by Darwin Bond-Graham
Sixteen banks at the core of the global financial system —including JP Morgan, Bank of America, and Citigroup— scored a major victory last Friday when a federal judge dismissed nearly all the charges brought against them by a group of plaintiffs that includes municipal governments, pension funds, bondholders, and other investors who lost billions of dollars as a result of LIBOR rigging. The ruling is a major setback, both legally, and financially, for those harmed by the LIBOR manipulation conspiracy. Among the most damaged are are thousands of local governments that were played like ATMs during the Financial Crisis by the banks. Banks used their power to set 3-Month and 1-Month LIBOR rates so as to extract potentially billions in interest rate swap payments from the public. Countless small investors lost equally huge sums of money as investments indexing LIBOR were rigged to pay out less. The lawsuit’s dismissal ensures that the banks will keep billions of dollars in ill-gotten gains. The ruling may also bolster the banks’ positions against ongoing investigations and settlements sought by government regulators in the US, Europe, and Japan.
Strangely, the judge’s order (available here) acknowledged the massive global fraud that caused financial damages to the public in favor a few wealthy institutions. However, Judge Naomi Reice Buchwald relied on technical legal arguments to throw out the core claims of the lawsuit. In other words, the ruling doesn’t deny that the crime occurred and that the Plaintiffs sustained serious damages, but still dismisses the claims.
“We recognize that it might be unexpected that we are dismissing a substantial portion of plaintiffs’ claims, given that several of the defendants here have already paid penalties to government regulatory agencies reaching into the billions of dollars,” concluded Judge Buchwald in her 161 page order. She justified this position, however:
“…these results are not as incongruous as they might seem. Under the statutes invoked here, there are many requirements that private plaintiffs must satisfy, but which government agencies need not. The reason for these differing requirements is that the focuses of public enforcement and private enforcement, even of the same statutes, are not identical. The broad public interests behind the statutes invoked here, such as integrity of the markets and competition, are being addressed by ongoing governmental enforcement.”
Government regulators have already proven through their own investigations that LIBOR was rigged to enrich the banks at the expense of their customers and counterparties who entered into LIBOR-linked derivatives contracts, or purchased LIBOR-referencing securities. Beginning as early as 2005 Barclays, a member of the British Bankers Association, submitted false quotes to Thompson-Reuters, the company responsible for calculating and disseminating the different LIBOR rates each day. The false quotes were designed to skew LIBOR upward, or downward, by precise amounts, so as to benefit the positions of Barclays traders against their counterparties. In doing so Barclays violated securities laws and committed a fraud that harmed countless other market participants relying on LIBOR to value their financial deals.
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