LIBOR Antitrust Claims Dismissed
Over the last decade, many loan rates – from commercial debt to residential mortgages – have been tied, directly or indirectly, to LIBOR – the London Interbank Offered Rate. During the financial crisis of 2008-2010, however, LIBOR acted oddly, throwing off financiers’ expectations and preventing countless interest rate swap agreements from acting as intended.
In 2011, internal emails from LIBOR member banks came to light indicating that at least some member banks had manipulated their reported interest rates to artificially depress the published LIBOR rate. Numerous antitrust class actions were filed against the LIBOR member banks, alleging that the defendant banks had perpetrated a scheme to depress LIBOR rates so as to create the impression that the banks were financially healthier than one might otherwise have believed in the midst of the financial crisis, and further, to reduce the rates they would have to pay on their own debt obligations.
Dozens of antitrust and RICO class actions were consolidated by the Judicial Panel on Multi-district Litigation and transferred to the Southern District of New York. In re LIBOR-Based Financial Instruments Antitrust Litigation, MDL No. 2262.
On March 29th, however, the district court dismissed the antitrust allegations in their entirety, along with certain commodities manipulation claims (time-barred), RICO (applies only to U.S. enterprises), and all state law claims (for a variety of reasons).
It is difficult to explain the court’s reasoning, at least with respect to the antitrust claims. The court emphasized – quite correctly – that, among other things, plaintiffs must demonstrate “antitrust injury;” i.e., that plaintiffs’ injuries resulted from the anticompetitive nature of the defendants’ conduct. Slip op. at 27.
The court went on to conclude that “the process of setting LIBOR was never intended to be competitive,” and further, that it was merely “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.” Slip op. at 31. The court then concluded that the plaintiffs’ injuries did not result from harm to competition, necessitating the dismissal of all antitrust claims.
It is difficult to comprehend how, even under the court’s characterization of LIBOR, the defendant banks’ concerted efforts to artificially set the interest rates they both pay and charge did not harm competition. While the process of reporting loan rates to create a combined LIBOR rate was not itself intended to be competitive, the banks were supposed to report competitive rates – and the allegation is that they did not quote competitive rates but instead collusively made up artificial rates.
Take a swap agreement, for example. Often, a commercial borrower takes out a loan with a variable rate of interest. To offset the risk of rising rates, the borrower simultaneously enters into an interest-rate swap agreement – based on LIBOR – that hedges against rising rates and, essentially, converts the variable rate loan into a synthetic fixed rate. But when the LIBOR banks allegedly colluded to artificially depress the LIBOR rate by quoting non-competitive rates, that upset the swap formula, so borrowers did not get what they bargained for due to the LIBOR banks’ collusion and failure to report true, competitive rates.
Similarly, investors in debt instruments tied to LIBOR were paid artificially depressed interest rates solely because the LIBOR banks allegedly did not report genuine, competitive rates but instead colluded to depress the LIBOR rate.
How is this different from any other price-fixing? When plywood or steel or computer manufacturers agree on a fixed price, they violate the law. The LIBOR banks did the same thing. Rather than quoting their actual rates when compiling a jointly published LIBOR rate, they rigged the bids, so to speak. They manipulated their published rates. They injured competition by not reporting competitive rates during the LIBOR process, thereby artificially depressing the published LIBOR rate, causing purchasers of interest rate swap agreements to not get what they paid for, and investors in LIBOR-denominated investments to be underpaid.
It will be interesting to see how the Second Circuit addresses this on the anticipated appeal.