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Suits Mount in Rate ScandalBillions of Dollars At Stake In Claims
Banks being probed for interest-rate manipulation face potentially tens of billions of dollars in claims from dozens of lawsuits in the U.S. from cities, insurers, investors and lenders who say they were hurt by the allegedly fudged rates.
The allegations come from parties as varied as individual investors and institutions like Charles Schwab Corp. SCHW +0.07%that say they were cheated out of returns on bonds with artificially low rates, to cities and hedge funds with financial contracts squeezed by traders who allegedly colluded with each other.
The exact number of cases isn't clear, but they have been piling up for months, a review of federal- and state-court filings by The Wall Street Journal shows. Barclays BARC.LN -1.53%PLC's settlement with U.S. and U.K. regulators in June for about $450 million triggered a burst of new lawsuits against the British bank and other financial institutions now under investigation, including Bank of America Corp., BAC -1.13%Citigroup Inc. C -1.40%and J.P. Morgan Chase JPM -1.42%& Co.
"This is just the beginning," said Michael Hausfeld, a lawyer at law firm Hausfeld LLP in Washington, D.C., who is representing plaintiffs in several cases. "Scores of interested potential clients" have called, he said.
It won't be easy for the plaintiffs to win in court even though financial institutions are likely to reach settlements with regulators in coming months totaling billions of dollars, according to people close to the Libor investigation. The plaintiffs must prove that banks successfully manipulated interest-rate benchmarks such as the London interbank offered rate, or Libor, and caused the plaintiffs to suffer a loss.
Still, some investors and analysts are forecasting huge damages despite the legal hurdles. In a July report, Macquarie Research estimated that banks face potential legal liability of about $176 billion, based on the assumption that Libor was "understated" by 0.4 percentage points in 2008 and 2009.
Other predictions are far smaller. Analysts at Keefe, Bruyette & Woods Inc. said Libor lawsuits could cost banks a total of about $47.5 billion, assuming settlements of 10% of the damages claimed in lawsuits. Morgan Stanley predicted payouts of $7.8 billion.
The proliferation of Libor suits partly reflects how much the interest rate is hard-wired into the global financial system. Libor is tied to hundreds of trillions of dollars in loans and financial contracts and was called the "world's most important number" in 2009 by the British Bankers' Association, the trade group overseeing Libor. Now those four words are popping up in many of the Libor-related lawsuits.
It will likely take years for the lawsuits to be resolved, analysts say, but they expect banks to be under considerable pressure to settle at least some of the allegations. Firms facing the biggest potential payouts, according to Morgan Stanley, based on the financial business they do rather than their assumed culpability, include Deutsche Bank AG, DBK.XE -1.78%Royal Bank of Scotland RBS.LN +0.41%PLC, Barclays, Bank of America and J.P. Morgan.
Representatives for Bank of America, J.P. Morgan Chase and Citigroup declined to comment. Representatives for Deutsche and RBS didn't immediately respond to a request for comment.
Financial institutions also are vulnerable because of Libor's wide ripple effect. The interest rate affects commercial paper, corporate bonds, syndicated loans, derivatives, adjustable-rate mortgages and student loans.
On loans pegged to Libor, the alleged manipulation benefited borrowers by lowering their payments. But lenders and mortgage-bond investors were among those shortchanged when Libor was depressed, some of the plaintiffs claim in their lawsuits.
Holders of bonds paying interest at a certain rate above Libor have "probably the easiest claim against the banks," said Darrell Duffie, a finance professor at Stanford University. "Assuming they can convince a jury Libor was too low, it's pretty easy to then show they were paid too little interest."
Libor: What You Need to Know
What it is: Libor – or the London interbank offered rate benchmark – is supposed to measure the interest rates at which banks borrow from each other. It is based on data reported daily by a 16-bank panel. Other interest rate indexes, like the Euribor (Euro interbank offered rate) and the Tibor (Tokyo interbank offered rate), function in a similar way.
Why it's important: More than $800 trillion in securities and loans are linked to the Libor, including $350 trillion in swaps and $10 trillion in loans, including auto and home loans, according to the CFTC. Even small movements – or inaccuracies – in the Libor affect investment returns and borrowing costs, for individuals, companies and professional investors.
How Libor Is Set:
By 11:10 a.m. London time, the banks on the Libor panels submit to Thomson Reuters, as an agent for the British Bankers' Association, their estimated borrowing rates.
Thomson Reuters discards the highest and lowest submissions. The remaining 50% of the submitted quotes are averaged to work out the Libor rate.
By about 11:30 a.m. London time, Libor rates are published.
Linda Zacher, a widow living in Bryn Mawr, Pa., is a lead plaintiff in a purported class-action suit filed this year against banks on the U.S. Libor panel in a federal court in New York on behalf of investors with more than $500 billion of Libor-linked securities.
She owns a bond issued by Israel that was held in her late husband's retirement account and has a face value of about $10,000, according to a person familiar with the case.
If Libor was suppressed by 0.4 percentage point for the 34-month period claimed in the lawsuit, then Ms. Zacher's interest losses would be about $100. A lawyer for Ms. Zacher declined to comment.
In contrast, another purported class-action suit against banks on the U.S. dollar Libor rate-setting panel alleges damages linked to a futures market with a notional value of more than $560 trillion last year.
Plaintiffs in the case include a Vienna hedge fund FTC Capital GmbH, the fund-management arm of German private bank Bankhaus Metzler, market-making firm Atlantic Trading USA LLC in Chicago, buildings operator AVP Properties LLC in Fargo, N.D. and Spanish polo player Roberto Calle Gracey.
In a statement emailed by his lawyer, Mr. Calle Gracey, who was made bankrupt by the English courts last year for reasons unrelated to the Libor issue, said any damages collected in the Libor-related suit "would go to pay the creditors." His unpaid debts in the U.K. could total more than £700,000, or about $1.2 million, according to a spokesman for the bankruptcy trustee.
Fund manager Charles Schwab has alleged it deserves damages related to billions of dollars in fixed-rate investments held by its funds, as well as investments with returns pegged directly to Libor. Schwab alleges in lawsuits it filed last year that the fixed rates were set in relation to Libor.
Money managers BlackRock Inc., BLK +0.50%Vanguard Group Inc. and Federated Investors Inc. FII -0.88%have said they are investigating whether their funds were harmed by possible Libor rate-rigging but they haven't yet taken any legal action.
Other large investors that are weighing potential legal claims include the California Public Employees' Retirement System. The largest public pension fund in the U.S. is still crunching numbers to assess losses and gains from any Libor manipulation.
"We have exposure across numerous strategies, which could have been affected for the positive and the negative," said Anne Simpson, head of governance at Calpers. "Meanwhile, we await the regulatory investigations, which will drive the outcome."
The large banks ensnared in the world-wide probe of interest-rate manipulation also might have suffered losses given their sprawling operations, numerous business units and massive investment portfolios.
Few legal experts predict that they will file suits against other banks. "They're blamed for the problem and effectively barred from claiming for any losses," Mr. Duffie said.
—Kirsten Grind contributed to this article.
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Practice Areas: Securities and Financial Services