I’ve occasionally pointed out that one problem with the antitrust Libor lawsuits is that the allegations are mostly “the banks lied about Libor in order to trick each other about their creditworthiness and/or screw each other on some swaps trade,” so it’s hard to claim that they were all working together in a big antitrust conspiracy. But Judge Naomi Reice Buchwald, who mostly dismissed a batch of Libor lawsuits on Friday, has an even better objection, which is that even if it was a conspiracy, it was supposed to be a conspiracy:
[T]he process of setting LIBOR was never intended to be competitive. Rather, it was a cooperative endeavor wherein otherwise-competing banks agreed to submit estimates of their borrowing costs to the BBA each day to facilitate the BBA’s calculation of an interest rate index. Thus, even if we were to credit plaintiffs’ allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury. Plaintiffs’ injury would have resulted from defendants’ misrepresentation, not from harm to competition.
As Judge Buchwald points out, in a delightfully sensible 161-page opinion, antitrust violations require a competitive market that can be subverted by a conspiracy. Here, there was no competitive market to subvert, and the injury that the plaintiffs suffered – manipulated Libors – could have come as easily from individual bank manipulation as from a grand conspiracy. Normal markets don’t work that way: if I just decide to charge you twice the going rate for my product, and no one else does, that tends not to work. If I submit twice the real rate for my Libor, and no one else does, that kind of still works, though I guess it works better if everyone joins in.
So, so much for antitrust. RICO, the loosely-mafia-based general-purpose suing-people-for-doing-shady-stuff-together statute, is also right out, because it can’t be used to sue people (1) who commit securities fraud (as the Libor banks maybe did) or (2) who reside abroad (as the British Bankers’ Association does). Ponder the class implications of that.
The lawsuits weren’t entirely dismissed; some plaintiffs were allowed to go ahead on commodities manipulation claims, because they traded Eurodollar futures on the CME and those are considered commodity contracts (and they settle based on Libor). This is a pretty tough case, though, because it requires not only that the banks manipulated Eurodollar future prices (which they would do automatically any time they manipulated 3-month Libor1) but also that they “specifically intended to do so,” which is tougher. Most of the most damning Libor evidence is about banks manipulating Libor either (1) to look healthier or (2) to make money on OTC swaps; it’s less clear that there’ll be much specific evidence of Eurodollar-future driven manipulation.2 And the opinion makes clear that manipulating Eurodollar futures via Libor, not just manipulating Libor, is the only thing that the banks might be on the hook for.
What’s left? In this case, nothing, but you could wonder what this means for other lawsuits and other plaintiffs. We talked a couple of weeks ago about Freddie Mac’s suit against the Libor banks, which claims that the banks signed contracts promising not to lie about Libor, and then lied about Libor anyway, contract be damned. I think that theory is a little cutesy but it seems mostly unaffected by this decision.
Or other people can sue for securities fraud, if they bought “securities” from the Libor banks. (This probably means floating-rate bonds, that sort of thing – not swaps.) Judge Buchwald is actually pretty sympathetic there:
If the offering materials described how LIBOR was calculated by reference to the “proper” procedures rather than the manipulation that allegedly was occurring, they would contain a material misrepresentation. If they did not describe how LIBOR was calculated, they would still be omitting that LIBOR was being manipulated, surely a material omission.
I think that only works if you bought your floating-rate bonds from a Libor-manipulating bank, but still. The notion that “not telling you that we’re manipulating Libor” would count as securities fraud is surely encouraging to a lot of potential plaintiffs, and loosely speaking it seems to make Freddie’s case – “not telling us that you manipulated Libor counts as breach of contract” – a little stronger.
Incidentally some of the plaintiffs here did buy floating-rate bonds from Libor banks, and yet got tossed out of court because they didn’t bring any securities fraud claims. Why not? Well for boring RICO treble-damages reasons, mostly,3 but also maybe because the plaintiffs realized (as their lawyers themselves said) that “they would not have been able to prove reliance on defendants’ misrepresentations.” A securities fraud case requires you to prove not only that the banks lied to you, but also that you believed them to your detriment. Here the lawyers didn’t think they could do that.
Why not? Oh, bunches of reasons, including that most people probably don’t buy floating-rate securities because of their belief in the unmanipulated nature of Libor. But also perhaps because everyone knew that Libor was being manipulated? The opinion spends a fair amount of time on this, for statute-of-limitations reasons that need not concern us; there’s even this handy chart:
Judge Buchwald decided that, by May 29, 2008, anyone using Libor was “on inquiry notice” that there might be a problem. That’s not quite the same as saying “no one should have trusted Libor from then on,” or that anyone who relied on Libor after that date couldn’t win a fraud lawsuit, but I’m not sure it helps.
In re LIBOR-Based Financial Instruments Antitrust Litigation [SDNY via Reuters / Alison Frankel]
In Libor Ruling, a Big Win for the Banks [DealBook / Peter Henning]
Judge finds for banks, dismisses most claims in Libor lawsuits [Reuters]
1. I guess? Actually only one day a month is a Eurodollar futures fixing based on 3mL but I suppose manipulating Libor on non-fixing days, and for that matter manipulating non-3m-Libor, can affect the trading price of the contract and be enough to get you in trouble.
2. Judge Buchwald is mildly optimistic:
Moreover, the Barclays settlement documents suggest that Barclays had a concrete economic interest in manipulating the price of Eurodollar contracts and, indeed, may have manipulated LIBOR for the express purpose of profiting on Eurodollar contracts. See, e.g., CFTC Order 2 (“Barclays based its LIBOR submissions for U.S. Dollar . . . on the requests of Barclays’ swaps traders, including former Barclays swaps traders, who were attempting to affect the official published LIBOR, in order to benefit Barclays’ derivatives trading positions; those positions included swaps and futures trading positions . . . .”) (emphasis added); DOJ Statement ¶ 10 (“Barclays employs derivatives traders in New York, New York and in London, England who trade financial instruments tied to LIBOR and EURIBOR, including interest rate swaps and Eurodollar futures contracts . . . .”).
3. Because you can’t bring a RICO case if you also have a securities fraud case, the plaintiffs withdrew their securities fraud case. Judge Buchwald is suspicious:
The securities fraud claim was withdrawn in the amended complaint, a decision that, according to plaintiffs’ counsel, was not manipulative, but rather took account of their realization that they would not have been able to prove reliance on defendants’ misrepresentations. Frankly, this explanation strikes us as a dubious position adopted in an effort by plaintiffs to disown their original complaint and thereby avoid dismissal of their RICO claim, a claim whose siren song of treble damages apparently proved irresistible.