DOJ Trying to Delay FX Benchmark Fix Case

The court handling the FX benchmark antitrust case released a letter last week from the Department of Justice asking for a limited stay in the discovery phase of this case citing a grand jury investigation that is currently under way. After an initial six month stay the DOJ would then decide if a longer stay is required. The court gave both sides in the case until Friday to respond to the DOJ's request.

One would expect the plaintiffs view to be along the justice delayed is justice denied theme. The banks' position may not be as clear. Although delaying a case with a foreseen bad outcome may generally be preferable, they would also need to weigh how a quicker trial here might affect the DOJ's case, which apparently is against several bank employees involved with the fix. Different banks may have different views. An additional layer of complexity is due to additional reported probes by the DOJ into the FX practices of certain banks, including in FX structured products, and the affect on these from a delay.

Until discovery of bank documents and depositions of bank employees occurs, a more clear picture of the potential size of damages to the banks cannot be determined.

FX Manipulation Lawsuit Tsunami at Banks' Doorstep

First, about three weeks ago, JPMorgan settled an FX manipulation lawsuit for a reported $100 million. Now, Reuters reports that a judge allowed the investor plaintiffs' case to go forward to trial over the banks' objections. These included that there was a lack of evidence and that a prior LIBOR case alleging antitrust abuses was thrown out of court.

These two events alone should bring forth a barrage of suits as success seems more probable. In addition, now that this trial can go forward, the banks' position looks to be hurt by two factors.

First, depositions can now be taken, which may provide additional evidence of wrongdoing (several of the banks have already been fined by regulators following employee interviews). Second, a problem in suing to date has been attempting to prove wrongdoing and antitrust behavior. There is a lack of data on trades executed by banks on specific dates in specific currencies. Trade data released by banks during the discovery process may make the plaintiffs' calculation of any damages much easier, rather than relying upon models of what may have been manipulation based solely upon price movements.

While lawsuits from investors (money managers, pensions funds, etc.)and corporations are to be expected, many other groups impacted by currency rates can be expected as well. As an example,a few weeks ago we reported on British farmers that may have been affected by the conversion of subsidies from euro to British pounds.

Will the Banks be Hit by a Wave of FX Manipulation Lawsuits?

An article in yesterday's Telegraph reports that UK farmers were hurt by the FX benchmark rigging scandal, as there is a 2.6 billion pound EU subsidy that first has to be converted from euros before paid to British farmers. An unclear reference in the article cites one day's manipulation that cost the farmers 16 million pounds in one year.

Regardless of the details here, what struck us at FinancialPests, was the wide range of potential suits with which the banks could be hit. Beyond all of the financial players, who we would expect to be more likely to file suits now that JPMorgan has settled one US suit, there may be many others as well. UK farmers would not have been on our radar screen as potential litigants(although no suit was mentioned in the article). Europe is, of course, less litigious than the US, and slower to file suits, but this reinforced to us that potentially, there may be a landslide of suits filed around the world during 2015.

From SCOTUS Blog: LIBOR Litigation

For those of you following the LIBOR litigation appeal in front of SCOTUS, here's an excellent write-up from the good folks at SCOTUS blog.   

Report CFTC Finds Criminal Behavior in ISDAFIX Investigation

As we reported last week, the first lawsuit was filed in the ISDAFIX controversy.  This week Bloomberg states that the CFTC, which is limited to bringing civil cases, reported evidence of criminal behavior to the DOJ. The DOJ can then determine whether to pursue a criminal investigation.  Bloomberg bases the article on a person familiar with this matter.

The report alleges that ICAP, a broker with a central role in setting ISDAFIX through January 2014, accepted large numbers of trades from banks at the close, attempting to influence the fix.  This "banging the close" is similarly charged in FX benchmark cases.  In addition to these actual trades, banks also submitted rate quotes as part of the process of setting ISDAFIX.  The lawsuit last week alleged that identical quotes were submitted by multiple banks on most days, down to the thousandth of a basis point.

The ISDAFIX cases may have a better chance of reaching antitrust status, unlike the LIBOR case, due to the actual trades involved and the lack of reasons other than profit for banks entering into these ISDAFIX trades.

Another Shoe Drops: Pension Sues Banks Alleging Manipulation of ISDAfix

Hot off the presses, Bloomberg reports that the Alaska Electrical Pension Fund yesterday filed suit against the banks responsible for contributing to the ISDAfix rates. Those of you who want more about this brewing controversy can read my report here.  This comes on the heels of lawsuits alleging manipulation in gold, FX rates and LIBOR.  I'm sure there will be more to come as additional information comes to light. 

Goldman and Bain settle antitrust suit against private equity

NYT Dealbook reports that Bain Capital and Goldman's private equity division have settled an antitrust suit, breaking ranks with the other private equity defendants. The allegations involve PE firms essentially colluding on the price they were willing to pay for target companies, thereby denying shareholders of potentially higher takeover bids.

I haven't heard much about this suit before the settlement. Have any incriminating documents come to light to trigger the settlement?  Where is the DOJ?  

Bloomberg Business Week: Bank of Canada Conducting Survey as Part of Currency Review

Bloomberg Business Week reports that the Bank of Canada is conducting a survey as as to the usage of forex rates as part of its review of potential manipulation.  You can view the press release here and take the survey here. 

Banks Seek Dismissal of FX Fix Rate Manipulation Class Action Lawsuit

Reuters reports that the 12 banks included in the WM Reuters manipulation class action suit are requesting that the case be dismissed.  This would seem to be a standard legal maneuver but we will need to wait to see the judge's ruling.

The banks state that no specific instances of manipulation are mentioned in the suit, nor is there any specific instance of harm brought forth in the suit.  The plaintiffs apparently are waiting for internal bank or regulatory investigations to provide them with some specifics.  The banks are hoping for dismissal before this occurs and to avoid the discovery process if the case is allowed to continue.

Credit Suisse Concludes FX Benchmark Rate Investigation

At the end of March the Swiss Competition Commission named 8 banks including Credit Susisse to be investigated for collusion in manipulating FX rates.  Reuters reported Credit Suisse to be "astonished" to be included in the investigation after not being included in a preliminary investigation in 2013.

Last week during the Q1 earnings release conference call, Credit Suisse's CFO stated that the bank's internal FX benchmark investigation was completed and nothing "materially untoward" was found.

It is not clear why the regulators feel that there may be collusion involving Credit Suisse while the bank sends out the "all clear" message after an internal investigation.  Time will tell.

If FX Benchmarks were Manipulated, How Often did it Occur?

FX Week (subscription) reports that the counsel for one of the plaintiffs in the FX benchmark class action suit says that their analysis of London Close benchmark trades for the six most liquid pairs on the last day of the month for the past 10 years shows manipulation occurred between 26% and 34% of the time.  The headline of the article, however, is a bit misleading: FX benchmark manipulated more than 25% of the time, plaintiffs say.

Even if the interpretation of these results can be said to be true, this still would not mean that there was that much manipulation on all trading days.  The last day of the month was most likely reviewed because most asset managers that hedge the FX in their portfolios adjust the hedges on that day, leading to particularly high volumes.  These high volumes, and the tendency for these hedge adjustments to be in the same direction, would make those the days most likely for manipulation if there was any.

So even if you did accept the results, it does not answer the question of how extensive was any FX benchmark manipulation.

Class Action FX Benchmark Lawsuit Filed

A dozen individual lawsuits alleging antitrust and anti-competitive behavior on the part of the 12 largest FX trading banks, based upon their behavior at the WM Reuters London Close FX fix, were consolidated and filed as a class action last week.  The plaintiffs and defendants are listed below.

The allegations are similar to those aired in the press over the last nine months or so.  This suit has updated some of the individual suits based upon recent information from the Bank of England and recently fired or suspended bank traders and include some examples of how FX rates were allegedly manipulated.  While for bank customers and those interested in the integrity of markets, the issue is simply whether or not the allegations are true, for the success of the suit, antitrust and anti-competitive behaviors must be shown.  Thus much of the suit contains the plaintiffs' building of such a case.  Similar issues drove the LIBOR case.

Much of the information for the case and press stories, relates to banks' internal investigations and their cooperation with regulators.  As highlighted in the suit, DOJ LIBOR non-prosecution and deferred prosecution agreements require many banks to provide information relating to benchmark manipulation, including manipulation of FX benchmark rates.

The class has been defined as those trading FX at or around the London Close since at least June 1, 2003. Included are those not trading the fix but trading at around that time of day and those trading forwards and swaps as well as spot.

No attempt is made to quantify damages or who are the members of the class.  Reference is made that records should exist, which we can only assume would be held by the banks.

Plaintiffs                                                                        Defendants
Aureus Currency Fund                                                     Bank of America
City of Philadelphia, Board of Pensions and Retirement     Barclays
Employees’ Retirement System of the Government of       BNP Paribas
       the Virgin Islands                                                     Citigroup
Employees’ Retirement System of Puerto Rico Electric      Credit Suisse
       Power Authority                                                       Deutsche Bank
Fresno County Employees’ Retirement Association           Goldman Sachs
Haverhill Retirement System                                           HSBC
Oklahoma Firefighters Pension and Retirement System     JP Morgan
State-Boston Retirement System                                      Morgan Stanley
Syena Global Emerging Markets Fund                               RBS
Tiberius OC Fund                                                            UBS
Value Recovery Fund
United Food and Commercial Workers Union and
       Participating Food Industry Employers Tri-State
       Pension Fund

Law Firm to Lead FX Litigation Appointed

Reuters reports U.S. District Judge Lorna Schofield of SDNY has appointed the law firm of Scott + Scott LLP as interim lead counsel in a consolidated class action against the FX banks alleging manipulation. This matter appears to be proceeding rather quickly considering that news of the alleged manipulation broke not so long ago. 

At Least 10 Suits Filed to Date Alleging WM Reuters FX Fix Manipulations

There have been at least 10 lawsuits filed regarding the WM Reuters fix allegations.  Below is a list of suits, which began November of last year.  Although the banks accused in each case are not exactly the same, looking at a list of the 10 largest banks in FX gives a good indication.  The cases have been filed in the Second Circuit New York District Court.  The allegations of collusion among the banks has antitrust violations as the most typical cause of action.

November 1 - A Haverhill Retirement System
November 8 - Simmtech Co., Ltd.
December 23 - Oklahoma Firefighters Pension and Retirement System
December 26 - Employees' Retirement System of the Government of theVirgin Islands
December 31 - Prudent Forex Fund I LLC
January 17 - United Food and Commercial Workers Union and Participating Food Industry
                    Employers Tri-State Pension Fund    
January 24 - Boston Retirement System
January 27 - Five Star Forex, L.P.
February 5 - Newport News Employees #39 Retirement Fund, Value Recovery Fund LLC, and
                    Augustus International Master Fund LP

The 10th and most recent suit is filed by the City of Philadelphia Board of Pensions and Retirement goes a bit further in trying to prove it's case, as described in this article in the Financial Times . Its evidence purports to show that there was much greater volatility at the WM Reuters fix times before Bloomberg News published a story on the fix allegations, then afterwards.

In FX it's Not just the Fix under Investigation; Are Banks Racing to the Regulators?

In addition to the fix and traders trading for their personal accounts, banks are reported to have found instances of traders providing "sensitive information" (which we assume to be customer orders) to other customers and of having traded against their clients' interests by defending or preventing a breach of fx levels that will cause the client to receive an option payout.
WSJ

These allegations are reported to have been uncovered by banks during internal investigations of the fix allegations.  That leads us to this article by Reuters which says that UBS approached investigators last September to provide evidence of misconduct in an effort to get preferential treatment from the regulators when/if punishments are meted out to banks.  We had a prior post regarding the 'first mover advantage" to a bank being the first to provide evidence to regulators (see here May a Bank Tell All to Regulators?)

Reuters Describes the Path that FX Manipulation Cases will Need to Follow

Based upon the allegations to date (no regulatory investigations have been completed) and the class action antitrust cases filed, the article highlights some of the issues that the plaintiffs will need to prove:
- that there has been anti-competitive collusion and that it rises to the level of antitrust behavior under the Sherman Act
- although there are differences from the LIBOR case, those antitrust claims were dismissed by a New York federal judge
- certifying a class when on any given day any alleged manipulation may help or hurt a particular plaintiff, depending upon the direction of the manipulation and the plaintiff's position.
Reuters

These are valid points relating to the potential difficulty of these antitrust suits. From the banks' perspective, at least as important will be the result of the regulators' investigations. Should these show manipulation to have occurred, even if problems are found with these suits, a subsequent set of lawsuits could reasonably be expected. Thus, regardless of the outcome of these suits, the banks may not be able to remove themselves very easily from another set of legal troubles in the event that the ongoing investigations find misconduct.

More FX manipulation lawsuits to come?

Based on media reports there are currently two class actions against the major banks regarding the alleged manipulation of the FX market, filed by Haverhill Retirement System and Simmtech Co. Ltd.  Given the steady reporting of additional details of investigations and suspensions and firing of traders at the top banks, the question probably isn't whether more lawsuits will be filed but when and how soon. 

http://www.businessweek.com/news/2013-11-01/barclays-citigroup-among-banks-sued-over-wm-reuters-rates-1