In new Libor case, credit union agency bets on antitrust revival
On Monday, the National Credit Union Administration filed the latest blockbuster complaint based on banks’ manipulation of the benchmark London Interbank Offered Rate. On behalf of five failed corporate credit unions that held tens of billions of dollars of financial instruments with Libor-pegged interest rates, the federal agency – like so many duped investors before it – claims that Libor panel banks conspired to suppress their reported borrowing costs to the British Bankers’ Association, which supervised the benchmark average of reported rates. NCUA contends that because traders at Libor banks schemed to depress rate reports, the credit unions received less interest income than they were entitled to. The agency also raises the familiar accusation that as a result of artificial Libor suppression, the panel banks appeared healthier than they really were. NCUA asserts the same cause of action for this alleged (and in some cases admitted) misbehavior that we’ve seen in the big over-the-counter investors’ Libor class action and a host of suits by cities and counties that claim to be victims of Libor rate-rigging: antitrust violations under the Sherman Act and related state laws.
That’s quite an interesting calculation by NCUA and its lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel; Korein Tillery; and Stueve Siegel Hanson. As you surely recall, the judge overseeing the consolidated Libor multidistrict litigation, U.S. District Judge Naomi Reice Buchwald of Manhattan, does not believe that the alleged conspiracy to suppress Libor constitutes an antitrust violation. In a shocker of a ruling last March, Buchwald dismissed class action antitrust claims, finding that investors couldn’t show any antitrust injury from Libor manipulation because the supposed rate-rigging was not designed to impede competition amongst the banks. After Buchwald’s ruling, some alleged Libor victims, particularly those represented by Quinn Emanuel Urquhart & Sullivan, opted to emphasize securities claims over antitrust violations. Others, most notably the municipalities represented by Cotchett, Pitrie & McCarthy, are still pushing antitrust as their first cause of action. NCUA and its lawyers have had a lot of success in pioneering mortgage-backed securities litigation, so it’s notable that the agency has chosen the latter route. (I should note that NCUA filed its complaint in federal court in Kansas, but the suit is almost certain to consolidated in the Libor MDL and transferred to Buchwald for pre-trial rulings.)
Clearly, the agency is hoping that Judge Buchwald will change her mind about Libor antitrust claims – a dim prospect, as I’ll explain – or that the 2nd Circuit Court of Appeals has a different view of antitrust injury than she does. Either way, NCUA is apparently so confident that antitrust will be restored as a cause of action for Libor rate-rigging that it is only asserting antitrust claims, eschewing alternative fraud or securities causes of action.
NCUA’s complaint counters Buchwald’s reading of antitrust law without a lot of specificity. It describes the Libor panel banks as “direct horizontal competitors,” which is contrary to Buchwald’s finding that Libor rigging doesn’t affect competition among global financial institutions. The credit union group provided broad examples of how the banks view with one another: “They compete in the market for financial services including banking, trading, and brokerage services; they compete as borrowers and lenders in the London inter-bank money market; and, they compete in the market for LIBOR-based financial instruments, including in their capacity as issuers, underwriters, broker dealers, and sellers of securities whose interest coupon is tied to LIBOR, and as swap-counterparties in interest rate swaps that are tied to LIBOR,” the complaint said.
But that argument isn’t going to find much traction with Buchwald. She’s already heard it from lead counsel in the Libor class action by over-the-counter investors. Soon after Buchwald’s devastating opinion in March, class counsel for the OTC investors moved for reconsideration of her antitrust analysis. (I’m focusing only on the OTC investors’ motion for antitrust reconsideration, even though they also asked Buchwald to rethink other parts of her decision, and they weren’t the only parties to move for reconsideration.) Class counsel from Hausfeld and Susman Godfrey asked for leave to file a second amended complaint to show Buchwald how Libor manipulation dampens competition among panel banks. Last month, Buchwald refused to permit the second amended complaint to be filed and confirmed without any reservation her previous finding that the class does not have standing to assert antitrust claims.
In a harsh 65-page opinion on Aug. 23, Buchwald said she’d seen the new allegations the class sought to assert in its proposed amended complaint and they didn’t make a whit of difference. “Plaintiffs’ allegations include new ways of packaging previously known facts, such as arguing that the LIBOR-setting rules themselves give rise to competition, and new theories for how defendants compete, such as that they compete over their creditworthiness, that they compete to offer customers the best interest rate benchmark on financial instruments, or that they compete by ‘keeping other banks honest’ and reporting any improper conduct by them,” Buchwald wrote. “However, regardless of the creativity they display, none of plaintiffs’ allegations make plausible that there was an arena in which competition occurred, that defendants’ conduct harmed such competition, and that plaintiffs suffered injury as a result…. In other words, even if we grant that plaintiffs have alleged a vertical effect – that they suffered harm as a result of defendants’ conduct – they have not plausibly alleged a horizontal effect – that the process of competition was harmed because defendants failed to compete with each other or otherwise interacted in a manner outside the bounds of legitimate competition.” (Buchwald also said that the class should have known that antitrust standing was a problem and had ample opportunity to address it before her ruling in March; to permit a new complaint, she said, would effectively make her and defense lawyers “plaintiffs’ counsel’s cocounsel, with plaintiffs waiting to see what objections defendants raise and how the court rules on those objections and then amending their complaint as necessary based on what they learned in the process.”)
Despite Buchwald’s ruling, the OTC class went ahead and filed its second amended complaint on Sept. 10, noting that it was asserting antitrust allegations to preserve them on appeal. The class complaint’s depiction of the Libor-impacted competition amongst banks is far more detailed than anything in the NCUA complaint. And since Buchwald has already determined that the class’s newest filing still doesn’t establish an antitrust injury, we can safely assume that the less comprehensive NCUA complaint won’t satisfy her either.
So it will be up the 2nd Circuit to restore Libor antitrust claims for NCUA and other alleged Libor victims, assuming that the issue gets to the appeals court anytime soon. Last Tuesday, bondholders appealed Buchwald’s dismissal of their antitrust claims – the only allegations asserted by the bondholder class. The following day, OTC class counsel William Carmody of Susman sent Buchwald a letter asking her to enter final judgment on his clients’ antitrust claims so that OTC plaintiffs can appeal alongside bondholders. A few of the OTC class’s state-law claims remain alive, Carmody said, but those are separable from the antitrust allegations that are the heart of the plaintiffs’ Libor case. “The equities weigh strongly in favor of certification because the OTC plaintiffs should be permitted to brief and argue the appeal that will determine the major issue on their Sherman Act claims – whether antitrust injury is sufficiently pled – at the same time that the bondholder plaintiffs are appealing that same issue,” Carmody wrote. According to the docket, Buchwald has not yet ruled on his request.
Buchwald’s reading of antitrust law and Libor manipulation was quite controversial, but she’s convinced she is right. The NCUA and a whole lot of other alleged rate-rigging victims are equally convinced she isn’t. Whether the 2nd Circuit hears only from the bondholder class or from the OTC class as well, there are untold billions riding on this appeal.
(Reporting by Alison Frankel)
For more of my posts, please go to WestlawNext Practitioner Insights