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April 1, 2013

Libor Antitrust and RICO Claims Dismissed

By William Zale, J.D.

Holders of bonds and other financial instruments failed to assert antitrust injury from alleged violations of Section 1 of the Sherman Act and California's Cartwright Act in multidistrict litigation against member banks of the British Bankers' Association (BBA) dollar-based London Interbank Offer Rate (USD LIBOR) Panel for conspiring to artificially suppress LIBOR by understating their borrowing costs to the BBA, the federal district court in New York has ruled (Libor-Based Financial Instruments Antitrust Litigation, March 29, 2013, Buchwald, N.).

The court also held a federal RICO claim as barred by the Private Securities Litigation Reform Act of 1995 (PSLRA) and as seeking an impermissible extraterritorial application of U.S. law.

The defendants moved to dismiss (1) class actions brought by "over-the-counter" purchasers of interest rate swaps directly from at least one defendant in which the rate of return was tied to LIBOR; (2) class actions brought by bondholders who held Libor-based debt securities; (3) class actions brought by exchange-based managers of investment funds trading in Eurodollar futures; and (4) individual actions by the Charles Schwab Bank, a Schwab short-term bond market fund, and the Schwab money market fund. Because each amended complaint asserted only one federal antitrust claim, one Cartwright Act claim, and one RICO claim, the court referred in the singular to plaintiffs' federal antitrust "claim," Cartwright Act "claim," and RICO "claim."

The plaintiffs argued that the defendants had two primary motives for suppressing the USD LIBOR. First, "well aware that the interest rate a bank pays (or expects to pay) on its debt is widely, if not universally, viewed as embodying the market's assessment of the risk associated with that bank, Defendants understated their borrowing costs (thereby suppressing LIBOR) to portray themselves as economically healthier than they actually were." "[B]ecause no one bank would want to stand out as bearing a higher degree of risk than its fellow banks, each Defendant shared a powerful incentive to collude with its co-Defendants to ensure it was not the 'odd man out.'" Second, "artificially suppressing LIBOR allowed Defendants to pay lower interest rates on LIBOR-based financial instruments that Defendants sold to investors, including [plaintiffs], during the Class Period" defined as August 2007 to May 2010.

Antitrust injury. A private plaintiff can recover for a Sherman Act or Cartwright Act violation only where the loss stems from a competition-reducing aspect or effect of the defendant's behavior, the court observed. Although the defendants allegedly conspired to suppress LIBOR over a nearly three-year-long period and the plaintiffs allegedly were injured as a result, they did not allege that their injury resulted from any harm to competition, the court determined.

The process by which banks submit LIBOR quotes to the BBA was not competitive, and the plaintiffs did not allege that the defendants' conduct had an anticompetitive effect in any market in which the defendants compete, the court noted. With regard to the market for LIBOR-based financial instruments, the plaintiffs did not allege that the defendants' alleged fixing of LIBOR caused any harm to competition between sellers of those instruments or between buyers of those instruments. In addition, no harm to competition in the interbank loan market was alleged.

The injury plaintiffs asserted from the defendants' alleged conspiracy to suppress LIBOR was the same injury they would have suffered had each defendant decided independently to misrepresent its borrowing costs to the BBA, according to the court. Although the defendants' alleged manipulation of the level of LIBOR might have had the distributive effect of transferring wealth between the buyers and sellers of LIBOR-based financial instruments, including between the defendants and their customers, the plaintiffs did not alleged any structural effect wherein the defendants improved their position relative to their competitors.

Because the plaintiffs did not plausibly allege an antitrust injury, their Sherman Act and Cartwright Act claims were dismissed.

RICO. The PSLRA barred the plaintiffs from bringing a RICO claim based on predicate acts that could have been the subject of a securities fraud action brought by either the plaintiffs themselves or the SEC. The predicate acts of mail and wire fraud underlying the plaintiffs' RICO claim could have been the subject of a claim for securities fraud, according to the court. The defendants allegedly made misleading statements to the plaintiffs in connection with the defendants' sale of LIBOR-based securities to plaintiffs, despite the fact that certain of the alleged predicate acts might not have been actionable as securities fraud. Plaintiffs have unambiguously alleged that defendants' conduct constituted a single fraudulent scheme. Because some of the alleged predicate acts could have been grounds at least for a securities fraud action brought by the SEC, plaintiffs' RICO claim, in its entirety, is barred by the PSLRA, the court held.

In addition, an alleged RICO "enterprise" must be a domestic enterprise, in the court's view. The plaintiffs alleged that the enterprise was an association in fact whose members were the BBA panel banks, and their affiliates, and whose purpose was to submit artificially low LIBOR quotes to the BBA so that LIBOR is fixed at artificially low levels and the defendants profit on LIBOR-based financial instruments. This alleged enterprise was based in England was based in England.

For these reasons, the RICO claim was dismissed.

The case is No. 11 MD 2262 (NRB).

Attorneys: Daniel Hume (Kirby McInerney LLP) for FTC Capital GMBH. Arun Srinivas Subramanian (Susman Godfrey LLP) for Mayor and City Council of Baltimore. Brendan Patrick Glaskin (Lieff, Cabraser, Heimann & Bernstein LLP) for Schwab Short-Term Bond Market Fund. Arthur J. Burke (Davis Polk & Wardwell) for Bank of America Corp. Alanna Cyreeta Rutherford (Boies, Schiller & Flexner, LLP) for Barclays Bank PLC. Alan M. Wiseman (Covington & Burling, LLP) for Citibank NA. Elai E. Katz (Cahill Gordon & Reindel LLP) for Credit Suisse Group AG. Andrew Corydon Finch (Paul Weiss Rifkind Wharton & Garrison LLP) for Deutsche Bank AG. Edwin R Deyoung (Locke Lord Bissell & Liddell LLP) for HSBC Holdings PLC. Dana Ashley Jupiter (Simpson Thacher & Bartlett) for J.P. Morgan Chase & Co. Eric Jonathan Stock (Hogan Lovells US LLP) for Lloyds Banking Group PLC. Robert G. Houck (Clifford Chance US, LLP) for Royal Bank of Scotland Group PLC. Andrew W. Stern (Sidley Austin LLP) for The Norinchukin Bank. Peter Sullivan (Gibson, Dunn & Crutcher, LLP) for UBS AG. Christopher Martin Paparella (Hughes Hubbard & Reed LLP) for WestLB AG.

Companies: FTC Capital GMBH; Bank of America Corp.; Barclays Bank PLC.; Citibank NA; Credit Suisse Group AG; Deutsche Bank AG; HSBC Holdings PLC; J.P. Morgan Chase & Co.; Lloyds Banking Group PLC; Royal Bank of Scotland Group PLC; The Norinchukin Bank; UBS AG; WestLB AG

MainStory: TopStory Antitrust NewYorkNews

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