Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Management investment company files suit against banks over LIBOR manipulation, (May 22, 2014)

By Linda O’Brien, J.D., LL.M.

A management investment company has filed a complaint in the federal district court in Newark alleging that major domestic and foreign financial institutions engaged in a conspiracy to restrain trade through their manipulation of the London Interbank Offered Rate (LIBOR), in violation of federal and state antitrust laws and New Jersey RICO law (Prudential Investment Portfolios 2 v. Bank of America Corporation, May 19, 2014).

The British Bankers’ Association (BBA) is the leading trade association for the U.K. banking and financial services sector and is governed by a board of its member banks. The BBA determines LIBOR every business day based on an average of interest rates at which LIBOR member banks report as their costs of borrowing funds in various currencies. The reports are supposed to be made independently and accurately. LIBOR is the primary benchmark rate for setting interest rates globally on a wide variety of financial instruments. Prudential Investment Portfolios 2 (PIP2) is a management investment company that is comprised of six investment funds. PIP2 relied on representations of the LIBOR interest rate to be paid in its decisions to purchase securities and other instruments linked to the LIBOR interest rate.

The complaint claims that LIBOR is the reference point for determining interest rates for trillions of dollars in financial investments. In order to reap massive profits at the expense of investors, the defendant banks allegedly conspired to manipulate LIBOR from August 2007 to December 2010. Working in secret, the member banks reported artificially low LIBOR submissions in a successful effort to suppress LIBOR for their financial gain, according to the complaint. Although the member banks held themselves out as competitors, they conspired to hide their conduct until government regulatory bodies disclosed the results of their investigations, PIP2 charged.

Analysis by consulting experts demonstrates that LIBOR deviated from other well-established benchmarks of the banks’ costs of borrowing during the relevant period which was unprecedented and not explained by market fundamentals. The defendant banks’ patterns of divergence from the Eurodollar benchmark were very similar to each other during this period. The statistical evidence indicates collusion, since the defendants were artificially suppressing LIBOR in common but unpredictable ways that did not correspond to the LIBOR definition or track market fundamentals, the complaint alleges.

Regulatory agencies in the United States, United Kingdom, and other foreign regulatory authorities initiated investigations into LIBOR manipulation in 2011. In 2012 and 2013, sanctions and settlements with the defendant banks and affiliated entities were announced in connection with the manipulation of LIBOR.

According to the complaint, the defendant banks had strong incentives to suppress LIBOR. They were able to control how much interest they were paying to other financial institutions and could affect the value of the other instruments that could be traded. By suppressing LIBOR, the member banks allegedly limited their exposure to rising interest rates that could result in lost revenue. In addition, the member banks were charged with understating their true borrowing costs to avoid negative publicity and scrutiny about their liquidity and creditworthiness during the economic crisis that began in 2007.

PIP2 relied on the integrity of the process in setting LIBOR concerning the interest rates to be paid on the transactions entered into directly with the defendant banks. The defendants’ artificial suppression of LIBOR reduced the amounts that PIP2 received and should have received for holding the securities and other investments purchased in the transactions, the plaintiff argued.

Prudential Investment Portfolios 2 asserts claims for violations of Section 1 of the Sherman Act, New Jersey RICO law, the New Jersey Uniform Securities Act, fraud, aiding and abetting fraud, intentional interference with contract, intentional interference with prospective economic relations, breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and restitution. The action seeks rescission; indemnification; compensatory, punitive, and treble damages; pre-judgment interest; costs of suit; attorney fees; and any other just and proper relief.

The case is No. 2:14-cv-03220.

Attorneys: Kathleen Barnett Einhorn (Genova Burns Giantomasi Webster LLC), Daniel L. Brockett and Jeremy D. Andersen (Quinn Emanuel Urquhart & Sullivan, LLP) for Prudential Investment Portfolios 2.

Companies: Bank of America Corporation; Bank of America, N.A.; Barclays Bank PLC; Barclays Capital Inc.; Citibank, N.A.; Citigroup Funding Inc.; Citigroup Global Markets Inc.; Citigroup Inc.; Credit Suisse AG; Credit Suisse Group AG; Credit Suisse Securities LLC; Credit Suisse Inc.; Deutsche Bank, AG; HSBC Bank PLC; HSBC Finance Corp.; HSBC Holdings PLC; HSBC USA, Inc.; JPMorgan Chase & Co.; JPMorgan Chase Bank, N.A.; JPMorgan Securities LLC; Royal Bank of Canada; RBC Capital Markets, LLC; Royal Bank of Scotland PLC; RBS Securities Inc.; UBS AG

News: Antitrust NewJerseyNews