The manipulation of LIBOR – the London Interbank Offered Rate – is one of the biggest banking scandals in what has been a scandal-ridden decade for the industry. To date, more than $9bn (£5.7bn) of fines have been levied against banks across the world for their role in rigging the level of the crucial benchmark, more than 100 traders and bankers have been sacked or suspended, 21 have been charged and, this summer, former UBS employee Tom Hayes became the first to be convicted when he was sentenced to 14 years in prison for conspiracy to defraud.

Senior heads have also rolled, including Bob Diamond, former chief executive of Barclays and Piet Moerland, his counterpart at Dutch Rabobank.

The fallout is continuing. The banks involved are now vulnerable to litigation from thousands of companies, investors and other clients who bought financial instruments that were wrongly priced as a direct result of market manipulation of the LIBOR benchmark.

LIBOR is not just an esoteric number used for trading between banks: it affects a large swathe of the global financial market. Loans directly based on LIBOR are worth at least $300tn, from variable rate mortgages in the US to corporate loans, while derivatives such as interest rate swaps, options or futures are based on LIBOR, adding many trillions more to the grand sum that could be affected by rate manipulation.
"If a client could establish actionable misrepresentation relating to LIBOR, the court may order rescission of loss-making contracts"The fact that LIBOR was manipulated by the banks means anyone using it as a benchmark may have been over- or under-charged, depending on which direction the manipulation went on that particular day. They could, therefore, take action against any lender who knowingly levied the wrong charge. Barclays, RBS and Deutsche Bank are among those that have already confessed, while regulators have fined others across the globe, making it clear where the guilt lies. Proving actual loss for bank customers, however, is rather more difficult.

Proving damages Stephen Rosen, a partner at Collyer Bristow solicitors, says anyone contemplating action for breach of contract “would need to show that they have actually suffered damage from the manipulation”.

That would take some effort: LIBOR is set daily by a panel of international banks, which submit an estimate of their borrowing costs to Thomson Reuters at 11am UK time. Reuters then discards the highest and lowest 25%, averaging the remainder to get the daily rate. On any given day, an individual lender could be within the top and bottom discards and, even if their rate is counted, their estimate may not have a significant impact on the overall total. As the rate is set daily, thousands of these calculations may be needed to prove damages, depending on the terms of the loan – and some may have ended up benefiting customers, arguably offsetting negatives on other days.

Ed Coulson, a partner at global litigation practice Hausfeld, says: “Hausfeld has been working with experts in the area to design damages models to analyse and estimate the extent of losses across a range of LIBOR-based clients and derivatives.”

The firm’s US arm is already co-lead counsel on a class action against banks that manipulated LIBOR. In Europe, it is planning action arising out of breaches of competition law, and Coulson says reports into the scandal from the European Commission and the Financial Conduct Authority are “useful to highlight the wrongdoing that can support a claim”.

Opening the floodgates Collyer Bristow’s Rosen says bank customers may alternatively be able to claim that the secret rate manipulation means the product based on it was fraudulent, and therefore the bank made a fraudulent misrepresentation as to the setting of LIBOR. “On that basis, customers are entitled to cancel the contract in its entirety and get their money back,” he says.

£120,000
The amount it could cost companies to take action against banks in the first year aloneThe firm is acting against Barclays on behalf of the combined group Rhino, which comprises three companies that Barclays placed in administration and that had purchased interest rate swaps based on LIBOR. The argument is that manipulation of the rate was a fraudulent misrepresentation by Barclays, so the contract can be rescinded and Barclays has to repay everything that Rhino paid under the swaps. An initial hearing on that case is unlikely to happen until at least next year, and given the significance of the case – a victory could open the floodgates for thousands of claims – it could then spend years going through the appeals process. 

Stephen Elam, Senior Associate at Cooke, Young & Keidan, says: “If a client could establish actionable misrepresentation relating to LIBOR, the court may order rescission of loss-making contracts, meaning that the customer could receive their money back.”

His firm acted in the case of Guardian Care Homes, alleging fraudulent misrepresentation against Barclays for LIBOR manipulation in relation to interest rate derivatives – a case that was settled weeks before it was due to go to trial. That followed an appeal process in which Barclays attempted to have the action struck out, culminating in a Court of Appeal ruling in November 2013, which found that the allegations based on implied representations as to the accuracy of LIBOR are (at least) properly arguable and should be considered at trial.

Had the case reached the court, Barclays staff – including potentially senior executives up to the level of Diamond himself – could have been required to give evidence. They, along with executives at rival banks, will have noted the amount of embarrassing material that was aired about UBS’s business during the two-month long trial of Hayes over LIBOR manipulation, and will be unenthusiastic about following suit.

Abhishek Sachdev of Vedanta Hedging specialises in advising companies on derivative contracts but, for the last few years, much of his firm's time has been spent advising on litigation over those contracts, because companies are concerned about the selling methods used by the banks in some cases. All of the cases his firm has been involved in have settled before they have reached court, usually at a mediation or without prejudice meeting – invariably, however, with confidentiality clauses prohibiting those involved discussing the details. Some of the LIBOR derivative contracts have cost the companies involved “tens of millions of pounds in losses,” he adds.

Sachdev’s firm’s focus has mainly been on misselling of hedging contracts in the run up to 2008. These contracts are purported to offer protection against interest rate changes but, in fact, ended up costing the holders huge sums when interest rates fell in the aftermath of the financial crash. Depending on the size of the claim, customers can now add LIBOR manipulation to the case, which could materially increase the potential damages.

The fear factor Sachdev believes banks are “terrified” of LIBOR manipulation cases for three key reasons: 

1. The fear of contagion as other types of contract are drawn into the net.
2. It sets a precedent for others to take action against the bank.
3. Concerns over what could be disclosed in court.

“But that does not mean a bank will roll over and settle – they will put up obstacles to the case,” says Sachdev, for example by delaying the trial, or requiring review of large amounts of documentation, which adds to costs.

Taking action is not, in any case, an easy – or a cheap – option. Sachdev says it could cost approximately £120,000 in the first 12 months alone, even for a small £1m derivative claim, on lawyers, QCs and advisers – and anyone taking action has to be aware that they could be liable to pay the bank’s costs too if the action fails. But, of course, the bigger the contract involved, the greater the potential gains from rescinding it.