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NEW YORK Make no mistake: A 161-page ruling late Friday by the federal judge overseeing private litigation stemming from manipulation of the benchmark London Interbank Offered Rate (Libor) has devastated investor claims that they were the victims of artificially suppressed Libor rates.
U.S. District Judge Naomi Reice Buchwald in New York ruled that owners of fixed and floating-rate securities do not have standing to bring antitrust claims against the banks that participated in the Libor rate-setting process, even though some of those banks have admitted to collusion in megabucks settlements with regulators. If that result, which Buchwald herself called "incongruous," weren't bad enough, the judge also cut off an alternative route to treble damages for supposed Libor victims when she held that federal racketeering claims of fraud by the panel banks are precluded under two different defense theories.
Buchwald's opinion didn't address every Libor case that's been filed, since she only ruled on bank motions to dismiss two class actions (one by owners of Libor-pegged securities and the other by derivatives traders) and individual claims by Charles Schwab entities. She held, moreover, that some claims based on the banks' supposed violations of the Commodity Exchange Act may go forward, although she also said she had doubts that Eurodollar contract traders would ultimately be able to tie losses to misconduct by the Libor banks. But unless and until the 2nd Circuit Court of Appeals reverses Buchwald, Libor antitrust and RICO claims in federal court seem to me to be dead.
That's because Buchwald's ruling is based on her interpretation of the law, not on facts. The judge said investors simply couldn't show that any injury they received from manipulation of the Libor process was the result of anticompetitive behavior by panel banks because the rate-setting process was collaborative, not competitive. (In that process, 12 or so banks would report their own interbank borrowing rate to Thomson Reuters, which would calculate the daily mean rate to be disseminated by the British Bankers' Association.) And though plaintiffs argued that the banks colluded to suppress Libor in order to lower the interest rates they would have to pay on securities pegged to the interbank rate, Buchwald said that the manipulation was not designed to hamper competition between the banks, which she said was a necessary element of antitrust standing.
"Even if we were to credit plaintiffs' allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury," she wrote. "Plaintiffs' injury would have resulted from defendants' misrepresentation, not from harm to competition."
As for RICO claims (which were only asserted by Schwab and not by the classes), the judge said in a broad holding that they are barred both under the federal law precluding investors from transforming securities fraud allegations into racketeering suits and under the U.S. Supreme Court's ruling in Morrison v. National Australia Bank that U.S. laws don't apply outside of our borders unless Congress so specified. Buchwald rejected arguments by Schwab's lawyers at Lieff Cabraser Heimann & Bernstein that the banks' misrepresentations were directed at investors and that not all of them related to securities. And even if that were true, Buchwald held, the RICO case would be impermissible under Morrison, which has been read by courts in the 2nd Circuit to preclude racketeering cases in which the illegal enterprise was based overseas. In Libor, the judge said, rate-reporting decisions were made by banks all over the world, but the center of the enterprise was London, where the British Bankers' Association is located.
Buchwald didn't dismiss the antitrust or RICO counts with prejudice, but I don't think there's much chance that the claims can be revived through an amended complaint with additional facts because Buchwald didn't even dig into investors' specific allegations. I doubt the classes will waste their time with an amended complaint. Instead, the plaintiffs may file a motion for reconsideration, arguing that the judge misapplied the law on horizontal price-fixing. Buchwald said that even if the classes can show a price-fixing conspiracy among competitors - a so-called "per se" violation of antitrust laws - investors must separately show that their injury was due to the defendants' anticompetitive behavior. Class action lawyers, on the other hand, had contended that because collusion by competitors is inherently illegal under federal antitrust laws, they have standing to sue regardless of whether their injury was due to dampened competition or simply to rate-rigging. If lead counsel from Hausfeld and Susman Godfrey, which represent the broadest class of investors, don't persuade Buchwald to change her mind (or if they decide not to bring a motion for reconsideration), you can expect their argument at the 2nd Circuit to turn on the trial judge's interpretation of standing to sue for injuries in a horizontal price-fixing conspiracy.
Meanwhile, the other Libor cases in federal court are likely to remain on hold. Under the rules for multidistrict litigation, the federal judges who oversee such cases have transferred every case filed in federal court (as of mid-February) to Buchwald for pretrial proceedings. Last August she said she would stay all of the other suits until she ruled on the banks' motions to dismiss the class actions since her analysis of those motions would affect the other Libor cases. Some plaintiffs whose cases have been transferred to Buchwald have since filed motions contending that they're not covered by the class actions, usually because they've brought state-law and federal racketeering claims in addition to the federal antitrust claims asserted by the classes. Buchwald has not said how she'll handle the additional suits now that she has tossed federal antitrust causes of action (as well as California state-law antitrust claims), and two plaintiffs' lawyers in the follow-up cases told me they're still trying to figure out what to do. The simplest solution would be for the other cases before Buchwald to remain stayed until there's a more definitive finding from the 2nd Circuit on the antitrust standing question.
Plaintiffs whose cases haven't yet been transferred to Buchwald - such as the Federal Home Loan Mortgage Corp, which sued Libor banks in March in federal court in Virginia - may fight transfer to her court, but the MDL rules are pretty clear that Libor suits in federal court go to her.
But for all of the doors closed by Buchwald's ruling on Friday, there are a couple left open, albeit only a crack. I've mentioned that the judge left alive some claims under the Commodity Exchange Act, whose statute of limitations gets a thorough 40-page going-over by the judge. (I'm not kidding: 40 pages.) Securities investors have a more favorable cutoff date for claims than derivatives investors under the Supreme Court's 2010 ruling in Merck v. Reynolds. So even if buyers and sellers of Libor-pegged securities can't bring antitrust claims, they may still be able to sue panel banks for securities fraud under the federal Securities Act or under state common laws, said Daniel Brockett of Quinn Emanuel Urquhart & Sullivan. (Caveat emptor: Quinn Emanuel, which has been pushing its Libor securities fraud theory since February, seems to be eager to represent clients with Libor securities claims.)
As Brockett pointed out in an interview with me on Monday, Buchwald's opinion strongly implies that the facts alleged by Libor plaintiffs are better suited to fraud and misrepresentation suits than to antitrust claims. "There was a fraud here," he said. "Fraud claims are viable as long as the statute hasn't run." So too, he said, are claims that individual banks on the Libor panel breached swaps contracts with individual investors. (In the Virginia suit filed last month, Freddie Mac brought such breach-of-contract claims against Bank of America, Barclays, Citigroup and several other banks.) Depending on choice-of-law clauses in the contracts, investors could have up to six years (under New York state law) to bring common-law fraud or contract cases against banks that sold them Libor-pegged securities.
There's a catch, of course, in that these cases would have to be filed by individual investors who can show that they relied on misrepresentations about Libor's legitimacy. (If there were a viable securities class action on behalf of owners of Libor-pegged securities, which aren't traded on stock exchanges, you can bet that it would already have been filed.) Only investors with enormous holdings, in other words, have an economic rationale for pursuing fraud or contract claims against particular panel banks. But Quinn Emanuel and at least one other big securities fraud firm I talked to believe such investors are out there.
If the 2nd Circuit upholds Buchwald, the Libor litigation may end up resembling securities litigation over mortgage-backed securities. After federal courts narrowed the standing of lead plaintiffs, MBS class actions ended up being much smaller than investors' lawyers originally expected. The 2nd Circuit subsequently expanded standing for lead plaintiffs in MBS class actions, but in the meantime individual investors in mortgage-backed notes, including German banks that held tens of billions of dollars of MBS, brought their own suits in state and federal courts. We're still waiting to see how profitable those cases turn out to be. (Alison Frankel writes the On the Case blog for Thomson Reuters News & Insight newsandinsight.com. The views expressed are her own.)
(Reporting by Alison Frankel; Editing by Ted Botha)