Opinion

Alison Frankel

New LIBOR antitrust complaints: Lots of charts, few juicy specifics

By Alison Frankel
May 3, 2012

It takes serious economics chops to be a big-time antitrust lawyer. If you want proof, read through the amended complaints filed in federal court in Manhattan this week in the consolidated litigation over the London Interbank Offered Rate, or LIBOR. Three different sets of plaintiffs contend that banks around the world colluded to misreport interbank borrowing rates, which are averaged to produce the LIBOR every day. In turn, LIBOR rates (which are currently determined for 10 currencies) are used as the primary benchmark for short-term interest rates worldwide. As Susman Godfrey and Hausfeld noted in their 103-page amended complaint on behalf of a class of investors in LIBOR-based swaps, options, and CDOs, “LIBOR thus affects the pricing of trillions of dollars’ worth of financial transactions.”

Their complaint, like the amended LIBOR complaints also filed Monday night by a class of investors in exchange-traded, LIBOR-based securities and by Charles Schwab, is filled with charts and economic analysis purporting to show that the LIBOR panel banks deliberately reported lower borrowing rates than they were actually charged, with the apparent motive of making themselves look healthier than they were and of setting artificially low interest rates on LIBOR-based securities. (Here’s the 107-page filing by the exchange-traded securities class, which is represented by Kirby McInerney and Lovell Stewart Halebian Jacobson; here’s the 103-page Schwab complaint, filed by Lieff Cabraser Heimann & Bernstein.) The complaints track LIBOR rates against other metrics, like the banks’ probability of default, Eurodollar deposit rates, and credit default swap spreads, to conclude that the rates banks reported every day to the unregulated LIBOR-setting body couldn’t be truthful.

Regulators around the world suspect the same thing, as the amended complaints point out. No fewer than nine enforcement and criminal agencies are investigating alleged LIBOR manipulation, including the U.S. Department of Justice, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. All of the new filings cite juicy disclosures in the Singapore and Canada proceedings. In Canada, affidavits from an official in the criminal antitrust department revealed that one bank – later reported to be UBS – is actively cooperating with investigators and has provided records and testimony in the conspiracy probe. The Canadian affidavits include some of the detailed allegations of collusion between traders at different banks that can make or break an antitrust case. Similarly, in the Singapore wrongful termination case, a former Royal Bank of Scotland trader claims that he was scapegoated for manipulating LIBOR rates, when the bank itself condoned and encouraged the practice. The complaints also point to news stories about investigations of LIBOR collusion by officials in Japan and the European Union, among other places.

But those are the only detailed and specific allegations of an actual conspiracy in the complaints – thanks to the banks’ successful effort to block the private antitrust plaintiffs from getting their hands on evidence the banks have turned over to U.S. investigators. That evidence was the subject of a quick but furious exchange of letter briefs to U.S. District Judge Naomi Reice Buchwald in February. All of the plaintiffs’ lawyers made a joint pitch to Buchwald to order the banks to provide them “the documents they have already produced to U.S. regulators investigating the alleged manipulation of LIBOR.” If the judge ordered the production before the plaintiffs filed their amended complaints, the lawyers argued, there would be no need to waste time with subsequent pleadings when the government’s evidence eventually came to light.

The banks’ lawyers countered that the plaintiffs’ “extraordinary and unduly burdensome” demand was improper unless and until the plaintiffs filed amended complaints and got past defense motions to dismiss. (The banks have counsel from Davis Polk & Wardwell; Simpson Thacher & Bartlett; Shearman & Sterling; Hogan Lovells; Sullivan & Cromwell; Sidley Austin; Locke Lord; Katten Muchin; Clifford Chance; Milbank, Tweed, Hadley & McCloy; Mayer Brown; Paul, Weiss, Rifkind, Wharton & Garrison; Gibson, Dunn & Crutcher; Covington & Burling; Hughes Hubbard & Reed; and Cleary Gottlieb Steen & Hamilton.)

We’ll never know how much stronger the LIBOR plaintiffs’ amended complaints might have been with the government’s evidence because Buchwald sided with the banks and denied the production request.

It’s not easy to survive a motion to dismiss in antitrust litigation after Bell Atlantic v. Twombly. There are billows and billows of thick black smoke in the new LIBOR complaints. We’ll have to wait and see if the judge believes there’s enough fire as well.

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