for a UK class action — with a lesson to investment banks that the cost of anticompetitive behavior could be more painful than before.

The mass lawsuit is being brought by Michael O’Higgins, a former head of the UK's pensions regulator, who is seeking potentially hundreds of millions of pounds from five banks. He wants them to pay compensation to pension funds and others for their collusion to manipulate foreign-exchange markets, which he calls "cartel" activity.

His classwide claim is a new test for the UK's nascent collective-action regime, and financial services is the latest sector to learn that their activities face a heightened risk of antitrust-related litigation.

In the UK, that risk is intensifying. Already, a clutch of banks — Barclays, Citibank, HSBC, Royal Bank of Scotland, UBS and JPMorgan — face a damage claim lodged by investors such as Allianz over their foreign-exchange trading conduct, in what might turn out to be one of the UK's biggest-ever cartel claims.

With O'Higgins' class-action suit now running alongside that claim, banks’ conduct is firmly in the spotlight.

'Semi-grumpy' collusion

As in previous collective UK actions filed against truckmakers and Mastercard, the O'Higgins class action flows from an infringement decision made by EU regulators.

Barclays, Citigroup, Royal Bank of Scotland, JPMorgan and Japan’s MUFG  — formerly Bank of Tokyo-Mitsubishi UFJ — settled in May with EU competition authorities by paying a fine of more than one billion euros for manipulating currency rates. UBS was the whistleblower.

The banks admitted that their traders organized two cartels, named "Three-way Banana Split" and "Essex Express", through equally colorfully-named online chatroom groups such as "Semi-Grumpy Old Men". These were used from 2007 to 2013 by the bank employees to share sensitive information and coordinate trading across 11 currencies, including the US dollar, the euro and pound sterling.

O’Higgins’ lawsuit targets those same banks, bar MUFG. It is seeking payouts for investors and companies such as pension funds, asset managers, hedge funds and corporates, which he argues were harmed by the rogue traders' rate fixing.

Citigroup, JPMorgan and UBS declined to comment to MLex on the suit, while Barclays and RBS did not respond.

As there is an EU decision pending against Credit Suisse under the same foreign-exchange manipulation inquiry, the scope of the mass lawsuit could well expand still further.

All in all, this drumbeat of events will be pricking the ears of institutional boardrooms and investors monitoring O’Higgins’ suit, which has been years in the making.

Settlement and scrutiny

O'Higgins can take heart from signs that his class claim could be successful.

In August last year, his appointed lawyers secured more than $2.3 billion in compensation from 15 banks, including Barclays, RBS and UBS, in the wake of a successful US class-action suit over the same issue.

Indeed, O’Higgins has spelled out his aims clearly: further redress is available “just as compensation has been won in the US.”

Other events, too, should propel enthusiasm for the UK suit. Allegations about banks’ collusion across currency markets have since led to intervention and heavy fines from regulatory authorities such as the US Department of Justice.

There have also been a patchwork of private cases against banks in the US and elsewhere, seeking compensation for alleged losses from foreign-exchange rigging. There have even been related criminal investigations.

Now, O’Higgins is taking his chance in the UK. Changes in the country's consumer laws four years ago opened the door for companies to be automatically included as beneficiaries in actions on behalf of a whole class of claimants to pursue redress for suspected antitrust violations.

That shift could lead to the UK adopting US-style class actions, which have put a myriad of sectors, including tobacco and pharmaceuticals, on the hook for compensation.

The banking sector should take a warning that it, too, can be a target.

Legal arguments

Intensified scrunity and legal redress are two different things, however. For O’Higgins, as for all those who bring UK class actions, the primary task is to get the suit certified for trial via a so-called collective proceedings order.

The Competition Appeal Tribunal uses this order to make a claim eligible on the basis of class, commonality and suitability. That is easier said than done. No CPO has yet been awarded by the CAT, and key questions remain over central issues such as the O'Higgins claim's scope, loss and damage distribution.

At first glance, the claim’s class is broad. That’s because O’Higgins argues the banks’ cartels had a wide effect across the European foreign-exchange market, and even encompasses the activities of financial institutions not involved in anticompetitive conduct.

But the lawsuit is focused narrowly. Only those who entered into spot foreign-exchange trading — an agreement to exchange a specific amount of one currency against another — and forward transactions — an agreement to exchange currency in the future at a specified rate —  are included as financial instruments covered by the class action.

Such transactions will have taken place via voice or other direct trade, or via an electronic platform. Not included are retail currency transactions, account-fund transfers, card transactions, spread betting, swaps, options and futures.

O’Higgins also said he has foreign-exchange market experts, former traders, quantitative analysts, competition economists and forensic accountants to calculate how much the prices of trades were artificially inflated, to therefore determine the aggregate damage suffered by the class.

As it plots its way through a novel legal regime, the CAT has signaled potential plaintiffs of more manageable and narrowly-defined claims may feel they can better navigate the legal tests. That makes O'Higgins' approach matter.

There are other elements, too.

O’Higgins — currently chairman of the Local Pensions Partnership, a public sector pensions provider, and of the Channel Island Competition and Regulatory Authorities — says his experience in the pensions industry makes him ideally placed to run the claim.

Another aspect is funding. The CAT has said that, to approve a claim, it must be satisfied that the class representative has the resources to fund it and pay the defendants’ costs if ordered. Otherwise put, availability of third-party funding to mitigate the class representative's exposure to costs is seen as a central consideration for certification.

Therium Capital Management, a specialist third-party litigation funder, is providing more than 29 million pounds ($35 million) of capital to O'Higgins' claim. The group has significant skin in the game of collective actions, having already funded one of the mass claims against a truckmaking cartel.

Supreme Court and Mastercard

All seems in place, but O’Higgins knows the claim remains stuck at first base — and that won't change any time soon.

That’s because O’Higgins, like other mass claimants, is waiting for Supreme Court judges to decide whether Walter Merricks' landmark claim against Mastercard should be certified as acceptable to be heard at trial. If it is — and even if it isn't — ​this will clarify the criteria for competition judges to approve mass lawsuits. The hearing is likely to be held late next year, and a ruling is not expected until months after that.

A queue of proposed claims is backing up and in the same position as that of O'Higgins. And with the CAT already having postponed certification hearings for other mass lawsuits, the O’Higgins action looks set for the same fate.

O’Higgins himself admits that the legal process for the claim could take several years, and says it is “possible” the banks will settle before trial. At this point, dangling that carrot may be a useful tool to keep immediate interest levels high.

Another week, another pitch for a mass lawsuit — but the familiar hurdles remain.

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