Securities Regulation Daily Wrap Up, DERIVATIVES—CalSuperCt: Schwab Sues Banks for LIBOR Manipulation, (May 1, 2013)

By Lene Powell, J.D.

Charles Schwab Corp. and related entities filed a complaint in California state court against Bank of America and other major banks, alleging that manipulation of the LIBOR benchmark reduced payments on LIBOR-based financial instruments. The complaint asserts violations of the Securities Act, as well as state statutory and common law claims.

LIBOR is a benchmark interest rate disseminated by the British Bankers Association and is calculated for ten currencies, including the U.S. dollar. It is used to gauge the cost of unsecured borrowing in the London interbank market and sets the price for derivatives and other financial contracts worldwide.

A federal district court recently ruled on a number of LIBOR manipulation cases brought by Schwab, which were consolidated with other LIBOR lawsuits. The court dismissed an antitrust claim but allowed a commodities manipulation claim to proceed.

Systematic suppression of LIBOR benefited banks. In the complaint, Schwab argued that the banks systematically suppressed the benchmark rate from August 2007 to May 2010. This allowed the banks to pay unduly low interest rates on LIBOR-based financial instruments, with the result that plaintiffs did not receive proper payments on those instruments.

The complaint also noted that in addition to floating-rate instruments, whose interest rates are specifically set as a variable amount over LIBOR, market participants use LIBOR as the starting point for negotiating rates of return on short-term fixed-rate instruments, such as fixed-rate notes maturing in one year or less. Thus, the suppression of LIBOR ensured that artificially low interest rates would attach to fixed-rate and variable instruments as well, Schwab argued.

The complaint cited settlements in major enforcement actions against some defendants, including Barclays, UBS, and Royal Bank of Scotland. The factual findings in those settlements included admissions to the DOJ that defendants suppressed the U.S.-dollar LIBOR rate and also evidence of manipulation of the rate in other currencies, the complaint stated.

Claims. Schwab alleged that the banks violated the California code concerning Unfair Business Practices, as well as common law claims including interference with prospective economic advantage, unjust enrichment, and other tort and contract claims. In addition, the complaint alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.

The case is CGC-13-531016.

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