Opinion

Alison Frankel

New yen Libor ruling is bad omen for rate-rigging antitrust claims

By Alison Frankel
March 31, 2014

One of the most controversial and consequential antitrust rulings of the last few years came last March, when U.S. District Judge Naomi Reice Buchwald of Manhattan tossed class action claims under the Sherman Act against the banks on the London Interbank Offered Rate panel. Buchwald acknowledged that her holding was “incongruous,” considering that some of the bank defendants had already admitted to colluding to manipulate the benchmark Libor rate, which was used to set interest rates for trillions of dollars of securities. But the judge was convinced the class couldn’t show any antitrust injury. The Libor rate-setting process (in which individual banks report the interest rates they’re being charged to borrow, which are then averaged and reported daily) was cooperative, not competitive, she said. So even if the banks conspired to rig Libor, Buchwald held, any harm they caused was not from reduced competition — and since federal and state antitrust laws are intended to target conduct that impedes competition, they don’t apply to Libor manipulation.

The ruling shocked antitrust plaintiffs firms, which had sunk enormous expense into expert analysis of the alleged Libor conspiracy. They asked Buchwald for leave to file an interlocutory appeal of her ruling to the 2nd Circuit Court of Appeals. She refused (and pretty angrily, to boot), which means that it will probably be years before the 2nd Circuit gets to consider the question of whether collusive rate-rigging is anti-competitive. After Buchwald’s ruling, some Libor claimants, including the Federal Deposit Insurance Corporation in its recent suit against Libor panel banks, made the decision to assert breach-of-contract claims as their main cause of action. But that’s only possible when plaintiffs engaged in Libor-pegged transactions directly with the banks. Other Libor plaintiffs, like the National Credit Union Administration, are counting on the 2nd Circuit to overturn Buchwald’s interpretation of antitrust injury.

That hope looks a bit more remote after a ruling Friday by a Buchwald colleague, U.S. District Judge George Daniels, who is overseeing a class action alleging manipulation of two other benchmark interest rates, the Euroyen Tokyo Interbank Offered Rate (or Tibor) and the yen Libor. Daniels agreed completely with Buchwald’s analysis of antitrust injury, endorsing her controversial holding that collusive rate manipulation doesn’t amount to a horizontal antitrust conspiracy. That’s bad enough for plaintiffs who are hoping to revive Libor antitrust claims (which, of course, carry treble damages). But Daniels also rested his antitrust holding in part on the very 2nd Circuit case plaintiffs are relying upon to refute Buchwald. When a judge turns your own citation against you, that’s got to be discouraging. (I should note that Daniels kept alive class claims based on the Commodity Exchange Act, as did Buchwald in the U.S. dollar Libor litigation.)

The class in the Tibor and yen Libor case, represented by interim class counsel from Lowey Dannenberg Cohen & Hart, accused panel banks of harming investors in Euroyen Tibor futures by colluding to depress average interbank borrowing rates. Lowey Dannenberg alleged pretty much the same basic rate-rigging antitrust conspiracy as plaintiffs in the Libor class action, based on some of the same admissions from banks that have already reached Libor deals with U.S. and U.K. regulators. As you would expect, the Tibor and yen Libor defendants, which overlap with defendants in the U.S. dollar Libor litigation, relied heavily on Judge Buchwald’s ruling from last year in their joint motion to dismiss the Sherman Act and unjust enrichment allegations.

In the class response, Lowey Dannenberg came up with case law from the 2nd Circuit to counter the defendants — and Judge Buchwald. In Gatt Communications v. PMC Associates, the appeals court set out a test to determine antitrust standing that required plaintiffs to show, among other things, the effect of defendants’ allegedly anticompetitive practices. (Oddly, Buchwald did not cite the Feb. 14, 2013, Gatt decision, although her ruling in the U.S. dollar Libor litigation came down about six weeks after the 2nd Circuit’s holding.) The yen Libor class argued that under Gatt definitions, the anticompetitive effect of collusive rate manipulation was to harm securities investors who relied on fair rate reports. “Plaintiff’s alleged loss flows from that which makes the conduct illegal — collusive rate setting — so the antitrust laws are served by maintenance of his claim for injury,” the class brief said.

Judge Buchwald made a mistake by looking only at the conduct of the defendants and not at the anticompetitive impact of their conduct, according to the yen Libor class brief. And she departed from the Gatt test, according to Lowey Dannenberg, when she considered whether any injury to plaintiffs resulted from individual bank decisions to under-report their borrowing rates, rather than a multibank conspiracy to manipulate the rate.

In Friday’s ruling, Judge Daniels agreed that Gatt (which wasn’t cited in the defendants’ joint motion to dismiss) set forth the 2nd Circuit’s test for antitrust standing. He even quoted the three-part test: “First, the party asserting that it has been injured by an illegal anticompetitive practice must ‘identify the practice complained of and the reasons such a practice is or might be anticompetitive.’ Next, we identify the ‘actual injury the plaintiff alleges.’… Finally, we ‘compare the anticompetitive effect of the specific practice at issue’ to ‘the actual injury the plaintiff alleges.’ It is not enough for the actual injury to be ‘causally linked’ to the asserted violation. Rather, in order to establish antitrust injury, the plaintiff must demonstrate that its injury is ‘of the type the antitrust laws were intended to prevent and that flows from that which makes (or might make) defendants’ acts unlawful.’”

But by his reading of Gatt, the judge said, the yen Libor class hadn’t shown that rate manipulation is anticompetitive. “The complaint does not allege facts that competition was harmed in any way,” he wrote. “At most, plaintiff alleges that prices were distorted. Plaintiff, however, does not allege that this was a result of reduction in competition.”

I’m sure we haven’t seen the last of Gatt, nor of the other cases that prompted first Buchwald and now Daniels to rebuff rate-rigging antitrust claims. But it seems like Libor antitrust plaintiffs who haven’t already pleaded breach of contract and Commodities Exchange Act claims might want to think about amending their complaints.

I left phone messages for yen Libor class counsel Vincent Briganti of Lowey Dannenberg and Mizuho Bank counsel Jeffrey Resetarits of Shearman & Sterling (who appeared for defendants when the motion to dismiss was argued on March 5, according to the docket). Neither got back to me.

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