On September 23, the NCUA announced a lawsuit against 13 international banks alleging violations of federal and state antitrust laws by artificially manipulating the London Interbank Offered Rate (LIBOR) system. The NCUA filed the complaint in the U.S. District Court for the District of Kansas on behalf of five failed credit unions. The NCUA claims the institutions individually and collectively gave false interest rate information through the LIBOR rate-setting process to benefit their own LIBOR-related investments, to reduce their borrowing costs, to deceive the marketplace as to the true state of their creditworthiness and to deprive investors of interest rate payments. According to the NCUA, the now defunct credit unions held tens of billions of dollars in investments and other assets that paid interest streams tied to LIBOR, and that the alleged conspiracy to artificially depress LIBOR caused the failed credit unions to receive less in interest income than they otherwise were entitled to receive.
On December 30, the U.S. District Court for the Southern District of New York held that three LIBOR suits should remain under federal jurisdiction and denied the plaintiffs’ motions to remand. In Re LIBOR-Based Fin. Instruments Antitrust Litig., No. 11-md-2262, slip op. (S.D.N.Y. Dec. 30, 2013). One of the cases was removed from state court, and the other two were referred by the Judicial Panel on Multidistrict Litigation, to be joined with the numerous consolidated suits that have been brought by investors and bondholders who claim that certain financial institutions colluded to deliberately depress LIBOR, which caused the plaintiffs various economic injuries. LIBOR is a global benchmark rate used in financial products and transactions, which was set using data from the banks under the auspices of the British Bankers’ Association. Focusing on the only disputed element for Edge Act jurisdiction—whether the conduct “arises out of” (i) transactions involving international or foreign banking or (ii) other international or foreign financial operations—the court held that it has federal jurisdiction under the Edge Act. Applying a “common sense” statutory interpretation, the court reasoned that the cases arise out of the financial institutions’ allegedly misleading submissions to the LIBOR panel, which is an international or foreign financial operation, and without which there would be no cases at all. Although it did not need to address the financial institutions’ alternative basis for federal jurisdiction, the court explained that it could also retain jurisdiction under the Foreign Sovereign Immunities Act.
On April 25, the Financial Stability Oversight Council (FSOC) met in an open session to announce the release of its 2013 Annual Report to the Congress. The Annual Report outlines the FSOC’s views with regard to, among other things, (i) the need for housing finance reform to attract private capital to the housing finance system, (ii) increased awareness of operational risks, whether from cyberattack or acts of nature, and (iii) the importance of working with foreign counterparts to reform the governance and integrity of interest reference rates like LIBOR. FSOC Chairman and Treasury Secretary Lew also advised that the FSOC met in executive session to discuss its continuing analysis of non-bank financial companies and that he expects a vote on an initial set of systemically important designations of non-bank financial companies soon.
On March 29, the U.S. District Court for the Southern District of New York dismissed the antitrust claims brought by plaintiffs in numerous consolidated actions against 23 financial institutions over their alleged manipulation of the London Interbank Offered Rate (Libor). In re LIBOR-Based Fin. Instruments Antitrust Litig., No. 11-2262, 2013 WL 1285338 (S.D.N.Y. Mar. 29, 2013). Libor is a global benchmark rate used in financial products and transactions, which was set using data from the banks under the auspices of the British Bankers’ Association. The various consolidated suits have been brought by investors and bondholders who claim that the institutions colluded to deliberately depress Libor, which caused the plaintiffs various economic injuries. The court determined that the process by which Libor data was provided by the banks was not anticompetitive, and held that, even if the institutions’ conduct had constituted a violation of antitrust laws, the plaintiffs may only pursue antitrust claims for “antitrust injuries,” i.e. injuries resulting from any harm to competition. The court also (i) dismissed as time-barred certain commodities manipulation claims, (ii) dismissed a RICO claim because RICO only applies to domestic enterprises, and (iii) dismissed all state-law claims, some (e.g., those related to antitrust claims) with prejudice.
On March 14, Freddie Mac sued 15 banks and the British Bankers’ Association (BBA), claiming that the institutions manipulated the London Interbank Offered Rate (LIBOR) and caused substantial losses to Freddie Mac on investment activities tied to LIBOR. Fed. Home Loan Mortg. Corp. v. Bank of Am. Corp., No. 13-342 (E.D. Va. filed Mar. 14, 2013). LIBOR is a global benchmark rate used in financial products and transactions, and during the time period covered by the complaint it was set using data from the banks, under the auspices of the BBA. Freddie Mac alleges that the banks deliberately suppressed the rate to hide their financial condition and boost profits, while the BBA participated in the rate fixing to protect revenue generated by selling LIBOR licenses. As a result, Freddie Mac claims it suffered losses on pay-fixed, receive-floating interest rate swap transactions indexed to LIBOR, and mortgage-backed securities in which coupon payments or the underlying collateral were indexed to LIBOR. The mortgage financing enterprise, which currently is in U.S. government conservatorship, alleges that the banks engaged in fraud, breached their contracts with Freddie Mac, and violated antitrust laws. Freddie Mac seeks full damages for all economic, monetary, actual, consequential, and compensatory damages, treble damages under the Sherman Act, and punitive damages. Some of the banks already have settled civil and criminal enforcement actions by U.S. and foreign authorities, and the institutions face other private claims related to the alleged LIBOR conduct.
DOJ Announces Criminal Charges and Penalties for LIBOR Manipulation, Regulators Announce Parallel Civil Enforcement Actions
On February 6, U.S. and U.K. authorities announced that a Japanese financial institution and its British bank parent company agreed to pay roughly $612 million to resolve criminal and civil investigations into the firms’ role in the manipulation of the London Interbank Offered Rate (LIBOR), a global benchmark rate used in financial products and transactions. The U.S. DOJ announced that the Japanese firm agreed to plead guilty to felony wire fraud, admit its role in in the manipulation scheme, and pay a $50 million fine. In addition, the DOJ filed a criminal information and deferred prosecution agreement (DPA) against the parent company for its role in manipulating LIBOR rates and participating in a price-fixing conspiracy in violation of the Sherman Act. As a result, the parent company agreed to pay an additional $100 million penalty, admit to specified facts, and continue to assist the DOJ with its ongoing investigation. The DPA acknowledges the remedial measures undertaken by the bank’s management to enhance internal controls, as well as additional reporting, disclosure, and cooperation requirements undertaken by the bank. Domestic and foreign regulators also announced penalties and disgorgement to resolve parallel civil investigations, including a $325 million penalty obtained by the CFTC, and a $137 million penalty imposed by the U.K. Financial Services Authority.
DOJ Announces LIBOR-related Criminal Charges and Penalties, Regulators Announce Parallel Civil Enforcement Actions
On December 19, both federal law enforcement and U.S. and foreign regulatory authorities announced that a Japanese bank and its Swiss bank parent company agreed to pay more than $1.5 billion to resolve criminal and civil investigations into the firms’ role in the manipulation of the London Interbank Offered Rate (LIBOR), a global benchmark rate used in financial products and transactions. The DOJ announced that the Japanese bank has signed a plea agreement, whereby the bank agreed to pay a $100 million fine and plead guilty to one count of engaging in a scheme to defraud counterparties to interest rate derivatives trades by secretly manipulating LIBOR benchmark interest rates. In addition, its parent company entered into a non-prosecution agreement (NPA), whereby the parent company agreed to pay an additional $400 million penalty, admit to specified facts, and assist the DOJ with its ongoing LIBOR investigation. The DOJ explained that the NPA reflects the parent company’s substantial cooperation in discovering and disclosing LIBOR misconduct within the institution and recognizes the significant remedial measures undertaken by new management to enhance internal controls. Domestic and foreign regulators also announced penalties and disgorgement to resolve parallel civil investigations, including a $700 million penalty obtained by the CFTC, $259.2 million as a result of a U.K. Financial Services Authority action, and $64.3 million to resolve a Swiss Financial Markets Authority action.