In a damaging judgment for RBS, the High Court has ruled that LIBOR fraud allegations against RBS in a derivatives mis-selling claim are “plainly properly arguable” and that there is evidential “support for an inference of fraud and dishonesty at the highest level of RBS” (Property Alliance Group Limited v. The Royal Bank of Scotland PLC).
The decision is relevant to any SME that has been mis-sold swaps or other interest rate hedging products (IRHPs) by RBS, Barclays Bank, Lloyds, Bank of Scotland, HSBC, Deutsche Bank, JP Morgan, or UBS, especially those that face contractual limitation time bars of six years, which do not apply in the same way to LIBOR fraud mis-selling claims.
What is LIBOR (London Interbank Offered Rate)?
LIBOR is a benchmark interest rate organised by the British Bankers’ Association (“the BBA”) that fixes rates for various currencies, including pound sterling, the US dollar, the euro, the Swiss franc, and the Japanese yen.
The process of setting LIBOR involved a panel of banks (including RBS), each of whom would submit on a daily basis the interest rates that they would expect to pay for borrowing from other banks. Those submissions were then used to derive the LIBOR rate for a given currency and tenor (such as 3-month GBP).
In recent years, several banks have been fined by regulators for their participation in LIBOR rigging, which involved making false submissions at the request of their derivatives traders in order to benefit their trading positions.
LIBOR manipulation fines against major banks
In June 2012, Barclays was fined £59.5 million by the Financial Services Authority (which is now known as the Financial Conduct Authority) for LIBOR fraud, and UBS was fined £160 million by the FSA in December 2012 for its part in LIBOR manipulation.
In February 2013, RBS was fined £87.5 million by the FCA for LIBOR rigging, which had involved RBS taking requests from its derivatives traders in relation to JPY (Japanese yen) and CHF (Swiss franc) LIBOR and then making false submissions. RBS was also fined £207 million by the US Commodity Futures Trading Commission and £150 million by the US Department of Justice for the same instances of LIBOR rigging.
In July 2014, Lloyds Bank and Bank of Scotland were together fined £105 million by the FCA for LIBOR manipulation and for attempting to manipulate their fees payable to the Bank of England under the Special Liquidity Scheme (which was a taxpayer-backed government scheme to support British banks during the recent financial crisis).
In April 2015, Deutsche Bank was fined a record £227 million by the FCA for LIBOR manipulation, which primarily involved Deutsche Bank managers, traders and submitters based in London.
Mis-selling Claim for LIBOR fraud against RBS
Between October 2004 and April 2008, RBS sold four interest rate swaps to its customer, Property Alliance Group (“PAG”). PAG made payments of about £5 million to RBS under the swaps and subsequently terminated these swaps in June 2011, which involved paying breakage costs of approximately £8 million.
Each of these swaps used 3-month GBP LIBOR as a reference rate.
PAG subsequently brought a swaps mis-selling claim against RBS, in which PAG alleged that RBS had made four representations about LIBOR, namely that:
- LIBOR represented the interest rate defined by the British Bankers’ Association (“the BBA”);
- RBS had no reason to believe that LIBOR represented or might represent anything other than the rate defined by the BBA;
- RBS had not made false or misleading LIBOR submissions to the BBA nor had RBS engaged in attempting to manipulate LIBOR so that it represented a different rate from that defined by the BBA; and
- RBS did not intend in future to make false or misleading LIBOR submissions to the BBA or to engage in attempts to manipulate LIBOR so that it represented a different rate from that defined by the BBA.
In its Defence pleading, RBS denied making any of those representations but formally admitted its misconduct in relation to JPY and CHF LIBOR rigging. RBS was subsequently ordered by the High Court to provide disclosure in relation to all LIBOR currencies and tenors, rather than just 3-month GBP LIBOR.
Further allegations of LIBOR rigging fraud
After receiving disclosure from RBS, PAG applied to amend its Particulars of Claim to include four additional points:
- A further breach of duty arising from Crestsign v. National Westminster Bank PLC;
- An allegation that RBS provided inadequate information;
- Further details of the alleged LIBOR manipulation by RBS, including an allegation that RBS had been involved in LIBOR rigging in relation to GBP and USD LIBOR from August 2007 onwards; and
- An allegation that RBS made the LIBOR representations fraudulently.
RBS attempted to oppose the third and fourth amendments, which related to LIBOR fraud, by alleging that they were too wide and were unsupported by the disclosure material relied upon. However, Mr Justice Birss held that the allegations of LIBOR fraud were “plainly properly arguable”, and therefore granted permission for PAG to amend its Particulars of Claim accordingly. In support of his decision, Mr Justice Birss explained at paragraph 58:
“In my judgment the material relied on by PAG and set out in the Amended Particulars of Claim and its schedule provides ample prima facie support for an inference of fraud and dishonesty at the highest level of RBS. The materials show that, arguably, members of the RBS board were aware that LIBOR was “broken” during a period in which RBS was selling swaps to PAG referable to LIBOR. “
MR JUSTICE BIRSS
Property Alliance Group Limited v. The Royal Bank of Scotland PLC
[2015] EWHC 3272 (Ch)
LIBOR Fraud: Impact on Mis-sold Derivatives Claims
This decision demonstrates that allegations of LIBOR fraud are not only a relevant factor in the court’s determination of a claim but also can arguably be a determinative factor in swaps mis-selling claims against RBS and other major banks who have been subjected to regulatory punishments for LIBOR rigging.
After all, would businesses have purchased such interest rate swaps had they known the reference interest rate was being fraudulently manipulated by the very bank selling the swaps?
Such fines and the trail of evidence they leave behind (which are obtainable via the process of disclosure and inspection of documents in litigation) expose major banks’ fraud and dishonesty in setting, or rather rigging, LIBOR rates during the period of mis-selling of interest rate derivatives to SMEs in the UK.
Limitation: Extra Time for Swaps Mis-selling Claims?
Many SMEs have good winnable cases that they ought to have brought against the major banks but failed to do so in time. SMEs are often slow to take legal advice on the basis they are scared to act against their lender and in the belief that the regulator will force the banks to provide redress. These often misguided fears and hopes have resulted in many SMEs becoming time barred from their usual contractual legal rights as the IRHPs were, now, mostly sold over six years ago.
Often directors feel they should be given additional time to pursue legal claims for mis-sold derivatives because the bank(s) have made promises to redress the business, for example via the bank complaints process or via the FCA IRHP Review or because they simply couldn’t afford to take specialist legal advice. Such sentiment is largely ill-founded and will be ignored by the court which will enforce the Limitation Act 1980 to ensure that there is legal certainty.
Limitation hurdles are not necessarily insurmountable, as demonstrated in the case of Kays Hotel Limited v. Barclays Bank PLC, where Barclays failed to strike out the Hotel’s claim as the court determined that s14A of the Limitation Act applied, thereby giving the Hotel an extra three year period from the date of knowledge of the mis-selling.
However the decision of the court in PAG v RBS goes further and highlights an arguable route around the usual limitation hurdles that face most swaps mis-selling claims where the derivatives product in question was sold over six years ago.
Any similarly affected businesses that have been sold derivatives such as swaps or collars should obtain specialist legal advice in relation to the possible impact of LIBOR rigging on their IRHP mis-selling claims as soon as possible.
LEXLAW have conducted and settled substantially more derivatives litigation than any other law firm in England & Wales and are the leading law firm acting against banks in derivatives mis-selling claims.