Second Circuit Revives Libor Antitrust Case

(CN) — Sixteen major banks must face antitrust claims accusing them of conspiring to manipulate interbank lending rates, the Second Circuit ruled Monday, in a major victory for bondholders.

Ellen Gelboim and Linda Zacher's case against Bank of America, Credit Suisse Group and 14 other major banks is consolidated in Manhattan with 60 other similar lawsuits.

The two bondholders claim that the banks' alleged manipulation of the Libor — the London Interbank Offered Rate — violates antitrust law.

The Libor rate is what international banks charge each other for short-term loans. It is an average interest rate, calculated every business day based on submissions from leading banks around the world.

As the primary benchmark for short-term interest rates globally, Libor is used as a reference rate for many interest rate contracts, mortgages, credit cards, student loans and other consumer-lending products.

More than $300 trillion in financial derivatives are tied to Libor rates.

"The British Bankers Association (BBA) publishes Libor every day in ten currencies, including U.S. dollars. Various banks - respondents here - together provided the information that the BBA used to set the U.S. dollar Libor. It has been revealed, however, that respondents conspired to manipulate Libor by submitting false information. The respondents' collusion suppressed Libor, which directly suppressed the payments on Libor-linked financial instruments, including the interest paid to floating rate bondholders for the use of their money," plaintiffs say.

Barclay's, UBS, Deutsche Bank, and the Royal Bank of Scotland have paid American and European regulators billions to settle charges for Libor manipulation.

Last year, the U.S. Supreme Court permitted the bondholders to appeal the dismissal of their antitrust claim, although other claims in the consolidated cases remained pending.

The Second Circuit reinstated Gelboim and Zacher's lawsuit Monday, ruling that the alleged horizontal price-fixing constitutes an antitrust violation.

"Appellants' complaints contain numerous allegations that clear the bar of plausibility. These allegations evince a common motive to conspire — increased profits and the projection of financial soundness — as well as a high number of interfirm communications, including Barclays' knowledge of other banks' confidential individual submissions in advance. The parallelism is accompanied by plus factors plausibly suggesting a conspiracy," Judge Dennis Jacobs said, writing for the three-judge panel.

The New York-based appeals court remanded the case so that the lower court could reach the second component of standing for asserting an antitrust injury — whether the bondholders are efficient enforcers of antitrust law.

The panel concluded its 61-page opinion by expressing some doubts about the bondholders' argument.

"Common sense dictates that the banks operated not just as borrowers but also as lenders in transactions that referenced Libor. Banks do not stockpile money, any more than bakers stockpile yeast. It seems strange that this or that bank (or any bank) would conspire to gain, as a borrower, profits that would be offset by a parity of losses it would suffer as a lender," Jacobs said.

However, Jacobs noted that the record is undeveloped, and said bondholders have "cleared the motion-to-dismiss bar."

In November, a federal jury convicted two bankers from the London office of Rabobank of manipulating the Libor rate to benefit the bank's trading positions.

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