Until 2014, the British Bankers’ Association (the “BBA”) published the London InterBank Offered Rate (“LIBOR”). The BBA’s LIBOR served as an interest rate benchmark for financial instruments and loan products around the world. Under the BBA’s direction, a LIBOR quote was generated every business day using a two-step process. First, BBA member banks submitted a daily quote representing the rate the bank could purportedly borrow funds. Second, a third party would rank the quotes and calculate an arithmetic mean of the middle half of the submissions. The resulting calculation was the reported LIBOR benchmark to which short term interest rates around the world were pegged.
Scrutiny of the BBA’s LIBOR rate followed the financial crisis of 2007. In 2011, BBA member banks began disclosing that they had received subpoenas and information requests from regulatory authorities around the world. As recounted later in indictments, complaints, court opinions and settlements, the BBA member banks were accused of manipulating LIBOR. In particular, the banks and their individual employees have been accused of collusively suppressing LIBOR by submitting artificially low LIBOR quotes each business day.
Criminal and regulatory actions arising out of LIBOR manipulation are continuing, but have already yielded substantial settlements and criminal convictions, though some juries have declined to issue guilty verdicts. In 2014, the BBA’s responsibility for the setting of LIBOR came to an end.
Private LIBOR Antitrust Litigation
In comparison to the LIBOR criminal prosecutions and settlements obtained by government agencies, antitrust litigation brought by private plaintiffs has generated fewer headlines. Not long after BBA member banks disclosed government investigations, private plaintiffs brought class actions and individual cases alleging harm as a result of the anticompetitive suppression of LIBOR. The private plaintiffs allege that they were harmed by receiving lower returns on LIBOR-denominated financial instruments as a result of the BBA banks’ manipulation of LIBOR.
On August 12, 2011, the Judicial Panel on Multidistrict Litigation transferred the antitrust cases to the Southern District of New York for “coordinated or consolidated” treatment before Judge Naomi Reice Buchwald. Plaintiffs’ cases uniformly included a federal antitrust claim under Section 1 of the Sherman Act though other claims (RICO, Commodities Exchange Act, state law) were variously included.
On June 29, 2012, the defendant banks filed motions to dismiss. Judge Buchwald decided the motions on March 29, 2013. While Judge Buchwald acknowledged that plaintiffs’ complaints included “extensive evidence that allegedly supports their allegations,” the banks won dismissal of the antitrust claims. The district court dismissed the antitrust claims on the grounds that the complaints failed to plead antitrust injury, a component of antitrust standing. The district court’s reasoning took three steps: (1) because LIBOR setting was cooperative, not competitive, plaintiffs’ injury did not arise from harm to competition; (2) allegations of price fixing in the complaints were disconnected from harm to a market; and (3) precedent is clear that normal competitive conduct cannot be the source of antitrust harm.
The Appeal Leads to Reversal …
The LIBOR antitrust plaintiffs took a circuitous route to a hearing before the Second Circuit Court of Appeals. While the district court dismissed the antitrust claims, claims under the Commodities Exchange Act survived. Accordingly, the Second Circuit initially dismissed plaintiffs’ appeals sua sponte in October 2013 “because a final order ha[d] not been issued by the district court [that] disposed of all claims” before the district court. The Supreme Court, however, ruled in 2015 that plaintiffs’ appeal could proceed.
A year later, in a May 23, 2016 opinion written by Second Circuit Judge Dennis Jacobs, the appeals court reversed Judge Buchwald’s dismissal of the LIBOR plaintiffs’ antitrust claims. According to the appeals court, Judge Buchwald had “blur[red] the distinction between an antitrust violation and an antitrust injury.”
The appeals court first considered plaintiffs’ allegations of an antitrust violation. Since plaintiffs “allege that the banks, as sellers, colluded to depress LIBOR” the banks “increased the cost to appellants, as buyers, of various LIBOR-based financial instruments.” In the appeals court’s view, plaintiffs “allege a horizontal price-fixing conspiracy, ‘perhaps the paradigm of an unreasonable restraint of trade.’”
As for antitrust standing, the appeals court found that plaintiffs adequately alleged antitrust injury. Citing the Supreme Court, Judge Jacobs’ opinion explains that when consumers, because of a conspiracy, must pay prices that no longer reflect ordinary market conditions, they suffer injury of the type the antitrust laws were intended to prevent. The import that Judge Buchwald paid to the cooperative nature of the LIBOR process did not resonate with the appeals court. Quoting a 1940 Supreme Court decision, the Second Circuit’s opinion states that “the machinery employed by a combination for price‐fixing is immaterial.”
… But The Appeals Court Did Not Rule on an Alternative Defense for the BBA Member Banks
While the Second Circuit held that the LIBOR plaintiffs adequately alleged antitrust injury, the appeals court raised doubts about a second element of antitrust standing: are the plaintiffs efficient enforcers of the antitrust laws?
As noted by Judge Jacobs, the district court “had no occasion to consider the efficient enforcer” question, but the question is due “proper consideration” on remand. Among other concerns, the appeals court raises potential doubt regarding the “directness or indirectness of the [plaintiffs’] asserted injury.” In particular, since the defendant BBA banks covered only a part of the market for LIBOR denominated instruments, the appeals court articulates concern about the consequence of granting antitrust standing to purchasers that dealt with non-defendant banks. “Requiring the Banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent LIBOR‐denominated derivative swap would . . . bankrupt 16 of the world’s most important financial institutions [and] vastly extend the potential scope of antitrust liability.”
Private LIBOR Antitrust Litigation Moves Forward and Defendants Seize on the 2nd Circuit’s Standing Discussion
Half a decade since allegations of LIBOR manipulation came to light, private plaintiffs represented in the litigation consolidated before Judge Buchwald may be in the position to restart their case on remand. The Second Circuit held that the plaintiffs have plausibly alleged that the banks committed an antitrust violation and also held that plaintiffs plausibly alleged that they were injured.
On the other hand, the Second Circuit exposed potentially prickly questions regarding at least some plaintiffs’ status as “efficient enforcers” of the antitrust laws in the LIBOR case. Indeed, on July 6, 2016 defendants filed a joint motion to dismiss based on the “efficient enforcer doctrine.” Defendants’ motion contends that “close attention” to the factors applied in an efficient enforcer analysis (causation, directness, speculative damages and duplicative recovery) should foreclose the claims of various plaintiffs. Most recently, plaintiffs (bondholders, exchange-based plaintiffs, OTC plaintiffs and individual plaintiffs) have filed opposition memoranda contesting defendants’ suggested application of the efficient enforcer factors. Judge Buchwald’s decision (and any appellate review thereof) will likely serve as a guidepost for potential antitrust plaintiffs challenging anticompetitive schemes in the financial sector. The decision may also finally allow the LIBOR case to proceed in earnest.
About Faruqi & Faruqi, LLP
Faruqi & Faruqi, LLP focuses on complex civil litigation, including securities, antitrust, wage and hour, and consumer class actions as well as shareholder derivative and merger and transactional litigation. The firm is headquartered in New York, and maintains offices in California, Delaware and Pennsylvania.
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About Richard Schwartz
Richard Schwartz is an associate in the firm’s antitrust practice group, resident in the firm’s Pennsylvania office. He has represented plaintiffs in class action litigation for 10 years.