LONDON Barclays (BARC.L) employees manipulated Libor benchmark interest rates to benefit one of the British lender's sterling investment funds between 2006 and 2010, according to evidence disclosed in court filings by a company that is suing the bank.
The details came to light on Thursday during a hearing at the Court of Appeal in London into a dispute between Barclays and residential care home operator Guardian Care Homes, a test case that could affect all banks tainted by the Libor scandal.
The key issue is whether Guardian Care Homes can rely on alleged Libor-rigging by Barclays to invalidate two interest rate swaps it entered into with the bank in 2007 and 2008.
Guardian Care Homes had taken out two loans totaling 70 million pounds ($113 million) from Barclays and alleges the bank mis-sold it inappropriate interest rate hedging products based on Libor that ended up costing it millions as rates fell.
Barclays denies mis-selling and says the Libor-rigging allegations are irrelevant to the dispute.
The bank has been fined $453 million by U.S. and British authorities in June 2012 over attempted manipulation of Libor rates, a scandal that led to the resignation of the bank's then chief executive Bob Diamond.
In legal papers filed to the court, Guardian Care Homes cites a letter from Barclays lawyers to the Singapore regulator that contains details of an internal investigation by Barclays covering the period between January 2006 and April 2010.
The investigation was into alleged manipulation of the three-month sterling Libor rate by bank employees, which Guardian Care Homes says is relevant to its case because that was the rate its two swaps with Barclays were tied to.
"Barclays continues to bury its head in the sand despite overwhelming evidence that the bank was manipulating Libor in order to profit from swaps," said Guardian Care Homes CEO Gary Hartland. "My swaps have cost me 12 million pounds so the suggestion that these allegations are irrelevant is fanciful."
According to Guardian Care Homes, the probe found that ex-Barclays employee Quan Hui Lee, now working at an investment fund run by Barclays called Ricardo Master Fund, had asked bank employees to manipulate the rate to boost the fund's returns.
"Go get Libor down," Lee was cited as saying in an email to Ian Pike, a London-based Barclays sterling Libor submitter, to which Pike responded: "I'll do my best boss!"
In another email, Lee was quoted as saying: "LOWER! Go for 3 percent ... I want yr end 3mL (three-month Libor) to be 2.8 percent or at worst 2.88 percent."
Citing the contents of the letter from Barclays lawyers to the Monetary Authority of Singapore, dated May 9, 2013, Guardian Care Homes said: "The purpose of the fraud was to make profit or avoid losses on 'Ricardo Master Fund'".
"The documents ... show that Barclays' misconduct goes further and wider than the regulatory findings and, importantly, compound the existing evidence that this misconduct in relation to Libor had a material economic impact upon the (swaps) entered into by (Guardian Care Homes)," the firm's lawyers wrote.
Barclays is trying to have the Libor-related elements of the case thrown out by the Court of Appeal, which is hearing the case in conjunction with a similar dispute between Deutsche Bank (DBKGn.DE) and Indian real estate developer Unitech (UNTE.NS).
"(The case) is not concerned with the extent to which Barclays manipulated Libor or the regulators' reports," the bank's lead counsel Robin Dicker told the court.
"It is concerned with a much narrower issue, whether Guardian Care Homes can rely on such conduct to avoid or reduce its obligations."
The three Court of Appeal judges are due to give their ruling later this year. Depending on which way it goes, it could either open the floodgates for similar lawsuits by small and medium-sized firms which had agreed deals pegged to Libor rates against banks involved in the scandal, or on the contrary make it much harder to launch such lawsuits.
"The nature of the case asserted by (Guardian Care Homes) is wide-ranging in its scope and indiscriminate in its application to any customer who contracted with a Libor-submitting panel bank," Barclays told the court in one of its own filings.
"The potential ramifications of (Guardian Care Homes') case ... are extensive, given the quantity and value of contracts referenced to Libor rates across the world."
(Additional reporting by Kirstin Ridley; Editing by David Holmes)