New York Bank Sues Libor-Setting Banks for Fraud

New York Bank Sues Libor-Setting Banks for Fraud

In the latest lawsuit to arise from the rapidly evolving Libor scandal, a New York bank has filed a purported class action in the Southern District of New York, seeking to recover damages from the U.S. Dollar Libor rate setting banks for fraud. The complaint, which was filed July 25, 2012 and which can be found here, purports to be filed on behalf of all New York based lending institutions.

The plaintiff in this latest suit is Berkshire Bank, which, according to the Wall Street Journal's July 30. 2012 article about the new lawsuit (here), has eleven branches in New York and New Jersey and about $881 in assets. The bank's complaint purports to be filed on behalf of a class of "all banks, savings & loan institutions, and credit unions headquartered in the State of New York, or with the majority of their operations in the State of New York, that originated loans, purchased whole loans, or purchased interests in loans with interest rated tied to Libor, which rates adjusted at any time between August 1, 2007 and May 31, 2010."

The defendants in the lawsuit include the 16 banks on the panel that set the U.S. dollar London interbank offered rate (Libor) between August 2007 and May 2012. (There are actually 21 named defendants, as multiple related corporate entities have been named as defendants for certain of the Libor setting banks.)

The complaint alleges that the plaintiff banks "suffered damages as a result of Defendants' fraudulent conduct in artificially decreasing the USD LIBOR rate during the Class Period, causing them to receive lower interest than they would have been entitled but for the Defendants' fraud." The specific harm the plaintiff alleges is that the reduction of Libor brought about by the defendants' alleged manipulation of Libor reduced the amount of interest the plaintiff banks could earn on their outstanding loans. The complaint asserts substantive claims for fraud and for unjust enrichment/disgorgement.

This latest suit is an interesting variation on the Libor-scandal litigation theme. Unlike many of the other lawsuits filed so far (including a prior antitrust class action purportedly filed on behalf of all community banks), this latest lawsuit does not allege claims under the federal antitrust laws. The absence of this allegation may relieve the plaintiffs of the challenging burden of showing that the defendants acted collectively in setting the rates. The plaintiffs' assertion only of common law claims may also avoid certain antitrust claim defenses, such as those available under the Illinois Brick doctrine (which prohibits indirect purchasers from asserting antitrust claims).

On the other hand, in order to prevail on their fraud claims, the plaintiffs will have to meet the state of mind requirement -- that the defendants acted intentionally. Another concern may be the location of the alleged fraudulent conduct and whether there is a sufficient basis for the assertion of fraud claims in the U.S. And in addition, the plaintiff banks in this case cannot avoid the difficult damages proof problems that will face all claimants in these Libor-scandal cases; that is, the suppressed Libor rates may have helped and hurt the plaintiff banks in different ways and at different times, depending on the specific interest-rate related activities in which the banks were engaged.

Evan Weinberger has an July 27, 2012 Law 360 article entitled "Libor's Complex Web May Limit Rate-Rigging Damages Claims" detail the proof problems associated prospective claimants Libor-scandal related damages claims, here (registration required).

The purported plaintiff class also seems somewhat heterogeneous. The different depositary institutions may or may not have used Libor-sensitive rates in its lending activities during the class period, or may have used it in different ways. The inclusion of not only banks but S&Ls and credit unions also diversifies the class in potentially complicating ways.

Nevertheless, this latest lawsuit represents an unwelcome development for the banks ensnared in the Libor scandal. The case itself represents a new litigation approach based on a new theory of recovery, and it raises the specter that the various rate setting banks could face a multitude of similar lawsuits filed on behalf of depositary institutions in the other states.

The other thing about this latest case is that it shows that the potential claimants and their attorneys are now and will continue to be casting about for alternative ways to try to recover damages connected to the Libor scandal. There undoubtedly will be many more lawsuits asserting a variety of purported claims, one of the many possibilities suggesting that the litigation related to this scandal could be a huge burden for the Libor-setting banks.

Alison Frankel has an interesting Juy 30, 2012 post on her On the Case blog (here) in which she considers whether this last lawsuit represents a developing "brawl" among the plainiffs' lawyers to represent members of the class of persons harmed by the Libor scandal.

Very special thanks to a loyal reader for sending me a copy of the complaint.

My recent overview of the Libor scandal and of the scandal-related litigation can be found here.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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