Earlier this week, the Second Circuit overturned Southern District Judge Shira Schiendlin’s earlier decision granting dismissal of the complaint by class action plaintiffs who had brought federal securities claims against Barclays after the LIBOR scandal broke.
The class action plaintiffs had initially brought suit against the bank, its then CEO Robert Diamond, and its former Chairman Marcus Agius, claiming that they incurred losses in their Barclays’ ADRs when Barclays announced regulatory settlements related to the manipulation of LIBOR it had engaged in between 2007 and 2009. Barclays, the first of the major banks to settle with international regulators for its involvement in manipulating the internationally used LIBOR rate, experienced a 12% ADR drop after settling with US and UK regulators in June 2012 for a combined $450 million. At that time, Barclays admitted that the Libor rates it had submitted between 2007-2009 were false. The plaintiffs alleged that because the Barclay defendants painted an inaccurate picture of the bank’s financial condition by misrepresenting the costs at which the bank could borrow money, the price at which they had bought their ADRs was artificially inflated, and hence they lost more in the subsequent drop. They also alleged that Barclays did not have the appropriate internal controls in place to prevent this type of misbehavior.
The defendants moved to dismiss, and almost exactly a year ago, on May 13, 2013, Judge Schiendlin granted that motion. She concluded that (1) the plaintiffs had not adequately pled loss causation because the effect of any misrepresentation of Barclays Libor submission rates between 2007 and 2009 would have been rectified prior to Barclays’ June 2012 announcement, “by an efficient market’s incorporation of Barclays’ 2009-2012 Libor submission rates into the company’s share price”; and (2) that any statements about the internal controls were puffery and not materially false or misleading. Judge Schiendlin wrote that it was implausible that an efficient market “would fail to digest three years of non-fraudulent Submission Rates and other more detailed financial information, and would instead leave intact artificial inflation as a result of fraudulent Submission Rates in 2007-2009.”
The Second Circuit agreed with Judge Schiendlin as to the internal controls claim. But in a ruling very likely influenced by the pending decision by the Supreme Court in Halliburton with respect to the “efficient market” presumption, the Second Circuit held that the plaintiffs had in fact pled sufficient loss causation to survive a motion to dismiss. The Second Circuit felt that Judge Schiendlin had reached her conclusion with respect to the effect of an efficient market prematurely, especially in light of the “defendants’ concession at oral argument that the misrepresentations were not brought to light until the disclosure of the Settlement Agreements” in June 2012. Revealing the long shadow cast by the pendency of the Halliburton decision, the Second Circuit noted in a footnote that the plaintiffs’ theory of continued price inflation caused by Barclays’ false Libor submissions was supported according the plaintiffs by an analysis conducted by an economics expert in loss causation. So if the Supreme Court dispenses with the presumption of market efficiency, yet another “battle of the (economic) experts” probably will begin.
The Barclays case now will return to the Southern District for discovery. While many of the banks swept up in the LIBOR scandal do not have securities traded in the American markets and so are not subject to these types of suits, the Second Circuit’s reversal serves as a reminder that the various and many litigations to arise out of the Libor scandal are far from over. In fact, just two weeks ago the FDIC filed suit against the U.S. LIBOR rate-setting banks and the British Bankers Association in its capacity as receiver for 38 banking institutions that failed between 2008 and 2011. The Second Circuit still has yet to hear an appeal of the dismissal of many of the claims by Southern District Judge Buchwald in the massive multi-district litigation, as she refused to grant them approval to file an interlocutory appeal. In other cases, such as Laydon v. Mizuho Bank, Ltd, also in the Southern District, plaintiffs continue to amend their complaints in an effort to make their claims stick (the Laydon plaintiffs will soon submit their proposed Third Amended Complaint).
We will continue to monitor the LIBOR litigations and see what, if any, claims survive.