Wednesday, February 11, 2015

Banks Manipulated Swiss Franc LIBOR, Class Action Asserts

[This story previously appeared in Securities Regulation Daily.]

By Lene Powell, J.D.

A New York-based investment fund sued a group of major banks in a putative class action, alleging that they conspired to restrain trade in and manipulate the Swiss franc London Inter-bank Offered Rate (LIBOR), from 2005 through at least 2009. This caused the fund to engage in derivatives transactions based on the benchmark rate at artificial prices, resulting in injury. The suit requests unspecified damages (Sonterra Master Capital Fund Ltd. v. Credit Suisse Group AG, et al., Feb. 5, 2015).

Price manipulation. A widely used benchmark interest rate, LIBOR is calculated based on the submissions of a panel of contributor banks. LIBOR is meant to reflect the cost of borrowing funds in the inter-bank market just before 11 am in London time. During the relevant time, LIBORs were published each day for 10 currencies, including Swiss francs.

Sonterra Capital Master Fund, Ltd., an investment fund headquartered in New York, NY, alleged that instead of accurately reporting their borrowing costs, four banks altered their Swiss franc LIBOR submissions to manipulate the prices of financial instruments that were priced, benchmarked, or settled based on Swiss franc LIBOR for their own financial benefit. The banks, including UBS AG, Royal Bank of Scotland plc (RBS), JPMorgan & Chase Co, and Credit Suisse Group AG previously agreed to settlements with various regulators to resolve charges of manipulation and restraint of trade. The settlements, entered into with the CFTC, DOJ, UK Financial Services Authority, and European Commission, resulted in over $2 billion in fines, as well as key admissions of wrongdoing. The complaint also named a number of John Does as defendants including other banks, cash brokers, and other co-conspirators.

Guidelines in place during the relevant period provided that the Swiss franc LIBOR must be based on offered inter-bank deposit rates representing the cost of borrowing unsecured funds in the Swiss franc market. Contributor banks are not allowed to consider costs unrelated to the cost of funding, e.g., the value of their Swiss franc LIBOR-based derivatives positions. However, the plaintiffs alleged that through instant messages and chat rooms, the banks’ derivatives traders shared information regarding their Swiss franc LIBOR-based derivatives positions, including Swiss franc currency futures contracts and forward agreements. The traders asked one another for submissions that would manipulate the prices of those derivatives for their benefit.

According to the complaint, the practice of nudging the rate to benefit traders’ positions was commonplace, and frequently joked about. In one exchange, an RBS submitter pretended he would not agree with a request, but let himself be persuaded by an offer of day-old sushi. At least two banks reorganized their trading desks so that derivatives traders and money market makers, some of whom were also LIBOR submitters, would share the same location in the firm, so they could share information more easily.

Collusion. The European Commission found that in 2007, the four banks participated in a cartel to fix the prices of Swiss franc LIBOR-based derivatives, said the complaint. Cartel members agreed to quote wider, collusive, bid-ask spreads for certain categories of derivatives for non-members, while maintaining narrower spreads for trades among themselves. This allowed the cartel members to reduce their transaction costs and maintain liquidity among cartel members, and prevented other dealers in the Swiss franc derivatives market from competing on the same terms. This anti-competitive combination of four of the biggest dealers caused injury to the plaintiffs and others who transacted in Swiss-franc LIBOR-based derivatives at artificial prices, the complaint asserted.

Claims. The plaintiffs argued that the defendants’ conduct was a conspiracy to restrain trade in violation of Section 1 of the Sherman Act. The conduct was a per se violation, or alternatively, the conspiracy resulted in substantial anticompetitive effects. There was no legitimate business justification or pro-competitive effects of the conspiracy.
The plaintiffs also contended that the defendants were liable for price manipulation under Sections 6(c), 9, and 22 of the Commodity Exchange Act, as well as multiple provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO). Finally, the plaintiffs asserted a common-law claim of unjust enrichment.

The case is No. 15 cv 0871.

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