In this presentation, John Hughes, a partner in Edwards Wildman's Insurance and Reinsurance Department, analyzes LIBOR litigation and its effects on insurance coverage.

1. LIBOR Litigation
Spotlight on
Insurance Coverage
Presented by:
John D. Hughes
Jacquelyn Burke
Gregory D. Pendleton
© 2013 Edwards Wildman Palmer LLP & Edwards Wildman Palmer UK LLP

2. Introduction
“It’s hard to imagine a bigger
case than LIBOR.”
~anonymous government official quoted in The New York Times (July 14, 2012)
2

3. LIBOR panel for USD transactions
1. Bank of America
10. Lloyds Banking Group
2. Bank of Tokyo – Mitsubishi UFJ
11. Rabobank
3. Barclays Bank
12. Royal Bank of Canada
4. BNP Paribas
13. Société Générale
5. Citibank NA
14. The Norinchukin Bank
6. Credit Agricole CIB
15. The Royal Bank of Scotland Group
7. Deutsche Bank AG
16. UBS AG
8. HSBC
17. Credit Suisse
9. JP Morgan Chase
18. Sumitomo Mitsui Banking Corp.
3

4. how is the LIBOR used?
loans and derivatives
Loans
♦
♦
The LIBOR is the primary benchmark for global short term interest rates.
Lenders use the LIBOR rate as a base and add basis points depending on
the borrower’s credit-worthiness.
Derivatives
♦
♦
The price of many financial instruments is pegged to the LIBOR, including
swaps and futures contracts.
The notional amount outstanding of OTC interest rate derivatives contracts
linked to the LIBOR in the first half of 2011 = $554 trillion.
Source: Financial Services Authority
The current value of all LIBOR-pegged financial instruments may be as
high as $800 trillion.
4

5. the LIBOR scandal
what happened?
♦
Historically, the LIBOR
and the costs of credit
default swap
obligations were
correlated.
♦
In certain periods,
however, the cost of
CDS obligations rose
substantially more than
their US LIBOR quotes
would suggest.
-Source: WSJ, 5/29/2008
5

6. the LIBOR scandal
what happened?
♦
Some banks are far
slower to change their
submissions than
others.
♦
Some banks’ LIBOR
submissions track the
market view of their
credit risk, as
measured by their
CDS swaps, far more
closely than others.
-Source: WSJ, 9/28/12
6

7. the LIBOR scandal
broadening scope
Since July 2012, criminal and civil investigations have been opened
against several banks. Regulators in multiple countries are now
investigating LIBOR rate-rigging.
Barclays, UBS and RBS have settled, but they are not alone –
news reports indicate that 40-50 other financial institutions may have
participated in LIBOR rate manipulation, including interbank brokers.
7

8. the LIBOR scandal
broadening scope
♦ Barclays:
♦ UBS:
Settled with CFTC, DOJ, FSA and FINMA for $1.5 billion in December 2012.
♦ Japanese subsidiary pled guilty to one count of wire fraud.
♦ RBS:
♦
♦ Bank
Settled with CFTC, DOJ and FSA for $450 million in June 2012.
Settled with CFTC, DOJ, and FSA for $612 million on February 6, 2013.
Japanese subsidiary pled guilty to one count of wire fraud.
of America: Acknowledged receiving subpoenas from the DOJ, CFTC, and
FSA.
♦ JPMorgan:
Disclosed investigations by the DOJ, SEC, and CFTC in the US, and
the European Commission, Canada’s Competition Bureau, and the Swiss
Competition Commission overseas, among others.
♦ Citigroup,
HSBC and Deutsche Bank are also in discussions with the DOJ, SEC,
and CFTC, as well as foreign authorities.
8

9. the LIBOR scandal
regulatory reactions
♦
As part of the fallout from the LIBOR scandal, UK regulators announced on
July 9, 2013, that a unit of NYSE Euronext – the parent company of the New
York Stock Exchange – would assume responsibility for administering LIBOR
from the British Bankers’ Association as of early 2014.
♦
LIBOR will keep name and remain under oversight of British regulators.
♦
New administrator from NYSE Euronext will be subject to ongoing scrutiny by
U.K. Financial Conduct Authority (―FCA‖).
♦
Activities of submitting and administering LIBOR are now regulated activities.
♦
Banks required to have submission methodology. Submitting banks systems
will be monitored and then comprehensively reviewed in late 2013.
♦
LIBOR administrator obliged to monitor and survey submissions in order to
identify potential manipulation.
♦
U.K. Financial Services Act makes it a criminal offense to knowingly or
deliberately make false statements relating to benchmark setting.
* Sources: Financial Stability Board; GOV.UK
9

10. the LIBOR scandal
regulatory reactions
♦
Movement toward benchmark derived from actual short term loans as
opposed to estimate of what interest rate would be if banks did lend each
other money?
♦
Financial Stability Board, regulating arm of the Group of 20 leading
economies, scheduled to issue report in June 2014 on how a reformed
LIBOR could be based on actual transactions.*
♦
FSB report will also discuss how to implement new LIBOR scheme without
major market disruption.
♦
Transition to new LIBOR regime likely to take several years.
* Source: Reuters
10

11. the LIBOR litigation
How are these claims faring? What are the coverage issues?
Four Key Categories:
♦
―Customer‖ Class Actions
♦
Securities Class Actions
♦
Shareholder Derivative Suits
♦
Regulatory and Criminal Investigations
11

12. the LIBOR litigation
what have been and may be the claims?
♦
Sherman Act Antitrust
♦
State Antitrust
♦
Commodity Exchange Act
♦
Securities Law
♦
RICO
♦
♦
♦
ERISA
♦
Common Law
Exchange Act of 1934
Shareholder Derivative
♦
Breach of Fiduciary Duty
against Ds & Os
♦
Disgorgement
♦
Restitution
♦
Unjust Enrichment
♦
Fraud
12

13. Customer Class Actions
In re Libor-Based Financial Instruments Antitrust Litigation
Multi-District Litigation in S.D.N.Y. (Dkt. 11-MD-2262), with four
main plaintiff groups:
1. Over-the-Counter – led by plaintiff City of Baltimore.
♦
♦
♦
Principal claims were under the Sherman Act.
Plaintiffs purchased ―hundreds of millions of dollars‖ in interest rate
swaps.
Complaint also encompassed asset swaps, CDOs, credit default
swaps, forward rate agreements, inflation swaps, interest rate swaps,
total return swaps, and options.
2. Exchange Based – led by plaintiff FTC Futures Fund.
♦
♦
Principal claims were under the Commodity Exchange Act.
Plaintiffs traded on exchange-based products such as Eurodollar
futures.
13

14. Customer Class Actions
In re Libor-Based Financial Instruments Antitrust Litigation
3. Corporate Bondholders – led by plaintiffs Ellen Gelboim
and Linda Zacher.
♦
♦
♦
Sought relief under the Sherman Act.
Plaintiffs are holders of LIBOR-based debt securities not issued by
any defendant.
The class period is August 2007 through May 2010.
4. Bond Funds – led by plaintiff Charles Schwab Bond
Market Fund.
♦
♦
Principal claims were under the Sherman Act and RICO.
The Schwab Fund ―acquired billions of dollars’ worth of LIBORbased financial instruments…which paid artificially low returns to the
Funds due to Defendants’ suppression of LIBOR.‖
14

15. Customer Class Actions
defenses
Sherman Act
♦ Parallel
Conduct versus Agreement to Conspire.
♦ Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007).
♦ What would have been the ―correct‖ USD LIBOR?
♦ Direct Purchaser Rule.
♦ Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
♦ Standing only established through purchase from
conspirator.
♦ Of note: This is not true of all state antitrust laws.
RICO
♦ Barred
Common Law
♦ Statute
by PSLRA ―RICO Amendment.‖
♦ U.S. laws are not generally extraterritorial.
♦ Morrison v. Nat’l. Australia Bank, 130 S.Ct. 2869
(2010).
of Limitations.
♦ WSJ articles first appeared in April 2008.
15

16. Customer Class Actions
defenses (continued)
Commodities Exchange Act (“CEA”)
♦
♦
♦
Claim by primarily foreign investors who maintain that
because defendants unlawfully suppressed USD LIBOR,
their cost to purchase EURIBOR (Euro Interbank Offered
Rate) futures, which are priced inversely to 3-month USD
LIBOR, was artificially increased.
CEA, like the Securities Exchange Act, requires ―loss
causation.‖
♦ Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005).
The plaintiffs must thus prove that they sold their Eurodollar
futures contracts at a loss after the price of Eurodollars
dropped because defendants’ manipulation of USD LIBOR
had either ceased or been revealed.
16

17. Customer Class Actions
In re Libor-Based Financial Instruments Antitrust Litigation
♦
On March 29, 2013, Judge Naomi Reice Buchwald dismissed the majority
of the plaintiffs’ claims, including:
♦
♦
♦
♦
♦
She allowed one type of claim to proceed:
♦
♦
Antitrust claims: No standing because LIBOR-setting is not a competitive
process.
RICO claim: Barred by PSLRA, and extraterritorial.
Restitution: No direct relationship between plaintiffs and defendants, which is
required for a quasi-contract claim.
State law claims: Declined to exercise supplemental jurisdiction in favor of
judicial economy.
Commodity Exchange Act claims: Properly pled, except for any claims that rely
on contracts purchased from 8/07 -5/08, as those were time-barred.
Judge Buchwald pointed out that the ―broad public interests‖ in punishing
the wrongdoing here was met by the regulatory settlements.
17

18. Customer Class Actions
In re Libor-Based Financial Instruments Antitrust Litigation
♦
On 8/23/13, Judge Buchwald issued lengthy opinion denying various
motions for reconsideration of her 3/29/13 ruling. She did, however:
♦
♦
♦
(i) invite additional motion for reconsideration briefing as to adequacy of
scienter allegations vis-à-vis the exchange-based plaintiffs’ commodity
manipulation claims; and
(ii) allow OTC plaintiffs to file an second amended complaint to plead
state law claims for unjust enrichment and breach of implied duty of
good faith and fair dealing.
Bondholder plaintiffs have appealed dismissal of their antitrust claims.
OTC plaintiffs have also asked Judge Buchwald to enter final judgment as
to their antitrust claims so they can appeal alongside bondholders.
18

19. Customer Class Actions
In re Libor-Based Financial Instruments Antitrust Litigation
♦
On April 29, 2013, the Schwab Plaintiffs filed suit in California
Superior Court.
♦
Complaint asserts state law claims for fraud, unfair business
practices, interference with prospective economic advantage, bad
faith, rescission of contract, and unjust enrichment.
♦
Schwab also asserts claims for violations of Sections 11, 12(a)(2)
and 15 of the ’33 Act.
♦
Much of the complaint is devoted to demonstrating why the statute
of limitations has not run.
19

20. Customer Class Actions
In re Libor-Based Financial Instruments Antitrust Litigation
♦
On September 23, 2013, the National Credit Union Administration
(―NCUA‖) filed suit in federal district court in Kansas. NCUA brought suit as
liquidator for five failed credit unions. Alleges that the credit unions
received less interest income than they were entitled to by virtue of traders
at LIBOR banks artificially depressing rate reports.
♦
Case likely to be consolidated in the LIBOR MDL and transferred to Judge
Buchwald for pre-trial rulings.
♦
Complaint asserts claims for federal antitrust violations under the Sherman
Act and state antitrust, unfair competition, and restraint of trade violations.
No allegation of securities fraud.
♦
Interesting pleading decision since Judge Buchwald previously dismissed
the antitrust claims in the consolidated action. NCUA appears to be
banking on the Second Circuit reinstating antitrust claims.
20

21. Customer Class Actions
Laydon v. Mizuho Bank, et al (12-cv-3419, S.D.N.Y.)
♦
Class Action alleging manipulation of Euroyen TIBOR
(Tokyo Interbank Offered Rate) and Yen LIBOR rates.
♦
Brings claims under the CEA, Sherman Act, Illinois
Consumer Fraud Act, NY Business Law, and common
law.
♦
Second Amended Complaint filed on 4/15/13.
♦
Motion to dismiss briefing scheduled to be completed by
9/27/13. Oral argument set for 11/12/13.
♦
Seeks to represent all who bought or sold exchangetraded Euroyen futures and options contracts from
6/1/06 to 9/10.
♦
Damages: The class transacted in Euroyen-based
derivatives at artificial prices.
21

22. Customer Class Actions
♦
Several new cases including allegations taken from UBS settlements filed
in December 2012 and January 2013—see, e.g.:
♦ LACERA v. Bank of America et al., C.D.Ca. 12-10903
♦ CA antitrust, RICO, interference with economic advantage claims.
♦ Class is all California persons or entities that held any financial
instrument tied to LIBOR from 1/1/05 to 12/31/10.
County of San Diego v. Bank of America et al., S.D.Ca., 13-00048
♦ CA and federal antitrust, common law fraud, negligent
misrepresentation, interference with economic advantage, bad faith
and unjust enrichment claims.
♦ Plaintiff purchased LIBOR-based instruments that paid unduly low
interest rates, including interest rate swaps directly with at least one
defendant.
Both cases are now part of the MDL in the S.D.N.Y.
♦
♦
22

23. Customer Class Actions
Federal Home Loan Corp. v. Bank of America (13-cv-342, E. D. Va.)
♦ Freddie
Mac filed suit on the ―rocket docket‖ in Virginia.
♦ Defendants
are LIBOR panel banks and the British Bankers’
Association.
♦ Freddie
Mac asserts Sherman Act claims as well as claims
for fraud, tortious interference and breach of contract.
♦ Freddie
Mac was part of the City of Baltimore class in the
MDL, but believes its claims are distinct because it entered
into contracts directly with the defendant banks.
♦ Case
has now been consolidated into the MDL in the SDNY
23

24. Customer Class Actions
Salix Capital v. Banc of America (New York Supreme)
♦ Now-defunct
hedge funds filed suit on May 20, 2013 in New
York state court.
♦ Complaint
alleges fraud and breach of contract claims, as the
funds entered into direct interest rate swap contracts with the
panel banks pegged to LIBOR.
♦ The
funds seek $250 million in damages.
♦ Removed
to federal court 6/12/13; as of 9/23/13, motion to
remand pending.
24

25. Customer Class Actions
Regents of U. Calif. v. Bank of America, 13-cv-2921 N.D.Cal.
♦
Suit alleges violations of state and federal antitrust laws between August
2007 and March 2011
♦
Up to $6 billion of the University system’s securities lending portfolio tied
to LIBOR during that time.
♦
The Complaint includes information from charges recently filed against
individual traders.
♦
Common law claims include fraud, negligent misrepresentation,
interference with economic advantage, bad faith, and unjust enrichment.
♦
MDL panel transferred case to SDNY on 7/24/13
25

26. Customer Class Actions
measure of damages
Guardian Care Homes (UK Litigation)
♦
Nursing home provider brought suit against Barclays
in the UK over ―mis-selling‖ two interest rate swaps
in 2007 and 2008.
♦
Trial of case delayed until April 2014.*
♦ Will shed light on how possible claims against
other banks involved might fare in court.
* Source: Reuters
26

27. Customer Class Actions
coverage and claims issues
E&O Policies for Financial Institutions:
♦ Manipulation of LIBOR rates may not constitute a ―Professional
Service‖ – are plaintiffs customers or clients in contract privity with
alleged LIBOR manipulating banks?
♦ Antitrust exclusions and misconduct exclusions also may apply.
D&O Policies:
♦ Antitrust claims may not be ―Securities Claims.‖
♦ If individual defendants are named, coverage analysis could be
affected.
♦ Antitrust exclusions; misconduct exclusions also may apply.
Claims Spotlight:
♦ Defense costs – defense costs for any claims that survive motions
to dismiss could be extremely costly to insurers.
♦ However, large financial institutions may have big SIRs (sources
indicate SIRs as high as $50 million).
♦ Indemnity – remains to be seen whether covered damages in civil
actions can be proven.
27

28. Securities Class Actions
Gusinsky v. Barclays (12-cv-5329, S.D.N.Y.)
Named defendants:
♦
Barclays; Robert Diamond (former CEO); Marcus Aguis (former
Chairman).
Causes of Action:
♦
♦
10(b) and 10(b)(5) violations under Exchange Act against all
defendants.
20(a) violations against individual defendants.
Class Allegations:
♦
Seeks to represent all persons who purchased Barclays sponsored
American Depository Receipts between 7/10/07 and 6/27/12.
Damages:
♦
Barclays stock traded at artificially high prices, then reacted
negatively with news of fines. Claims that on 6/28/12, shares
dropped 12%, and on 6/29/12, shares dropped another 5%.
28

29. Securities Class Actions
Gusinsky Case Dismissed May 13, 2013
♦
General statement about a company’s
business practices are ―puffery‖; no
reasonable investor would rely on them and
they do not support at 10(b)(5) claim.
♦
There was no loss causation:
♦ The false submissions allegedly took place
in 2009, while the corrective disclosures
did not take place until 2012.
♦
Plaintiffs moved for reconsideration, asserting
that they can plead materiality and loss
causation. Motion denied on 6/13/13.
Plaintiffs filed appeal on 7/12/13.
29

30. Securities Class Actions
coverage and claims issues
♦
―Securities Claims‖ against institutions typically covered under D&O
entity/Side-C coverage.
♦
―Securities Claims‖ against individual Ds & Os typically covered under
Side-B (insures company to extent of its obligation to indemnify Ds & Os).
♦
Side-A covers Ds & Os where the institution is not indemnifying them.
♦
♦
Stand-alone Side-A DIC policies should drop down to fill coverage gaps in company’s
primary D&O policy.
Large banks typically have large SIRs. If that is the case, it should reduce
insurer exposure on defense costs and possibly indemnity.
30

31. Shareholder Derivative Litigation
Zucker v. Rubin (Sup. Ct. N.Y.)
Named defendants: Current and former Ds & Os
of Citigroup, and Citigroup.
Causes of Action: Breach of fiduciary duty
Damages: Citigroup faces fines, penalties,
investigation costs, and litigation costs as a result
of alleged LIBOR manipulation.
♦
♦
♦
Amended Complaint filed 4/19/13
Alleges that demand is futile and should be
excused.
Motion to Dismiss filed 9/20/13
31

32. Shareholder Derivative Litigation
potential defenses
♦
Failed to make demand on board.
♦
Breach of duty of care notoriously difficult for
plaintiffs to prove.
♦ In re Caremark Intl. Inc. Derivative Litig., 698 A.2d
959, 967 (Del. Ch. 1996) (a claim for violation of
duty of care ―is possibly the most difficult theory in
corporation law upon which a plaintiff might hope
to win a judgment.‖); Benihana of Tokyo, Inc. v.
Benihana, Inc., 891 A.2d 150, 192 (Del. Ch.
2005) (a ―gross negligence‖ standard applies to
claims of breach of the duty of care).
♦
Business Judgment Rule – provides a shield against breach of fiduciary duty
claims by creating a presumption that Ds & Os ―acted on an informed basis, in
good faith and in the honest belief that the action taken was in the best
interests of the company.‖ In re Walt Disney Co. Derivative Litig., 907 A.2d
693, 747 (Del. Ch. 2005).
32

33. Shareholder Derivative Litigation
coverage and claims issues
♦
Industry exposure probably low – just three LIBOR-setting banks are domiciled in
the U.S. (Citigroup, Bank of America, and JP Morgan).
♦
♦
A-Side Coverage – applies where corporation does not indemnify its Ds & Os
because it is: (1) prohibited by law from doing so; (2) permitted to do so by law and
company bylaws but chooses not to; or (3) financially incapable of doing so.
♦
♦
♦
♦
These are the only likely defendants in derivative suits because of the ―internal affairs
doctrine,‖ pursuant to which courts of a corporation’s home country should address issues
concerning the governance of the corporation. U.S. courts are thus unlikely fora for
derivative suits against foreign banks.
Judgments or settlements of derivative suits not indemnifiable. See 8 Del. C. 145(b).
Misconduct exclusions for breach of duty of loyalty claims (final adjudication).
Fully severable – knowledge of one insured not imputed to another insured.
Special Litigation Committee – Second Circuit has held these are covered as
defense costs under certain D&O policies. See MBIA, Inc. v. Fed. Ins. Co., 652 F.3d
152 (2d Cir. 2011).
♦
Policy sub-limits for investigations of shareholder demands.
33

34. Regulatory and Criminal Investigations
Domestic Regulators
♦ SEC
♦ CFTC
♦ State Attorney Generals
♦ The AGs of New York and Connecticut have
already sent subpoenas to 16 banks in a joint
investigation including Bank of America, JPMorgan,
HSBC, Citigroup, and Deutsche Bank among
others.
Criminal Investigations
♦ DOJ
Foreign Regulators
♦ Canadian, Swiss, and Japanese regulators have begun
investigations.
♦ In addition to Barclays, UBS, and RBS, at least 15
regulatory investigations are known to be ongoing.
34

35. Regulatory and Criminal Investigations
how will the investigations fare?
Barclays has paid:
♦
♦
♦
$200 million to the CFTC.
$160 million to the DOJ.
$92.8 million to the FSA (UK).
RBS has paid:
♦
♦
♦
$325 million to the CFTC.
$150 million to the DOJ.
$137 million to the FSA (UK).
UBS has paid:
♦
♦
♦
♦
$700 million to the CFTC.
$500 million to the DOJ.
$260 million to the FSA (UK).
$65 million to FINMA (Switzerland).

More fines will almost certainly result from continuing investigations.

Deutsche Bank has acknowledged that it may face substantial fines; new
Deutsche Bank documents indicating large profit from trades pegged to LIBOR
in 2008 released in January 2013; has set aside significant litigation reserves.
35

36. Regulatory and Criminal Investigations
coverage and claims issues
Policy Language:
♦ Definitions of ―Securities Claim.‖
♦ Do subpoenas qualify as ―Claims‖?
Defense Costs:
♦ Appears to be significant exposure for ―formal investigations‖ by
regulators.
♦ Responding to subpoenas or requests for information could be very
costly.
Indemnity:
♦ Should be no coverage for fines, penalties, and/or disgorgement.
Coverage Defenses:
♦ ―Loss‖ does not include restitution, fines, or penalties.
36

37. QUESTIONS?
37

38. Contact Us
John D. Hughes
Partner
Edwards Wildman Palmer LLP
Boston, MA
617.951.3373
JHughes@edwardswildman.com
Jacquelyn Burke
Associate
Edwards Wildman Palmer LLP
Boston, MA
617.239.0540
JBurke@edwardswildman.com
Gregory D. Pendleton
Associate
Edwards Wildman Palmer LLP
Boston, MA
617.239.0764
GPendleton@edwardswildman.com
38