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From Securities Regulation Daily, April 1, 2013

In Private Action Alleging LIBOR Manipulation, Federal Judge Allows Commodities Fraud Claims to Proceed, Dismisses Antitrust Claims

By Jim Hamilton, J.D. LL.M.

In a private action alleging the manipulation of LIBOR, a federal judge ruled that, while federal antitrust claims were not made out, the investors did allege commodities fraud in the manipulation of the global benchmark (In re LIBOR-Based Financial Instruments Antitrust Litigation, March 29, 2013, Buchwald, N.).

LIBOR is a benchmark interest rate disseminated by the British Bankers Association and is calculated for ten currencies, including the U.S. dollar. LIBOR is used to gauge the cost of unsecured borrowing in the London interbank market and sets the price for derivatives and other financial contracts worldwide. As such, LIBOR is an integral part of the modern financial system, referenced in a large number and variety of financial contracts. Although LIBOR is calculated in London, it is based on daily submissions from a number of international banks and is used as a global benchmark.

Antitrust claims. In dismissing the antitrust claims, the court found that the alleged conduct was not anti-competitive. Indeed, the process of setting LIBOR was never intended to be competitive. Rather, it was a cooperative endeavor in which competing banks agreed to submit estimates of their borrowing costs to the British Bankers Association to facilitate the calculation of the index. Even crediting the allegations that the banks subverted this cooperative process by conspiring to submit artificial estimates instead of good faith estimates, noted the court, it would not follow that the investors suffered antitrust injury. Rather, said the court, any injury would have resulted from misrepresentations and not from harm to competition.

Commodities fraud. The investors stated a claim for commodities fraud under the Commodity Exchange Act by showing that the defendants had the ability and intent to influence market prices, that artificial prices existed, and that the defendants caused the artificial prices. Specifically, the investors stated a claim for the manipulation of Eurodollar futures contacts. LIBOR was directly incorporated into the price of Eurodollar futures contracts, and, by allegedly manipulating LIBOR, the defendants manipulated the price of those contracts.

The court found that the financial firms had the ability to influence the price of Eurodollar futures contracts because each of them had the ability to influence LIBOR, and it followed that, because LIBOR affected the price of Eurodollar contracts, each firm had the ability to influence the price of Eurodollar contracts. As for intent, the court said that the allegations gave rise to a strong inference of scienter by showing that the firms had both motive and opportunity. Motive was set out by charges that the firms stood to gain concrete benefits from manipulating the price of Eurodollar futures contracts, noted the court, and the firms had the undeniable opportunity to manipulate Eurodollar-contract prices by submitting artificial LIBOR quotes.

Thus, overall, the investors adequately stated that LIBOR was fixed at artificial levels for substantial parts of the class period and that the price of Eurodollar futures contracts is significantly influenced by existing LIBOR fixes. While there are serious questions regarding whether the financial institutions harmed the investors, said the court, they adequately alleged that the firms caused the prices of Eurodollar futures contracts to be artificial, that they purchased their contracts at an inflated price, that the degree of LIBOR artificiality later changed, and that they suffered damage as a result.

That said, in order to recover, the investors will ultimately need to show that they sold or settled their Eurodollar contracts at a loss and that this loss resulted from the misconduct of the defendants. The court anticipates that meeting this burden might pose a serious challenge for the investors, especially with regard to Eurodollar contracts that were both purchased and sold within the class period.

The court added that LIBOR is not the commodity underlying Eurodollar futures contracts and that the investors do not have standing to bring suit against the financial institutions based on the manipulation of LIBOR as a commodity.

The court rejected the argument that the claims rested exclusively on foreign commodities manipulation and had to be dismissed because the Commodity Exchange Act does not apply extraterritorially. Applying the test from the U.S. Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, Ltd., the court found that Section 9(a) of the Commodity Exchange Act applies only domestically. However, the court went on to find that the claims were within the Act’s domestic application because they involved futures contracts traded on domestic exchanges. By manipulating LIBOR, reasoned the court, the financial firms allegedly manipulated the price of Eurodollar futures contracts, which is directly based on LIBOR, and Eurodollar futures contracts are traded on the Chicago Mercantile Exchange.

Application of statute of limitations. While the investors adequately stated their commodities fraud claims, continued the court, some of the claims are time-barred because numerous articles published in April and May 2008 in prominent national publications placed the investors on notice of their injury. Specifically, commodity manipulation claims based on contracts entered into between August 2007 and May 29, 2008, are time-barred. Claims based on contracts entered into between April 15, 2009, and May 2010 are not time-barred. Finally, claims based on contracts entered into between May 30, 2008, and April 14, 2009, may or may not be time-barred, said the court, but they will be permitted to proceed at this stage.

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

Attorneys: Daniel Hume (Kirby McInerney, LLP) and Samuel Howard Rudman (Robbins Geller Rudman & Dowd, LLP) for FTC Capital GMBH, FTC Futures Fund PCC Ltd., FTC Futures Fund SICAV, Carpenters Pension Fund of West Virginia, City of Dania Beach Police & Firefighters' Retirement System, Ravan Investments, LLC, Mayor and City Council of Baltimore, Richard Hershey, and Jeffrey Laydon. Andrew Scirica Kingsdale (Lieff Cabraser Heimann & Bernstein, LLP) for Schwab Money Market Fund, Charles Schwab Bank, N.A., and Charles Schwab & Co., Inc. Elizabeth Lieberman, pro se. Arthur J. Burke (Davis Polk & Wardwell) for Bank of America Corporation. Alanna Cyreeta Rutherford (Boies, Schiller & Flexner, LLP) for Barclays Bank. Alan M. Wiseman (Covington & Burling, L.L.P.) for Citibank, NA. Dana Ashley Jupiter (Simpson Thacher & Bartlett) for J.P. Morgan Chase & Co.

Companies: Bank of America Corp.; Barclays Bank; Charles Schwab & Co., Inc.; Charles Schwab Bank, N.A.; Citibank, NA; J.P. Morgan Chase & Co.; Ravan Investments, LLC

LitigationEnforcement: CommodityFutures

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