LIBOR Liability: What’s next in Securities Litigation?

V. James Mann is a New York-based JAMS panelist who spent 25 years as an in-house attorney with Merrill Lynch, where he represented the broker-dealer, investment banking, institutional trading and sales businesses.

Securities litigators looking for the “next big thing” cannot have failed to take note of the manipulated LIBOR (London Interbank Offered Rate) investigations and potential prosecutions in the United States and Europe. Although it is premature to predict the ultimate success of likely lawsuits, a wave of class action litigation is probably on the horizon.

Complex issues involving damages and loss causation are likely to feature prominently in many of those cases, and the risk and the cost to both sides will be significant. For example, an institution with a complex balance sheet will probably both make and receive LIBOR-linked payments.  Netting such payments to calculate losses measured in a few basis points may prove both challenging and costly. As a consequence, a jury trial is not likely to be attractive to many litigants, and it is likely that significant cases involving LIBOR-manipulation will be resolved without a trial. In those cases that survive motions to dismiss or for summary judgment, a sophisticated and knowledgeable mediator can offer valuable insights and assistance to the parties as they negotiate the labyrinth of what will otherwise be a difficult, costly and time-consuming process.

LIBOR is used as a benchmark rate for credit and other financial transactions around the world, and was established in the 1980s as demand grew for an accurate measure of the rate at which banks would lend to each other. LIBOR is set for different currencies based on different panels of banks by asking them at what rate they could borrow funds “in a reasonable market size.” The rate is established by averaging the rates submitted, after excluding the highest and lowest rates.

In June, Barclays PLC paid approximately $450 million in fines to U.S. and British authorities, and admitted that some traders and executives tried to fix the LIBOR rate by submitting lower than justified rates. The scandal has since spread to more than 16 financial institutions.

Potential plaintiffs without direct contractual or other relationships with alleged manipulators might face some challenges to bringing suit against the wrongdoers, and may find themselves limited to claims against defendants with whom they are in privity.

Class action cases often settle for very little and often institutional plaintiffs choose to opt out of these cases in favor of a separate lawsuit. The Wall Street Journal recently reported that several large mutual fund companies, including Blackrock, Inc. and Vanguard Group, Inc., are exploring the viability of LIBOR-manipulation litigation. These companies are paying particular attention to whether they have suffered compensable damages.  Nonetheless, cases will be brought. But by utilizing the confidential and efficient nature of ADR, resolution can occur in a more timely matter than a lengthy and costly litigation.