Banks Settle Interest Rate Manipulation Lawsuit

Seven banks have settled a class action lawsuit brought in the US regarding the ISDAfix. The ISDAfix is a benchmark rate used in daily pricing of trillions of US dollars in derivatives, including interest rate swaps, futures and exchange traded options. The seven are JP Morgan, RBS, Deutsche, Credit Suisse, Barclay's, Citi and BOA.

The lead law firm, Scott + Scott, is the same as in the FX benchmark manipulation class action suit. The charges are similar to the FX suit and to the LIBOR charges as well. The charges included placing numerous orders at the close ("banging the close"), collusion leading to to submission of identical orders and placing off-market rates. Eight other banks remain in the suit. If this follows the trajectory of the FX suit, banks that settle later will tend to pay larger settlements.

FX Scandal Not Blowing Away

First of all, the rest of the world is looking at the US class action suit in which over $2 billion in settlements have already been made by 9 large banks, and lawyers and investors are planning additional suits in several countries. A $1 billion suit has just been filed in Canada relating to benchmark currency fixes.

Secondly, a Citi FX trader who had been dismissed in the UK relating to his sharing of client information with FX traders from other banks on chat rooms, is fighting his dismissal. He is claiming that it was a market practice at the time to share such information, especially regarding the trading of central banks. He mentions one M&A deal in which Citi front run the client's trade and made a profit of $35 million. He states that the very top Citi FX management actually had a hand in this deal.

There are other FX traders who were dismissed relating to similar charges who are also planning on disputing their firings.

FX Investigations Widen Beyond WM Fix

When Bloomberg's initial story hit the wires in June 2013, the allegations, later confirmed to be true, were primarily limited to banks manipulating the WM benchmark rates. Since then regulators in the US, UK and Switzerland have instituted over $10 billion in fines on major banks related to FX, and in many cases, banks have acknowledged criminal wrongdoing. These fines related primarily to collusion by the banks in attempting to manipulate the fix, on the back of transcripts of chat room conversations by bank FX traders that clearly showed their collusion and attempts to profit at the expense of market participants. (For other wrongdoings acknowledged in bank settlements earlier this year, please see our blog post from June 1, 2015, FX Bank Settlements — More Misconduct than the Fix)

These regulatory and criminal matters relating to the fix are at least partially behind us now (individual traders and local emerging market fixes remain under scrutiny), although a class action civil lawsuit in the US related to these same matters is ongoing, with 9 banks having settled so far. In addition, law firms around the world are reported to be attempting to institute civil lawsuits in other jurisdictions as well, particularly in the UK. There, in the largest FX market in the world, new laws as of October 1 will allow suits similar to class action suits in the US (and will allow non-UK residents to participate). With over $2 billion in settlements to date in the US (with 7 banks remaining in the suit), there may be several billion pounds of additional settlements in the UK. Regulators in Australia, South Africa, Brazil and South Korea (and possibly others) are investigating benchmark rate rigging as well.

Banks fined by regulators and those settling the US class action have agreed to cooperate with regulators and the parties bringing the suit. Lawyers from the suit are reported to have said that evidence from the cooperation in the US points to bank manipulation of the bid-offer spread on currency trades through the rest of the day, not having to do with the fix. How this may have been done is not clear, but if true would dramatically increase the scope of bank wrongdoing. It would mean that the rates on many more trades are not entirely market driven and all such trades would have the bank gaining at client expense, while the benchmark manipulation had some clients gaining and some losing from each manipulated rate.

Until more information is released it is hard to know if there was additional rate-rigging in FX markets. Should it be shown to have occurred, a further move toward exchange-type trading should be expected, as well as further criminal prosecutions and civil suits. Bank traders and investors beware.

FX Manipulation Class Action Spreads to more Banks in US, Possibly Around the World

It is now reported by Reuters that four additional banks, HSBC, Barclays, BNP Paribas and Goldman Sachs, have agreed to settle the US FX benchmark manipulation class action suit. In addition to bank settlements announced previously, this brings total settlements over $2 billion. Individual bank settlement amounts have not yet been announced. These banks plus five banks that settled previously have all agreed to "substantial cooperation" against the remaining 7 bank defendants, including recently added defendants (Bank of Tokyo-Mitsubishi UFJ, RBC Capital Markets, Société Générale and Standard Chartered were added August 1). Counsel referred to these settlements as "just the beginning" and mentioned that they are consulting on bringing additional cases against banks in larger Asian and European markets.

6 Month Delay for FX Benchmark Fix Lawsuit

Reuters reported the stay in the case involving the antitrust class action against a dozen FX banks. As we reported in February, the DOJ requested a stay due to grand jury investigations ongoing in criminal cases being brought by the DOJ. The plaintiffs have gone along with the stay, however they have been granted exceptions that should allow them to continue to make their case during this period. These exceptions allow them to use discovery to access trade data (perhaps the most important item in order to estimate damages) and some ability to depose witnesses (although the limitations are unknown).

A hearing is scheduled in the case for March 26.

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.

Legal Theories in LIBOR and FX Lawsuits

While this article in CapLaw discusses the history of the allegations, investigations and lawsuits in the FX and LIBOR scandals, we thought it most interesting to focus on the legal theories and their current status.

In LIBOR, the US consolidated case held that there was no antitrust damage as the LIBOR rate setting process was not competitive in nature and thus there could not be anti-competitive behavior.  However, "second-generation" lawsuits filed by plaintiffs claiming direct trading losses from derivatives with banks that provided benchmark LIBOR rates, are moving through the legal system.  Two large plaintiffs are the FDIC, on behalf of 38 failed banks, claiming fraud and collusion were used by the LIBOR setting banks to suppress rates, and Freddie Mac and Fannie Mae, claiming that LIBOR manipulations caused them to suffer losses on mortgages and financial derivatives.

LIBOR cases in the UK have been limited, with only two cases filed, one of which was settled and the other remains with the courts.

In the FX benchmarks, the US has consolidated numerous class action suits into one.  Differences between the rate setting process in FX vs. LIBOR make it unclear whether antitrust charges will hold up in the FX case.  Fraud and collusion charges remain in FX as well, but the later start of FX allegations, the complexity of the cases and the continuing regulatory and internal bank investigations, means that further clarity will not be forthcoming until at least late 2014.

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.

New Consolidated Lawsuit Filed on Alleged FX Rate Manipulation

The WSJ reports that a new lawsuit was filed by 12 investors, all of whom had previously filed individual suits that have been consolidated by the courts into this one suit, amending and expanding upon a suit filed in November, 2013 by A Haverhill Retirement System (first mover advantage for the fund, as it was the first of these type suits filed). Most of the plaintiffs are public pension funds in the US and Virgin Islands, with 12 major banks charged with colluding to manipulate benchmark currency rates.  Collusion is charged, based upon a " small and close-knit group of traders" using chat rooms and instant messaging, often having worked in previous jobs together, living in the same neighborhoods and socializing together.

Interestingly, the complaint did not quantify losses, calling the impact of the alleged manipulation "presently undetermined".  We have looked at this issue as well, but on an industry-wide rather than an individual firm basis.  The work requires many assumptions, particularly when there is no available data as to what, if anything, actually occurred on particular days. Thus, we assume that the plaintiffs will be seeking data from the banks and looking to what regulators unearth to help their case.

Law Firms Hired in Alleged FX Rate Manipulation Cases

This week Legal Week reported the names of the law firms representing various major banks and representing some of the plaintiffs, mostly pension funds, in many of the lawsuits that have been filed to date alleging foreign exchange rate manipulation by the banks.  Many of the suits have been consolidated into a class action lawsuit.

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.

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.

A Third WM Reuters Fix Class Action Suit Filed; Deutsche Suspends Head of Emerging Markets FX Trader in NY

Courthouse News Services reports that a class action suit was filed by Five Star Forex alleging that Barclays, BNP Paribas, CitiBank and Credit Suisse conspired to fix the foreign currency exchange market through the manipulation of WM/Reuters Rates bought and sold in the US since 2003. The suit was filed in USDC Southern District of New York.  There have been at least two previous class action lawsuits filed, by A Haverhill, a Massachusetts pension fund and Simmtech, a South Korean corporation.

It was also reported today that Deutsche suspended this senior trader in mid-December.

Reuters

The stories continue, but at this point neither of these sheds any more light on what actually happened. The filing of lawsuits is understandable, and possibly encouraged by the banks continued suspension and firing of employees related to internal bank investigations of the fix allegations.

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