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Steven LOBLE

International & Commercial Litigation

Potential claims arising out of the manipulation of interest rates by banks

According to the Financial Services Authority Final Notice (“the Final Notice”) dated 27 June 2012, Barclays Bank plc “breached Principle 5 of the FSA’s Principles for Businesses on numerous occasions between January 2005 and July 2008 by making US dollar LIBOR and EURIBOR submissions which took into account requests made by its Derivatives Traders. This included requests made on behalf of derivatives traders at other banks. The Derivatives Traders were motivated by profit and sought to benefit Barclays’ trading positions. The requests were made openly and in some cases Barclays’ trading desk managers received or participated in inappropriate communications.”

The Notice sets out some of the communications by which requests were made to the peoplein the Bank responsible for making submissions as part of the setting of official interest rates known as LIBOR and EURIBOR, extracts of which are below.

59. On Friday, 10 March 2006, two US dollar Derivatives Traders made email requests for a low three month US dollar LIBOR submission for the coming Monday:

i. Trader C stated “We have an unbelievably large set on Monday (the IMM). We need a really low 3m fix, it could potentially cost a fortune. Would really appreciate any help”;

ii. Trader B explained “I really need a very very low 3m fixing on Monday –

preferably we get kicked out. We have about 80 yards [billion] fixing for the

desk and each 0.1 [one basis point] lower in the fix is a huge help for us. So

4.90 or lower would be fantastic”. Trader B also indicated his preference that Barclays would be kicked out of the average calculation; and iii. On Monday, 13 March 2006, the following email exchange took place:

Trader C: “The big day [has] arrived… My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”

Submitter: “I am going 90 altho 91 is what I should be posting”.

Trader C: “[…] when I retire and write a book about this business your name willbe written in golden letters […]”.

Submitter: “I would prefer this [to] not be in any book!”

60. The number of requests and the period of time over which they were made indicate that the Derivatives Traders made requests on a routine basis. Specific emails also indicate the requests were made regularly. For example, the following email exchange took place on 27 May 2005:

Submitter: “Hi All, Just as an FYI, I will be in noon’ish on Monday […]”.

Trader B: “Noonish? Whos going to put my low fixings in? hehehe”

Submitter: “[…] [X or Y] will be here if you have any requests for the fixings”.

64. In response to a request from Trader C for a high one month and low three month US dollar LIBOR submission on 16 March 2006, a Submitter responded: “For you…anything. I am going to go 78 and 92.5. It is difficult to go lower than that in threes, looking at where cash is trading. In fact, if you did not want a low one I would have gone 93 at least”.

65. Trader C requested low one month and three month US dollar LIBOR submissions at 10:52 am on 7 April 2006 (shortly before the submissions were due to be made);

“If it’s not too late low 1m and 3m would be nice, but please feel free to say “no”... Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”. A Submitter responded “Done…for you big boy”.

66. On 29 June 2006, a Submitter responded to Trader E’s request for EURIBOR submissions “with the offer side at 2.90 and 3.05 I will input mine at 2.89 and 3.04 with you guys wanting lower fixings (normally I would be a tick above the offer side)”.

67. On 6 August 2007, a Submitter even offered to submit a US dollar rate higher than that requested:

Trader F: “Pls set 3m libor as high as possible today”

Submitter: “Sure 5.37 okay?”

Trader F: “5.36 is fine”

83. …, on 26 October 2006, an external trader made a request for a lower three month US dollar LIBOR submission. The external trader stated in an email to Trader G at Barclays “If it comes in unchanged I’m a dead man”. Trader G responded that he would “have a chat”. Barclays’ submission on that day for three month US dollar LIBOR was half a basis point lower than the day before, rather than being unchanged. The external trader thanked Trader G for Barclays’ LIBOR submission later that day: “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger”.

In additiontothe inappropriate submissions in relation to fixing the interest rates, the FSA also found that Barclays made inappropriate submissions to avoid negative media comment, failed to have adequate risk management systems or effective controls in place, and failed to conduct its business with due skill, care and diligence when considering issues raised internally in relation to its LIBOR submissions.

The FSA imposed a financial penalty of £59.5 million on Barclays (after a discount of 30% under the FSA’s executive settlement procedures.

Barclays was also fined £230.5m by the US Commodity Futures Trading Commission andthe US Department of Justice for the same offences.

It is clear that other banks were involved in trying to manipulate the interest rates in the same way as Barclays – see the Final Notice at paragraph 52

“iv. the requests sent by external traders to Barclays’ Derivatives Traders, which were passed on to Barclays’ Submitters; and

v. the attempts of Barclays’ Derivatives Traders to influence the EURIBOR (and to a much lesser extent the US dollar LIBOR) submissions of other banks by making requests, including examples of co-ordinated strategies to

influence the EURIBOR rates published by the EBF.”

During his appearance at the Treasury Select Committee hearing on 4 July 2012, Bob Diamond, the former Chief Executive of Barclays declared his love for the Bank from which he had resigned the previous day.

“Wow!” he said softly. “I love Barclays!”

“That’s where it starts. I love Barclays because of the people! Sixteen years ago today, on July 4, 1996, I began at Barclays. It’s been 16 years of just tremendous enjoyment!”

Indeed Barclays was especially wonderful when it found out about the rate fixing because it immediately acted to stop it. This is what Mr Diamond called “context”. “Let me put some context on that,” he kept saying.

Why, he was asked, didn’t he know that the rate fixing was happening? Mr Diamond was angry when he’d found out. “There is no excuse for the behaviour. I stand for a lot of people at Barclays who are really, really angry about this. Thisdoesn’t represent the Barclays that I know and I love . . .”

He said that they were 14 out of thousands. “What I am saying about Barclays — which is an amazing institution which I love — there are people, 140,000 employees, all impacted by these 14 traders. And it is not OK. No one is saying that it isOK.”

What the traders had done, said Mr Diamond, had made him “physically ill”. “We talked about the ‘no jerk’ rule. We were serious in Barclays, when people don’t behave, they have to leave. Fourteen people! It was wrong,”

Those words will, no doubt, be much quoted in the slew of litigation which has already started in the United States of America and in England.

Graiseley Properties Limited and others v Barclays Bank plc

On 29 October 2012 the Commercial Court in London allowed the Claimants in a case against Barclays “to amendtheir particulars of claim to plead implied representations by the defendant and, in the alternative, implied terms. The implied representations are said to have induced the claimants toenter into the series of loan agreements and related hedging transactions. In the alternative, the claimants allege that similar terms are to be implied into those contracts.”

The judge referred to findings by the United States Department of Justice that traders and rate submitters “who had engaged in efforts to manipulate LIBOR and EURIBOR submissions were well aware of the basic features of the derivative products tied to these benchmark interest rates. Accordingly, they understood that to the extent they increased their profits or decreased their losses in certain transactions from their efforts to manipulate rates, their counterparties would suffer corresponding adverse financial consequences with respect to those particular transactions.”

The judge went on to fine that, “In my judgment what holds for derivative traders as to their knowledge or understanding must at least arguably also hold for those senior management of  Barclays  who were also responsible for manipulation of LIBOR.”

It is clear that parties to transaction based on LIBOR and EURIBOR may well have substantial claims. Those interest rates apply to interest rate derivative contracts, exchange traded interest rate contracts, other loans and mortgages. There may be an argument that some contracts based on the artificially manipulated interest rates may be void or voidable. Clearly, some parties may have claims to damages against the banks which were involved in manipulating the rates and even claims to restitution against counterparties who were not involved in the rate manipulation.

It may well be appropriate, as well as considering claims in England, to review the possibility of making clams in the United States, where damages may be higher. We can assist in conjunction with leading US lawyers in connection with such potential claims.

Steven was involved in the English local authority interest rate swaps litigation and took several of the leading cases to trial.

Steven Loble has 30 years experience of complex litigation, including having represented one of the local authorities in the English local authority interest rate swaps litigation. He acts regularly in conjunction with major U S law firms in major financial litigation, including cases involving derivatives and other complex financial products.

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