A month ago – right after U.S. District Judge Naomi Reice Buchwald of Manhattan issued a stunning decision that dismissed antitrust and racketeering class action claims against the global banks involved in the process of setting the benchmark London Interbank Offered Rate – I told you that individual investors might be able to rise from the wreckage with common-law fraud and federal securities suits, so long as they could show that they were deceived by the banks’ misrepresentations about Libor’s legitimacy and held enough Libor-pegged securities to justify the expense of litigating claims on their own. On Monday, Charles Schwab filed a new complaint in San Francisco County Superior Court asserting that it meets both of those conditions: Schwab entities supposedly purchased billions of dollars of Libor-based financial instruments based on false assurances that the benchmark was set honestly.
Citing admissions from Libor settlements that U.S. and British regulators have reached with Barclays, UBS and Royal Bank of Scotland, as well as expert reports developed in the decimated federal multidistrict Libor litigation, Schwab’s lawyers at Lieff, Cabraser, Heimann & Bernstein claim that Libor banks conspired to suppress the benchmark borrowing rate. That artificial suppression, according to Schwab, permitted the banks to pay unduly low interest rates on floating-rate securities pegged to Libor and even on short-term fixed-rate notes with returns based on Libor rates. The parent company and various Schwab funds are asserting common-law fraud, breach of contract and unjust enrichment claims; violation of California’s trade practices statute; and federal securities claims.
Schwab (which also brought individual claims, now dismissed, in the antitrust MDL) takes care to address two potential bank defenses: reliance and timeliness. The bulk of the 125-page complaint is dedicated to demonstrating that Libor was manipulated, but Schwab spends several pages detailing the banks’ public assurances that it was not. The supposed conspiracy to depress Libor, according to the complaint, “was, by its very nature, self-concealing.” Reasonable investors could not know that the rate was being suppressed, Schwab said, when officials from Credit Suisse, JPMorgan Chase, Bank of America and Citigroup were assuring the public that Libor was legitimate.
The same “fraudulent and surreptitious nature of defendants’ misconduct,” according to the complaint, should toll the statute of limitations on Schwab’s claims. Until UBS disclosed in a regulatory filing in March 2011 that it was under government investigation for tampering with the benchmark, the company argued, investors weren’t on notice of the fraud. Schwab also contends that a conspiracy to conceal the misconduct continued long after the actual alleged manipulation, so the clock didn’t begin to run on its claims until the conspiracy was exposed.
The complaint specifies each Schwab fund’s Libor-pegged holdings but does not value the company’s supposed losses from Libor manipulation. You can be sure that among other defense arguments, the banks will claim that Schwab can’t actually tie losses to the behavior of any particular bank.