Sixteen major banks have been accused of conspiring to manipulate the Libor benchmark interest rate by a US appeals court on Monday which reinstated a civil lawsuit against the banks. the judges warned that the institutions could be bankrupted by the ruling which overturns a 2013 decision.

According to the US circuit court of appeals in Manhattan, based on the ground that the investors failed to allege harm to competition, a lower court judge erred in dismissing the antitrust portion of private litigation against Barclays, Bank of America, Deutsche Bank, HSBC, UBS and others.

Libor, or the London interbank offered rate is used to set rates on credit cards, student loans and mortgages and underpins hundreds of trillions of dollars of transactions. Submissions by banks that sit on panels forms the basis of the calculation of Libor.

In order to boost earnings or make their finances appear healthier, the big banks had suppressed Libor during the financial crisis, investors accused in the litigation that began in 2011.

The claims filed by private plaintiffs were dismissed by Manhattan federal district court judge Naomi Reice Buchwald back in early 2013. The plaintiffs failed to prove harm from such collusion and when the banks colluded to manipulate the Libor benchmark interest rate, they did not violate antitrust, ruled the judge in her 161 page decision.

At the time Barclays, UBS and Royal Bank of Scotland had already settled cases with more than $2.5bn in penalties and therefore Buchwald’s 2013 decision had surprised some. Including a penalty of $2.5bn against Deutsche Bank, penalties in Libor-rigging probes have climbed to roughly $9bn since the last ruling.

The three-judge appellate court panel disagreed with her decision.

“Appellants sustained their burden of showing injury by alleging that they paid artificially fixed higher prices,” Judge Dennis Jacobs wrote on behalf of the panel.

The panel sent the case back to the lower court after determining that the plaintiffs had sufficiently shown they had been harmed by the alleged rate manipulations. Buchwald consider if the plaintiffs are the appropriate parties to bring such charges, two of the judges asked that when revisiting the case. Cities including Baltimore, San Diego and Houston are among the plaintiffs bringing charges against the 16 banks.

The plaintiffs also warned of dire consequences should the case be proven against the banks. They would be eligible to receive triple damages and attorneys’ fees for any violations if the court were to rule in favor of the plaintiffs.

“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, if appellants’ allegations were proved at trial, not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad markets where derivative instruments have proliferated,” the US court of appeals in New York said in the ruling issued on Monday. 

There are several other lawsuits in Manhattan that are seeking to hold banks liable for alleged price fixing in bond, commodity, currency, derivatives, interest rate and other financial markets and the decision could help such investors involved in the lawsuits.

“It strengthens the hand of investors in other price-fixing cases based on benchmarks that were reached in collaborative, or outright collusive, arrangements,” said Lawrence White, a professor at New York University’s Stern School of Business.

(Adapted from The Guardian)

Categories: Economy & Finance, Regulations & Legal