edwards wildman john hughes libor litigation: spotlight on insurance coverage

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  1. 1. LIBOR Litigation Spotlight on Insurance CoveragePresented by: John D. Hughes Jacquelyn Burke Gregory D. Pendleton 2013 Edwards Wildman Palmer LLP & Edwards Wildman Palmer UK LLP
  2. 2. IntroductionIts hard to imagine a bigger case than LIBOR. ~anonymous government official quoted in The New York Times (July 14, 2012)2
  3. 3. LIBOR panel for USD transactions 1. Bank of America10. Lloyds Banking Group2. Bank of Tokyo Mitsubishi UFJ11. Rabobank3. Barclays Bank12. Royal Bank of Canada4. BNP Paribas13. Socit Gnrale5. Citibank NA14. The Norinchukin Bank6. Credit Agricole CIB15. The Royal Bank of Scotland Group7. Deutsche Bank AG16. UBS AG8. HSBC17. Credit Suisse9. JP Morgan Chase18. Sumitomo Mitsui Banking Corp.3
  4. 4. how is the LIBOR used? loans and derivatives Loans The LIBOR is the primary benchmark for global short term interest rates. Lenders use the LIBOR rate as a base and add basis points depending on the borrowers credit-worthiness.Derivatives The price of many financial instruments is pegged to the LIBOR, including swaps and futures contracts. The notional amount outstanding of OTC interest rate derivatives contracts linked to the LIBOR in the first half of 2011 = $554 trillion. Source: Financial Services AuthorityThe current value of all LIBOR-pegged financial instruments may be as high as $800 trillion.4
  5. 5. the LIBOR scandal what happened?Historically, the LIBOR and the costs of credit default swap obligations were correlated.In certain periods, however, the cost of CDS obligations rose substantially more than their US LIBOR quotes would suggest. -Source: WSJ, 5/29/20085
  6. 6. the LIBOR scandal what happened? Some banks are far slower to change their submissions than others.Some banks LIBOR submissions track the market view of their credit risk, as measured by their CDS swaps, far more closely than others. -Source: WSJ, 9/28/126
  7. 7. the LIBOR scandal broadening scope Since July 2012, criminal and civil investigations have been opened against several banks. Regulators in multiple countries are now investigating LIBOR rate-rigging. Barclays, UBS and RBS have settled, but they are not alone news reports indicate that 40-50 other financial institutions may have participated in LIBOR rate manipulation, including interbank brokers.7
  8. 8. the LIBOR scandal broadening scope Barclays: UBS:Settled with CFTC, DOJ, FSA and FINMA for $1.5 billion in December 2012. Japanese subsidiary pled guilty to one count of wire fraud. RBS: BankSettled with CFTC, DOJ and FSA for $450 million in June 2012.Settled with CFTC, DOJ, and FSA for $612 million on February 6, 2013. Japanese subsidiary pled guilty to one count of wire fraud. of America: Acknowledged receiving subpoenas from the DOJ, CFTC, andFSA. JPMorgan:Disclosed investigations by the DOJ, SEC, and CFTC in the US, and the European Commission, Canadas Competition Bureau, and the Swiss Competition Commission overseas, among others. Citigroup,HSBC and Deutsche Bank are also in discussions with the DOJ, SEC, and CFTC, as well as foreign authorities. 8
  9. 9. the LIBOR scandal regulatory reactions As part of the fallout from the LIBOR scandal, UK regulators announced on July 9, 2013, that a unit of NYSE Euronext the parent company of the New York Stock Exchange would assume responsibility for administering LIBOR from the British Bankers Association as of early 2014.LIBOR will keep name and remain under oversight of British regulators.New administrator from NYSE Euronext will be subject to ongoing scrutiny by U.K. Financial Conduct Authority (FCA).Activities of submitting and administering LIBOR are now regulated activities. Banks required to have submission methodology. Submitting banks systems will be monitored and then comprehensively reviewed in late 2013.LIBOR administrator obliged to monitor and survey submissions in order to identify potential manipulation.U.K. Financial Services Act makes it a criminal offense to knowingly or deliberately make false statements relating to benchmark setting. * Sources: Financial Stability Board; GOV.UK 9
  10. 10. the LIBOR scandal regulatory reactions Movement toward benchmark derived from actual short term loans as opposed to estimate of what interest rate would be if banks did lend each other money?Financial Stability Board, regulating arm of the Group of 20 leading economies, scheduled to issue report in June 2014 on how a reformed LIBOR could be based on actual transactions.*FSB report will also discuss how to implement new LIBOR scheme without major market disruption.Transition to new LIBOR regime likely to take several years.* Source: Reuters10
  11. 11. the LIBOR litigation How are these claims faring? What are the coverage issues?Four Key Categories: Customer Class ActionsSecurities Class ActionsShareholder Derivative SuitsRegulatory and Criminal Investigations11
  12. 12. the LIBOR litigation what have been and may be the claims? Sherman Act AntitrustState AntitrustCommodity Exchange ActSecurities LawRICOERISACommon LawExchange Act of 1934Shareholder Derivative Breach of Fiduciary Duty against Ds & OsDisgorgementRestitutionUnjust EnrichmentFraud 12
  13. 13. Customer Class Actions In re Libor-Based Financial Instruments Antitrust Litigation Multi-District Litigation in S.D.N.Y. (Dkt. 11-MD-2262), with four main plaintiff groups:1. Over-the-Counter led by plaintiff City of Baltimore. Principal claims were under the Sherman Act. Plaintiffs purchased hundreds of millions of dollars in interest rate swaps. Complaint also encompassed asset swaps, CDOs, credit default swaps, forward rate agreements, inflation swaps, interest rate swaps, total return swaps, and options.2. Exchange Based led by plaintiff FTC Futures Fund. Principal claims were under the Commodity Exchange Act. Plaintiffs traded on exchange-based products such as Eurodollar futures. 13
  14. 14. Customer Class Actions In re Libor-Based Financial Instruments Antitrust Litigation 3. Corporate Bondholders led by plaintiffs Ellen Gelboim and Linda Zacher. Sought relief under the Sherman Act. Plaintiffs are holders of LIBOR-based debt securities not issued by any defendant. The class period is August 2007 through May 2010.4. Bond Funds led by plaintiff Charles Schwab Bond Market Fund. Principal claims were under the Sherman Act and RICO. The Schwab Fund acquired billions of dollars worth of LIBORbased financial instrumentswhich paid artificially low returns to the Funds due to Defendants suppression of LIBOR.14
  15. 15. Customer Class Actions defenses Sherman Act ParallelConduct versus Agreement to Conspire. Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007). What would have been the correct USD LIBOR? Direct Purchaser Rule. Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Standing only established through purchase from conspirator. Of note: This is not true of all state antitrust laws.RICO BarredCommon Law Statuteby PSLRA RICO Amendment. U.S. laws are not generally extraterritorial. Morrison v. Natl. Australia Bank, 130 S.Ct. 2869 (2010). of Limitations. WSJ articles first appeared in April 2008. 15
  16. 16. Customer Class Actions defenses (continued) Commodities Exchange Act (CEA) Claim by primarily foreign investors who maintain that because defendants unlawfully suppressed USD LIBOR, their cost to purchase EURIBOR (Euro Interbank Offered Rate) futures, which are priced inversely to 3-month USD LIBOR, was artificially increased. CEA, like the Securities Exchange Act, requires loss causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005). The plaintiffs must thus prove that they sold their Eurodollar futures contracts at a loss after the price of Eurodollars dropped because defendants manipulation of USD LIBOR had either ceased or been revealed. 16
  17. 17. Customer Class Actions In re Libor-Based Financial Instruments Antitrust Litigation On March 29, 2013, Judge Naomi Reice Buchwald dismissed the majority of the plaintiffs claims, including: She allowed one type of claim to proceed: Antitrust claims: No standing because LIBOR-setting is not a competitive process. RICO claim: Barred by PSLRA, and extraterritorial. Restitution: No direct relationship between plaintiffs and defendants, which is required for a quasi-contract claim. State law claims: Declined to exercise supplemental jurisdiction in favor of judicial economy.Commodity Exchange Act claims: Properly pled, except for any claims that rely on contracts purchased from 8/07 -5/08, as those were time-barred.Judge Buchwald pointed out that the broad public interests in punishing the wrongdoing here was met by the regulatory settlements. 17
  18. 18. Customer Class Actions In re Libor-Based Financial Instruments Antitrust Litigation On 8/23/13, Judge Buchwald issued lengthy opinion denying various motions for reconsideration of her 3/29/13 ruling. She did, however: (i) invite additional motion for reconsideration briefing as to adequacy of scienter allegations vis--vis the exchange-based plaintiffs commodity manipulation claims; and (ii) allow OTC plaintiffs to file an second amended complaint to plead state law claims for unjust enrichment and breach of implied duty of good faith and fair dealing.Bondholder plaintiffs have appealed dismissal of their antitrust claims. OTC plaintiffs have also asked Judge Buchwald to enter final judgment as to their antitrust claims so they can appeal alongside bondholders.18
  19. 19. Customer Class Actions In re Libor-Based Financial Instruments Antitrust Litigation On April 29, 2013, the Schwab Plaintiffs filed suit in California Superior Court.Complaint asserts state law claims for fraud, unfair business practices, interference with prospective economic advantage, bad faith, rescission of contract, and unjust enrichment.Schwab also asserts claims for violations of Sections 11, 1