Last year American and European Regulators confirmed that there had been attempts to distort and manipulate the London Interest Bank Offered Rate (“LIBOR”) following investigations of international banking institutions.
After some hefty fines had been doled out to banks (and the sniggering had stopped about the traders and submitters' inappropriate communications!) it quickly became clear that the LIBOR manipulation scandal had legal implications for the banks relating to loan agreements and interest rate derivatives contracts that use LIBOR as a reference rate. We shall consider these implications shortly but we should first consider what exactly is LIBOR.
The LIBOR interest rate is fundamental to the operation of the international financial markets including the interest rate swaps market. The rate is published by the British Bankers Association (BBA) and there are LIBOR rates for many currencies such as British Sterling, US Dollars and Swedish Crowns. There are a number of panel banks for each currency. These panel banks each submit daily rates to Reuters who then publish the average rate.
The LIBOR test is the average rate at which an individual contributor panel bank could borrow funds, if it were asked to do so, by asking for and accepting interbank offers in reasonable market size just prior to 11am on the specific date.
Due to the financial crisis in 2008, one of the interesting aspects of the LIBOR scandal is that rates were not always deliberately set too high. The FSA (now FCA) found that the banks’ traders and submitters rates were motivated by profit to set the rate high between 2005 to 2008.
However during the financial crisis from September 2007 to about May 2009 the banks’ submitters engaged in the practice of ‘low-balling’ which was submitting low LIBOR submissions to bring the LIBOR rate down to protect reputation of the bank.
This means that borrowers who had loans and swaps under LIBOR may have both gained and lost out during different periods due to LIBOR manipulation.
In October 2012, the Claimant in the case of Graiseley v Barclays sought permission to amend their court pleadings to include allegations that the bank made implied representations. The bank opposed the amendment but the judge allowed the Claimant to amend because the bank could not show there was no prospect of success.
However the bank appealed the decision and the appeal hearing was recently heard together with the Deutsche v Unitech case (the Unitech case) and a judgement issued last week. For reasons of space we will not touch on the Unitech case.
The implied representations that Graiseley added to beef up their court pleadings against Barclays were as follows:
1) Barclays represented that LIBOR represented the interest rate as defined by the BBA (i.e. the test outlined further above).
2) Barclays had no reason to believe that on any given date LIBOR had represented or might represent anything other than the interest rate defined by the BBA.
3) Before interest rate swap taken out Barclays had not made false or misleading LIBOR submissions to the BBA.
4) Before interest rate swap taken out Barclays had not engaged in the practice of attempting to manipulate LIBOR such that it represented a different rate from the BBA.
5) Barclays did not intend in the future to make false or misleading LIBOR submissions to the BBA
6) Barclays did not intend in the future to engage in the practice of attempting to manipulate LIBOR such that it represented a different rate from that defined by the BBA.
If an implied representation was upheld then this could result in the contract being automatically rescinded (ripped up) with the net sums paid to the bank being returned to the borrower. If many borrowers were to succeed on this argument then there may be serious financial repercussions for the banks.
In the Appeal Hearing, the Court took the view that the banks should have a strong argument to defend the first alleged representation as one bank could not make a statement that LIBOR was accurate when this depended on the conduct of other banks.
In addition to the implied representations, the Claimant was also given permission to rely on an implied term that Barclays would not, during the currency of the contracts, manipulate or make false returns in relation to LIBOR. If the term was found to have been breached then the Claimants would be entitled to damages.
If an express or implied term of the contract is considered to be material (or in England a condition) then the Claimant may potentially seek to terminate the swap agreement rather than simply seeking damages for losses sustained under the swap. Many borrowers are in swap agreements where they are significantly ‘out the money’ and if the swap could be terminated then this may enable them to avoid paying out substantial breakage costs to the banks.
It is alleged that the implied representations that LIBOR was the interest rate as defined by BBA together with the other representations were made by the managers and staff of local branches of Barclays in documents and email correspondence between the Claimants and Barclays.
The question of whether management knew what was going on is a relevant to determine whether the representation is fraudulent and amounts to deceit. There is case law to suggest knowledge can be imputed to management as a whole.
Borrowers who are considering a LIBOR manipulation claim should also keep in mind that the regulatory findings on knowledge were worse for Barclays than RBS where management would appear to have had less awareness of what was going on.
Barclays and other banks have repeatedly warned that LIBOR litigation could have significant detrimental consequences for the banking industry perhaps with a view to hoping that for policy reasons the Court will take this into account when reaching its decision. However as implied representations are fact-specific and every case turns on its facts then the potential number of claims may be over-exaggerated by the banks.
The banks' position seems to be that there were no implied representations about LIBOR because they did not say the borrowers could rely on LIBOR when proposing a LIBOR linked product like an interest rate swap. The banks' position is that saying or doing nothing is not conduct that can be considered to be an implied misrepresentation.
The Court of Appeal took a different view and made an analogy with a customer sitting down in a restaurant impliedly representing that he or she has the ability to pay for their meal. The view ultimately reached was that it was arguable to say that proposing a LIBOR linked product was an implied representation that the bank's own involvement in producing the LIBOR rate was honest.
The banks may also sought support from the small print such as entire agreement clauses and disclaimers. The disclaimer defence is relatively weak as the Claimants’ position is that the contracts were fraudulently induced which should assist Claimants to overcome the small print.
The onus of proof is on the Claimants to show the banks actually manipulated LIBOR rather than just attempting to manipulate the LIBOR rate. The Claimants will also have to prove what the LIBOR rate should have been at the material time and work out the losses. This will involve expert evidence and again this may be an evidential hurdle that proves too high for some Claimants.
The bank may advance an argument that borrowers didn’t really care about LIBOR and it wasn’t a material consideration so there was no reliance on the implied representations. Of course it could be said against the bank’s argument that all borrowers rely on the interest rate being accurate and correct.
In Graiseley v Barclays (and Deutsche Bank v Unitech) the Court of Appeal unanimously allowed both cases to proceed to an evidential trial because they are arguable. The Court stressed the fact-specific nature of the claims and that it would be dangerous to kick them out without any evidence having been heard.
The EU Competition Commission is investigating LIBOR manipulation and should they find manipulation of LIBOR and fine the banks then this may entitle Claimants to pursue the banks in Court under s.47A (Commission decisions binding on Courts in the UK) which would fast-track claims to deciding what damage has been caused without needing to prove the banks were liable.
The Court of Appeal's decision to allow the claims to proceed to trial is significant because if the implied representation argument is successful then it may open the door for many other borrowers with LIBOR linked products such as interest rate swaps to pursue claims against their banks.
Do you have any queries about LIBOR manipulation? Is your loan or swap’s interest rate LIBOR rather than Base? Are you considering making a LIBOR manipulation claim? Do you want to preserve your claim (if close to time-bar) and await the outcome of the Graiseley case?
If so, MBM Commercial LLP may be able to assist you. For more information, please contact a solicitor in the Financial & Banking Disputes team, on 0131 226 8200.