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From Securities Regulation Daily, February 23, 2018

Second Circuit revives some LIBOR securities fraud claims

By Lene Powell, J.D.

The Second Circuit remanded an action to allow Charles Schwab to amend its securities fraud claim alleging manipulation of the LIBOR interest rate benchmark by major banks. A three-judge panel ruled that the district court had erred in holding that Schwab did not show loss causation for the claim that the banks’ misrepresentations and omissions led Schwab to purchase floating-rate instruments tied to LIBOR. However, the panel affirmed the dismissal of Schwab’s claims concerning fixed-rate transactions, because these did not reference or relate to the banks’ LIBOR submissions in any way (Charles Schwab Corporation v. FTC Capital GMBH, February 23, 2018, Lynch, G.).

LIBOR manipulation. Plaintiffs-Appellants Charles Schwab Corporation and other Schwab entities sued a group of major banks, asserting in federal and state-law claims that the banks conspired to manipulate the London Interbank Offered Rate (LIBOR), a set of benchmark interest rates widely referenced in financial transactions worth trillions of dollars. Schwab alleged that the manipulations caused hundreds of billions of dollars in damages in connection with their purchase of debt securities.

The federal district court for the Southern District of New York dismissed Schwab’s state-law claims for lack of personal jurisdiction, and dismissed both federal and certain state-law claims for failure to state a claim.

Loss causation in securities claims. The three-judge panel found that the district court had erred on the issue of loss causation as to the floating-rate transactions. Specifically, the district court incorrectly ruled at the pleading stage that alleged misrepresentations and omissions that induced Schwab’s purchase of floating-rate instruments could not have caused any losses. The panel explained that although a depressed LIBOR might result in lock-step reductions in the price of floating-rate instruments, such an effect was not certain, and expert testimony might well demonstrate that, in light of defendants’ manipulation, Schwab’s floating-rate instruments should have been priced even lower than they were. Therefore, the district court was wrong to assume, at the pleading stage, that Schwab was not harmed by LIBOR manipulation.

The panel found that Schwab had pleaded its Exchange Act claims as to the floating-rate transactions with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (PSLRA). Further, Schwab’s claims were not barred by the two-year statute of limitations. The panel did note, however, that it was not clear that Schwab’s complaint clearly articulated either of two theories of loss causation. The panel instructed Schwab to add allegations on loss causation on remand.

Turning to the fixed-rate instruments, the panel found that the misrepresentations claim failed here. At issue was whether the banks’ allegedly false LIBOR submissions were "in connection with" Schwab’s transactions in fixed-rate instruments that did not incorporate LIBOR at all. The panel concluded that they were not. Schwab received exactly what it expected, and was not misled about the value of the securities or the consideration received in return. As a result, the panel affirmed the dismissal of the claim involving fixed-rate instruments.

Other claims. The panel affirmed in part and reversed in part the district court’s dismissal of Schwab’s state-law claims on personal jurisdiction grounds. The panel also found that the district court erred in partially dismissing Schwab’s unjust enrichment claims as untimely.

The case is No. 16-1189-cv.

Attorneys: Eric F. Citron (Goldstein & Russell, PC) and Steven E. Fineman (Lieff Cabraser Heimann & Bernstein, LLP) for The Charles Schwab Corp., Charles Schwab Bank, N.A. and Charles Schwab & Co., Inc. Arthur Joseph Burke (Davis Polk & Wardwell LLP) for Bank of America Corp. and Bank of America, N.A. Christopher Michael Viapiano (Sullivan & Cromwell LLP) for The Bank of Tokyo-Mitsubishi UFJ, Ltd.

Companies: The Charles Schwab Corp.; Charles Schwab Bank, N.A.; Charles Schwab & Co., Inc.; Bank of America Corp.; Bank of America, N.A.; The Bank of Tokyo-Mitsubishi UFJ, Ltd.

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