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LIBOR Update

03 January 2013. Published by Mike Allan, Of Counsel

On 27 June, it was revealed that Barclays had agreed to pay fines totalling £290 million ...

… after investigators from the Financial Services Authority and the US Commodity Futures Trading Commission ("CFTC") had identified evidence that Barclays had tried to manipulate Libor and Euribor over a period of several years, both in the run up to the financial crisis and in its aftermath.

The full picture of the extent to which LIBOR was manipulated and the extent to which banks other than Barclays were involved is yet to emerge.

Barclays admitted that it had made false submissions from as early as 2005, as part of the Libor and Euribor rate setting process.  These fell into two categories. The first were influenced by requests made by Barclays' interest rate derivatives traders, in order to benefit Barclays' trading positions.  Traders had also sought to influence the Euribor submissions of other banks who contributed to the rate setting process. 

The second were made at the behest of senior management at Barclays, who held concerns over negative media comment concerning Barclays' financial condition.  They prevailed upon the personnel making LIBOR submissions to reduce them in line with those being made by other banks, to ensure that Barclays was not "sticking its head above the parapet". 

HBOS, HSBC and RBS have each confirmed that they are also being investigated by the FSA in relation to the manipulation of LIBOR.  It was reported in the Financial Times earlier this month that RBS is in settlement negotiations with the FSA, the US Department of Justice and CFTC, the result of which, it was reported, may be the voluntary acceptance of a fine of between £200 and £300 million.

The scandal may well give rise to claims against banks who are implicated in the manipulation of LIBOR by counterparties to Interest Rate Swap contracts and other financial products whose performance is linked to LIBOR. Barclays, along with RBS, HSBC and other banks, has already been named in investor claims, several of which are class actions, which have been commenced the US. 

One of the biggest class-action claims has been filed in New York by the Mayor and City Council of Baltimore and the City of New Britain Firefighters and Police Benefit Fund.  The claimants seek to recover damages of more than US$300 million from Barclays, RBS, HSBC and other banks, who are alleged to have mis-sold interest rate derivative products whose performance was then adversely impacted by their manipulation of LIBOR.

There is clear potential for equivalent claims to be brought in this country by counterparties who invested in products the performance of which is linked to LIBOR.  Such claims are likely to be advanced on the basis of an implied term in the transaction, to the effect that the bank would not manipulate or distort LIBOR.  Alternatively, that a false representation was made by the bank in relation to LIBOR, upon which the claimant relied when entering into the transaction.  It is certainly possible that such claimants could prove that they are entitled to damages, but this will involve a substantial and expensive forensic investigation.  In each case, a successful claimant would need to compare its actual position with the position that it would have been in, had the bank making a false LIBOR submission made an accurate submission. 

While the evidential burden upon claimants might be thought to be a heavy one, the fact that Barclays apparently attempted to move LIBOR by making false submissions on over 200 occasions tends to indicate that it believed that its attempts were having an effect.

The emerging facts of the scandal indicate that there may have been collusion between separate banks.  This in turn gives rise to the possibility of breaches of competition law, which may give an alternative route to victims of the crisis to recover their losses.  If the EU Competition Commission determines that the banks have colluded in breach of competition regulations, that finding will be binding in any private claims for damages that might be brought.  Such claims would, therefore, move directly to the question of damages, although claimants would still face the same difficulties in terms of causation and quantum that are identified above.

There is also the potential for criminal prosecutions. 

The SFO is presently investigating the involvement of banks in the manipulation of LIBOR, although no details of which banks are under investigation or what the potential charges might be have been disclosed.  None of the implicated Barclays staff, or the staff of any other bank have been arrested. The Director of the SFO, David Green QC, has stated, however, that he believes that existing legislation could be used to bring criminal prosecutions against banks and their employees.

The bases upon which such prosecutions might be brought are for false accounting under Section 17 of the Theft Act 1968, or for fraud under the provisions of the Fraud Act 2006, whether by way of false representation, failure to disclose information or by abuse of position.  Where more than one individual dishonestly intended to act together in order to defraud another or others, prosecutions might also be brought for the common law or statutory offence of conspiracy to defraud.

While the SFO investigation continues, both Michel Barnier, European Commissioner for Internal Markets, and Gary Gensler, Chairman of the CFTC, have issued statements this week to the effect that the seriousness of LIBOR manipulation means that any person who has been found to be involved should face criminal charges.

This story clearly has some way to run.