Make no mistake: A 161-page ruling late Friday by the New York federal court 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 of Manhattan 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.