Second Circuit Reinstates Barclays Libor Scandal Securities Suit

Second Circuit Reinstates Barclays Libor Scandal Securities Suit

 While claimants continue to file private civil actions seeking to recover  damages they claim to have sustained as a result of the Libor manipulation scandal, the fact is that at least up to this point, the plaintiffs have not fared particularly well in the Libor-related civil litigation.

As noted here, on March 29, 2013, Southern District of New York Judge Naomi Reice Buchwald substantially granted the motion to dismiss in the consolidated Libor-scandal antitrust litigation, and as discussed here, on May 13, 2013, Southern District of New York Judge Shira Scheindlin granted the motion to dismiss in the Libor-related securities class action lawsuit filed against Barclays. And as reported here, on March 27, 2014, New York Supreme Court Judge Shirley Werner Kornreich dismissed the shareholder derivative suit filed against JP Morgan’s board in connection with the Libor scandal.

However, as a result of an April 25, 2014 decision of the Second Circuit in the Barclays Libor scandal securities class action litigation, at least part of the dismissed claims of at least one of these sets of claimants has been revived. While affirming the dismissal of the plaintiffs’ allegations based on statements concerning the bank’s internal controls, the appellate court vacated the district court’s dismissal based on her finding that the plaintiffs had not adequately pled loss causation. The appellate court said “While expressing no view on the ultimate merits of plaintiffs’ theory of loss causation, we hold that the court below reached these conclusions prematurely.”


On June 27, 2012, Barclays announced that it had entered settlements with regulators in the United States and the United Kingdom relating to the Libor scandal. Barclays agreed to pay fines totaling more than $450 million and admitted for the first time that between August 2007 and January 2009 the bank had in its Libor submissions underreported the interest rates it was paying. The price of the company’s ADRs fell approximately 12 percent on the news of the settlements.

As discussed in greater detail here, on July 10, 2012, Barclays shareholders filed a securities class action lawsuit in the Southern District of New York, against Barclays PLC and two related Barclays entities, as well as the company’s former CEO, Robert Diamond; and its former Chairman Marcus Agius. The complaint, which can be found here, was filed on behalf of class of persons who purchased Barclays ADRs between July 10, 2007 and June 27, 2012.

The plaintiffs’ complaint alleges that the bank and several of its officers willfully misrepresented the bank’s borrowing costs between 2007 and 2009 and knowingly submitted false information for purposes of calculating Libor. The plaintiffs allege that by underreporting the bank’s interest rates, the bank presented a misleading picture of the bank’s financial condition and artificially inflated the bank’s share price. The plaintiffs also allege that the defendants misleadingly stated that the company had established “minimum control requirements for all key areas of identified risks.” (For a detailed background regarding the Libor rate setting process and the allegations regarding Libor’s alleged manipulation refer here.) The defendants moved to dismiss the shareholders’ complaint.

In a May 13, 2013 opinion (discussed here), Judge Shira Scheindlin granted the defendants’ motion to dismiss. With respect to the plaintiffs’ allegations that the bank had underreported its interest rates, Judge Scheindlin concluded that the plaintiffs had failed to present a plausible theory of loss causation. She reasoned that even if the defendants had misrepresented the bank’s interest rates between 2007 and 2009 and therefore inflated the bank’s share price, any share inflation would have been rectified prior to the June 27, 2012 announcement in which the company admitted it had underreported its interest rates. She also dismissed the plaintiffs’ claims based on the alleged internal control misrepresentations, on the grounds that the statements were mere “puffery” and were not materially false or misleading. The plaintiffs’ appealed the dismissal.

The April 25, 2014 Opinion         

In an April 25, 2014 opinion written by Southern District of New York Judge Richard Berman (sitting by designation) for a three-judge panel, the Second Circuit affirmed Judge Scheindlin’s dismissal of plaintiffs’ allegations based on the statements about the bank’s internal controls, but vacated Judge Scheindlin’s decision with respect to the alleged underreporting of the bank’s borrowing costs, holding that the plaintiffs had sufficiently pled loss causation.

With respect to the loss causation issue, appellate court said that “While expressing no view on the ultimate merits of plaintiffs’ theory of loss causation, we hold that the court below reached these conclusions prematurely.” Basically the Court could not agree with Judge Scheindlin’s assumption that Barclay’s false 2007-2009 submission rates were somehow corrected after January 2009 (but before June 27, 2012). The Court said that “while Barclay’s 2009-2012 submission rates may have provided accurate information about the company’s borrowing costs and financial condition for the period 2009-2012, that did not correct the prior years’ misstatements.”

The Court added “We cannot conclude, as a matter of law and without discovery, that any artificial inflation of Barclay’s stock price after January 2009 was resolved by an efficient market prior to June 27, 2012.” Whether the effects of Barclay’s ‘willfully false LIBOR representations dissipated before June 2012 is a question of fact that can be answered only upon a more developed record.”

With respect to the alleged misrepresentations concerning the company’s internal controls, the appellate court agreed with the district court that the alleged statements were not materially false because they were not specifically tied to Barclay’s LIBOR practices.


The case will now go back to the district court for further proceedings, and presumably for discovery. The appellate court’s reinstatement of the plaintiffs’ claims is a reminder that a trial court’s action is granting a dismissal is only one procedural stages, and that there is always the possibility for further developments in subsequent proceedings.

Though the appellate court’s reinstatement of a portion of these plaintiffs’ securities claims is a significant development in this case, it may have relatively little significance for most of the other financial institutions caught up in the Libor scandal. Most of the Libor benchmark rate-setting banks d not have securities that trade on the U.S. securities exchanges, and so the U.S. securities laws do not apply to trading in those banks’ securities. Indeed, even among the Libor rate-setting banks that do have securities trading on the U.S. securities exchanges, Barclays is the only one to have been hit with a federal court securities class action. (As noted here, one Libor-scandal claimant, the Charles Schwab Corporation, has filed an individual action in California state court seeking to recover damages from the Libor rate-setting banks on a number of theories, including under Section 11 of the ’33 Act.)

But while the significance of the appellate court developments in the Barclays Libor-related securities suit mostly is limited to the immediate parties to the case, the Second Circuit’s actions are a reminder that we may still have a long way to go in the Libor-scandal related litigation and it may be some time yet before a comprehensive assessment of how the plaintiffs have fared in the cases is possible.

It is worth noting that earlier this month Barclays settled two separate U.K. court proceedings in which claimants alleged that Barclays had missold financial products that were linked to the Libor benchmark interest rates.

The Second Circuit’s action setting aside the district court’s dismissal of the Libor-scandal securities suit is not the only unwelcome litigation development for Barclays in recent days. As noted here, Barclays was among the many banks named as a defendant in the recently filed high frequency trading securities class action lawsuit. Barclays’ legal woes continue.

Special thanks to a loyal reader for alerting me to the Second Circuit’s decision.

 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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