From the PLUS Journal article “Move Over Subprime? Financial Institutions and Brokers Face Increasing Concerns Over Allegation of Improper Libor Manipulation” (May 2012) by Eric C Scheiner and Jennifer Quinn Broda.


The U.S. criminal investigation into the alleged manipulation of these various interbank rates was only recently revealed in the U.S. civil litigation.  Specifically, in a letter dated February 27, 2012 (released March 6, 2012) addressed to Judge Buchwald, lawyers from the U.S. Department of Justice’s Fraud Section of the Criminal Division and Antitrust Division publicly acknowledged that they were “conducting a criminal investigation into alleged manipulation of certain benchmark interest rates, including Libors of several currencies.” [xvi]

In the letter, the Department of Justice’s lawyers note that they are writing in response to letters submitted by plaintiffs and defendants in the U.S. civil litigation with regard to the plaintiffs’ request for all documents produced by the defendants to “U.S. regulators investigating the alleged manipulation of Llibor.”  The Department of Justice goes on to state that, “given the ongoing investigation, we have an interest in aspects of the discovery that Plaintiffs are requesting.”  As such, the letter continues, “if the Court determines that any discovery should proceed at this time, we respectfully request that the Department of Justice be given an opportunity to advise the Court as to its position on the timing and scope of discovery” in the civil litigation. [xvii]   They also specifically advised the court that they may “request that any further submission by the Department of Justice be provided on an ex parte basis, if necessary, to protect the confidentiality of details of the investigation.”  On March 1, 2012, in a ruling from the bench, Judge Buchwald denied the investors’ request for documents related to the government investigations.

In light of the recent public acknowledgment of the U.S. criminal investigation, very little is known about the nature and breadth of the investigation.  Further, the February 27, 2012 letter from the Department of Justice does not otherwise provide information as to which entities and/or individuals are under investigation or have received subpoenas to date.


As noted above, to date it has been reported that regulators from the U.S., the U.K., Japan, Switzerland and Canada are investigating manipulation of the various inter-bank rates. [xviii]   Some of the banks that have disclosed that they have been approached by regulators investigating Libor include Barclays Plc, Royal Bank of Scotland Group Plc, HSBC Holdings Plc., Citigroup, Inc., UBS AG, Credit Suisse, Deutsch Bank, JPMorgan Chase & Co., Tokyo-Mitsubishi UFJ, Mizuho Financial Group Inc., Rabobank Groep N.V., Societe Generale, and Sumitomo Misui Banking Corporation. [xix]

Many of these same banks have terminated, laid off or suspended several employees in the growing wake of the ongoing investigations and/or have publicly announced that they are cooperating with regulators.  For example, the Royal Bank of Scotland Plc has reportedly terminated at least four employees in connection with its internal probe into the manipulation of these rates. [xx]   In response, one of those terminated traders, Tan Chi Min, has filed a wrongful dismissal action in the Singapore High Court. [xxi]   In that wrongful dismissal action, Min alleges that it was “common practice” for Royal Bank of Scotland senior employees to make Libor-related requests to the Libor rate setters and that such conduct was known to senior management. [xxii]   The bank has responded to Min by taking the position that he was terminated because he attempted to improperly influence the bank’s rate setters to submit information pertinent to Libor that would benefit his trading positions. [xxiii]

According to other reports, employees have been terminated, placed on leave, or suspended at JPMorgan Chase, Deutsche Bank and Citigroup. [xxiv]   In addition, although no conclusions of wrongdoing have been made, at least two senior UBS traders were suspended in connection with the probe, [xxv] and UBS reportedly sought immunity from prosecution by Canadian regulators investigating conduct tied to the manipulation of various interbank rates. [xxvi]   Specifically, in certain papers shown to Bloomberg News by Canadian court clerks, the bank reportedly “told the [Canadian] regulator that traders and cash brokers conspired to influence the Yen Libor rate from 2007 to 2010 to profit on interest-rate derivatives linked to the benchmark.” [xxvii]   Bloomberg News has further reported that an affidavit filed by the Canadian Competition Bureau indicates that HSBC, JPMorgan Chase, Citigroup, Deutsche Bank, and Royal Bank of Scotland were involved in a scheme to manipulate submissions with regard to Yen Libor in an attempt to improve trades tied to the rate. [xxviii]   UBS was also reportedly granted conditional immunity from Swiss regulators and the U.S. Department of Justice with regard to investigations involving Yen Libor, Tibor and Swiss franc Libor rates. [xxix]

To date, Japan’s FSA is the only regulator to formally impose sanctions with regard to wrongdoing associated with these rates.  In December 2011, Japan’s FSA sanctioned Citigroup by demanding the temporary suspension of trading derivative products tied to Tibor and Libor after two Citigroup traders were accused of trying to improperly influence Tibor by asking other banks for an advantageous rate in violation of Japan’s Financial Instruments and Exchange Act. [xxx]   UBS reportedly received a smaller sanction as well for allegedly similar misconduct. [xxxi]   The reports indicate that there was no evidence that Tibor was actually manipulated, but Japan’s FSA took the position that both banks lacked appropriate internal controls to prevent such manipulation. [xxxii]   In addition to the sanctions, Citigroup announced a $50 million write off unwinding the two traders’ positions. [xxxiii]

The investigations do not stop with just the banks.  There have been allegations that brokers communicated with traders at various banks in an attempt to influence the various types of rates.  Some of the brokerages that are reportedly being investigated include ICAP Plc, Tullett Prebon and RP Martin Holdings Ltd. [xxxiv]       ICAP Plc and RP Martin Holdings Ltd. were implicated in the affidavit filed by the Canadian Competition Bureau noted above in connection with the UBS investigation. [xxxv]   Further, although unsubstantiated and specifically denied by the Royal Bank of Scotland, there have been some reports of hedge fund managers asking traders at banks to change Libor. [xxxvi]

Finally, the BBA also recently announced that it is creating a panel of lenders to review the process as to how Libor is set, and that the panel will include some of the banks being investigated for allegedly manipulating the rate. [xxxvii]   This will be the second review of the rate-setting system in the last four years. [xxxviii]   Based on what has been uncovered to date, it is foreseeable that such review will include recommendations for how to provide better oversight regarding how these rates are set.


To date, it does not appear that any individual directors and officers of the defendant banks have been implicated in the MDL litigation, but consolidated amended complaints are still being drafted.  That said, there is a potential for litigation involving directors and officers with regard to the alleged misconduct.  If directors or officers are named in any antitrust litigation, the applicable directors’ and officers’ insurance policies may exclude coverage for alleged violations of the federal antitrust laws or may otherwise exclude various types of conduct that might be included in alleged violations of antitrust laws.  Further, courts may recognize that public policy limits or precludes indemnification from insurers for violations of federal antitrust laws because of the nature of the wrongdoing. [xxxix]   However, the possibility for exposure to directors’ and officers’ policies that do not have antitrust exclusions or that have “watered down” conduct exclusions is a possibility should directors and officers policies eventually be implicated in antitrust lawsuits.

In addition, the costs associated with the defense of these types of actions, the civil litigation exposure and the potential for civil and criminal penalties could be staggering given the widespread impact these interbank rates have on various financial instruments.  In this regard, if these costs and exposures are borne by the financial institutions themselves, derivative claims against directors and officers relating to improper oversight are a possibility.  Moreover, if there are any alleged public misrepresentations or material omissions made by the financial institutions in their financial statements or otherwise, class action securities litigation is also a possibility.

Several of these defendant banks may have blended insurance programs with several types of coverage.  As such, the banks may attempt to tender actions related to this alleged misconduct to their errors and omissions coverage, depending on the circumstances of the case.  Additionally, should regulators determine that criminal activity was also involved, fiduciary bond policies could be impacted as well.  Finally, in light of the various terminations of likely well-compensated traders, there could be additional significant employment practices liability claims that arise from this scandal.

As a result of the potential involvement of brokers and hedge funds, claims could also eventually be made against those types of entities, potentially implicating their insurers.  Depending on the scope of the various investigations and the level of involvement with other financial institutions, smaller banks could also eventually be implicated.

PLUS members can read this entire article in the PLUS Journal archive.