Antitrust Law Daily Wrap Up, ANTITRUST NEWS: State transportation authority alleges LIBOR manipulation, (Apr 1, 2014)

By Linda O’Brien, J.D., LL.M.

A state transportation authority has filed a complaint in the federal district court for the Northern District of California, alleging that major domestic and foreign financial institutions engaged in a conspiracy to restraint trade through their manipulation of the London Interbank Offered Rate (LIBOR), in violation of federal and state antitrust laws and RICO (Bay Area Toll Authority v. Bank of America Corporation, March 31, 2014).

The British Bankers’ Association (BBA) sets LIBOR every business day based on an average of interest rates at which LIBOR member banks report as their costs of borrowing funds at different maturity dates. Each bank self-certifies the rate at which it could borrow funds rather than an actual borrowing rate. LIBOR is the primary benchmark rate for setting short-term interest rates globally on a wide variety of financial instruments. Bay Area Toll Authority (BATA) administers and invests the toll revenues for state-owned toll bridges and issues fixed and variable interest rate bonds payable from those revenues. BATA has entered into interest-rate swap contracts under which from the swaps were linked to LIBOR.

According to the complaint, a bank reporting that it could borrow money at a lower interest rate was considered to be more credit-worthy. LIBOR-member domestic and foreign financial institutions betrayed investor confidence in LIBOR by suppressing LIBOR through the daily underreporting to the BBA the actual interest rates at which the defendant banks expected to borrow funds.

The complaint alleges that the defendant banks conspired to manipulate LIBOR from August 2007 to May 2010. The defendant banks had substantial financial incentives to suppress LIBOR in light of investor concerns over the stability of the financial market following the economic crisis emerging in 2007. First, the banks were motivated to understate their borrowing costs and the level of risk associated with the banks. Second, by suppressing LIBOR, the banks paid lower interest rates on LIBOR-based financial instruments they sold to investors.

Analysis by consulting experts demonstrates that LIBOR deviated from other well-established benchmarks of the banks’ costs of borrowing during the relevant period, contrary to fundamental principles of economics and finance. The discrepancies between the banks’ LIBOR quotes and their probabilities of default measuring their level of credit risk show that banks artificially suppressed LIBOR.

Regulatory agencies in the United States, United Kingdom, and Switzerland have initiated investigations and, in 2012 and 2013, announced settlements with entities affiliated with the defendant banks which detail the entities misconduct in connection with the manipulation of LIBOR.

LIBOR is the reference point for determining interest rates for trillions of dollars in financial instruments. According to the complaint, the defendant banks had strong incentives to suppressed LIBOR. They masked their true borrowing costs to portray themselves as economically healthier than they actually were and reaped unjustified revenues by setting artificially low interest rates on LIBOR-based financial instruments obtained by investors. The defendant banks’ manipulation depressed the returns on various financial instruments, including the interest-rate swaps that BATA obtained. As a result of the manipulation, BATA did not receive its rightful payments on those instruments.

Bay Area Toll Authority asserts claims for fraud, deceit and concealment, interference with prospective economic advantage, breach of contract, unjust enrichment, and violations of Section 1 of the Sherman Act, RICO, and California’s Cartwright Act and Unfair Competition Law. The action seeks injunctive relief, restitution, treble damages, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 4:14-cv-01493.

Attorneys: Richard M. Heimann and Steven E. Fineman (Lieff, Cabraser, Heimann & Bernstein, LLP) and Adrienne D. Weil, General Counsel, for Bay Area Toll Authority

Companies: Bank of America Corporation; Bank of America, N.A.; Bank of Tokyo-Mitsubishi UFJ Ltd.; Barclays Bank PLC; Citigroup, Inc. Citigroup Financial Products, Inc.; Citibank, N.A.; Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.; Credit Suisse Group AG; Deutsche Bank, AG; HSBC Holdings PLC; HSBC Bank PLC; JPMorgan Chase & Co.; JPMorgan Chase Bank, National Association; Lloyds Banking Group PLC; HBOS PLC; Royal Bank of Canada; The Norinchukin Bank; The Royal Bank of Scotland Group PLC; UBS AG; Portigon AG; Westdeutsche Immobilienbank AG; British Bankers’ Association; BBA Enterprises Ltd.; BBA Libor Ltd.

News: Antitrust CaliforniaNews