The U.S. District Judge Naomi Reice Buchwald said on Tuesday that she has found a “viable legal theory” that can potentially bring relief to 27 investors who filed individual lawsuits against global banks for allegedly rigging LIBOR.
LIBOR is a widely accepted benchmark for interest rates that is neither set by the government nor the market. LIBOR is set directly from borrowing costs of 18 banks, including Citigroup Inc. C, JPMorgan Chase & Co. JPM and Bank of America Corp. BAC.
Notably, investors have accused 16 banks for reporting artificially low borrowing costs to ramp up earnings and appear financially healthy. Lower borrowing costs resulted in lower LIBOR. This adversely impacted individuals and institutions that invested in the bond market, pension funds, mutual funds, money market funds, bank loan funds and several derivative products whose rates are tied to LIBOR.
According to some, rate rigging had started as early as Aug 2007. Apart from those mentioned above, Credit Suisse Group AG CS, Deutsche Bank AG DB and HSBC Holdings plc HSBC are also on the radar of these plaintiffs.
The Charles Schwab Corp. SCHW was one of the first plaintiffs to have filed individual lawsuit against global banks. However, Buchwald dismissed the case along with some others, referring to them as “wholly or substantially deficient.” Many class-actions were also deemed deficient.
Cities of Philadelphia and Houston, the National Credit Union Administration Board, Regents of the University of California and Salix Capital Ltd. are among the 27 plaintiffs whose claims won court approvals.
Buchwald’s verdict came just a day after former trader at UBS Group AG UBS and Citigroup, Tom Hayes, was sentenced to 14 years of imprisonment by U.K.-based judge Jeremy Cooke. He was the first person to be tried for manipulating LIBOR.
The Other Side
While LIBOR rigging by banks harmed investors, it indirectly helped borrowers. Those who borrowed money had to pay lower interest as rates remained low. Private student loans, most of which are tied to variable interest rates, also benefited from lower rates. Further, borrowers with adjustable-rate mortgages likely gained from lower rates as well.
Settlements
Banks have already shelled out more than $9 billion toward settlement of rate-rigging probes by various regulators. Notably in 2012, Barclays PLC BCS had admitted to its fraudulent practices and agreed to pay a penalty of $450 million for rigging the LIBOR; while UBS Group had paid CHF 1.4 billion ($1.5 billion) to the U.S., U.K. and Swiss authorities for resolving similar claims.
Including rate-rigging probes, big banks have paid more than $300 billion toward legal fines and settlements in the past 5 years.
Our Take
Since involvement of global banks in LIBOR rigging is undeniably true, the accused banks are expected to see a rise in legal costs as and when these 27 claims are resolved.
For the plaintiffs, any potential settlement will result in a larger amount owed to them individually, against settlement of an otherwise class action. Besides, individual actions provide better control and power to negotiate settlement terms.
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