The Implications of Private LIBOR Litigation
Like other major financial controversies, the London Interbank Offered Rate (“LIBOR”) case is spawning private litigation in the United States. The dangers of an antitrust violation include treble damages in private suits brought by persons directly harmed by an antitrust violation. Expensive class actions follow antitrust violations.
The implications of private LIBOR litigation are cataclysmic. A large number of cases already have been filed and other major institutions and local governments are considering filing cases.
Banks are preparing for a deluge of private claims, government investigations and political implications. The number of potential claimants is exponential, reaching state and local governments, investment banks, pension funds, insurance companies, small and large businesses which borrowed money keyed to LIBOR rates, and individual investors and consumers.
In 2011, 21 class action lawsuits were filed in various U.S. federal courts against a number of LIBOR member banks. The Judicial Panel on Multi-district Litigation has now consolidated these actions for pretrial purposes in the U.S. District Court for the Southern District of New York under the caption In Re LIBOR-Based Financial Instruments Antitrust Litigation (MDL No. 2262).
On April 30, 2012, three amended consolidated class action complaints were filed in the pending MDL. The federal judge handling the MDL suspended several new lawsuits while the court resolves motions to dismiss in the earlier filed cases.
Class actions also have been filed in approximately 23 states, including Alaska, North Dakota and Wyoming. Many more are expected.
The plaintiffs in the MDL actions essentially allege that the defendants perpetrated a scheme to depress LIBOR to improve the perception that the member banks were healthy and to reduce the amount the defendants would have to pay on financial instruments keyed to the LIBOR rate.
Some banks have dismissed or suspended employees who are implicated in alleged LIBOR manipulation. There is a risk that these employees may file employment cases and some may choose to cooperate with the government or the plaintiffs.
Private class actions will gain significant advantages from any government-led prosecutions and settlements. Even if the government investigations provide findings of fact or admissions, private litigants will face tough damage issues. In many cases, the plaintiffs probably made and received LIBOR-linked payments. As a result, the plaintiffs will have to determine possible benefits by calculating net benefits.
Even with these difficulties, damages in these cases can easily reach into the billions of dollars. If plaintiffs are able to prove in court that banks on the LIBOR panels violated the antitrust laws, even a basis point or two decrease in LIBOR pursuant to the price-fixing agreement would have cost investors and customers in the billions of dollars. If that agreement lasted over a period of years the losses could mount into the tens of billions. Add in the regulatory fines and litigation costs associated with the matter and the costs could quickly devastate some of our largest financial institutions.