Second Circuit Revives Schwab’s Claims Flowing From Alleged LIBOR Manipulation
02/27/2018On February 23, 2018, the United States Court of Appeals for the Second Circuit vacated portions of Judge Buchwald’s 2015 opinion that had dismissed claims brought by Charles Schwab Corp. and affiliates against over a dozen banks alleged to have manipulated U.S. Dollar LIBOR for lack of personal jurisdiction for state-law claims and a failure to link the alleged manipulation to damages for Securities Exchange Act claims. Charles Schwab Corp., et al. v. Bank of America Corp., et al., 16-1189-cv (2d Cir. Feb. 23, 2018). Schwab had been among the many plaintiffs to pursue claims against LIBOR panel banks under the antitrust laws, but—while the dismissal of those claims was pending appeal before the Second Circuit—Schwab initiated a parallel action against LIBOR panel banks, alleging California common law fraud and unjust enrichment claims, statutory claims under California’s Business and Professions Code, and claims under the Securities Exchange Act. The district court dismissed the complaint in its entirety, holding that (i) personal jurisdiction was lacking for the state law claims because the alleged manipulation took place outside of the U.S.; and (ii) the complaint failed to allege facts in support of a Securities Exchange Act claim because it failed to connect the suppression of LIBOR to any damages suffered by Schwab. In re LIBOR-based Financial Instruments Antitrust Litig., 2015 WL 6243526, *70 (Oct. 20, 2015 S.D.N.Y.). The Second Circuit vacated these rulings, directing the district court to grant Schwab leave to amend its complaint to address a number of issues identified in the opinion.
The court evaluated the personal jurisdiction issue by dividing the defendants into three categories: those who sold LIBOR-based instruments directly to Schwab (the “direct seller defendants”); those who sold instruments to Schwab indirectly through broker-dealer subsidiaries or affiliates (the “indirect seller defendants”); and those who did not sell instruments to Schwab but were alleged to be co-conspirators in the manipulation of LIBOR (the “non-seller defendants”). As to the first category, the court held that, because Schwab’s trading desk was located in California, those defendants who sold directly to Schwab were subject to personal jurisdiction for claims arising from those sales. The court found, however, that personal jurisdiction did not extend to claims arising more generally from false submissions made in London, reasoning that “the California transactions did not cause Defendants’ false LIBOR submissions to the BBA in London, nor did the transactions in some other way give rise to claims seeking to hold Defendants liable for those submissions.”
As to the indirect and non-seller defendants, the Second Circuit agreed that the operative complaint failed adequately to allege personal jurisdiction, but nonetheless permitted Schwab to attempt to address these defects in an amended complaint. With respect to the indirect seller defendants, the court held that “an agency relationship between a parent corporation and a subsidiary that sells securities on the parent’s behalf could establish personal jurisdiction over the parent,” but that Schwab’s allegations of agency were too conclusory to establish personal jurisdiction. Likewise, the court found that Schwab had failed to support a claim of personal jurisdiction over the non-seller defendants because it had failed to allege that the California sales were in furtherance of the LIBOR conspiracy or that the LIBOR conspiracy was “expressly aimed” at California. Specifically, the Court found that the allegation that the defendants conspired to manipulate LIBOR “to earn profits” from the manipulation was insufficient because “financial interest is not the same thing as furthering a conspiracy” and the complaint lacked allegations showing that the defendants undertook California sales as part of the alleged conspiracy.
Schwab also contended that personal jurisdiction existed over all defendants based on the “obvious and direct effects” of their conduct in California. The Second Circuit rejected this argument, finding it amounted to no more than “mere foreseeability.” The effects test, the court held, requires not just foreseeability, but that the conduct be “expressly aimed” at the state, and that even if the conduct were aimed at the United States as a whole, “it would not necessarily follow that the actions were aimed at California.”
The Second Circuit then addressed the district court’s dismissal of Schwab’s fraud claims based on its purchase of fixed-rate instruments, which by definition did not reference or incorporate the floating LIBOR rate. Schwab had argued that it was defrauded in purchasing fixed-rate instruments from the defendants because it had relied on the allegedly suppressed LIBOR rates associated with floating-rate instruments in deciding to buy the fixed-rate securities. The Second Circuit rejected this argument and affirmed dismissal of these claims, finding the chain of causation and intent too attenuated, and noting that the same logic would potentially apply to the purchase of any security, including equity securities, in the relevant period, leading to potentially “boundless liability.”
Turning to Schwab’s Exchange Act claims, the Second Circuit held that the district court erred in assuming that Schwab had not been harmed by the alleged manipulation through its purchases of “floating rate” securities that incorporated LIBOR as a benchmark, finding that it could not rule out Schwab’s asserted theories of loss causation as to these securities at the motion to dismiss stage, and permitting it to replead to add allegations to support its theories. Notably, however, the Court affirmed the portion of the district court’s decision that dismissed Schwab’s Exchange Act claims based on the purchase of fixed-rate securities that did not incorporate LIBOR as a benchmark, following analogous logic to its rejection of Schwab’s state-law fraud claims based on fixed-rate securities, and finding that the alleged misrepresentations as to LIBOR “were not made in connection with Schwab’s purchase of fixed-rate instruments, which did not reference or relate to Defendants’ LIBOR submissions in any way.”
In vacating the district court’s dismissal even while identifying defects in Schwab’s complaint, the Second Circuit explained that “the extraordinary scope of the litigation”—which included thousands of pages of briefing culminating in a 436-page decision on appeal—justified “relaxing our usual preservation requirements” and rejecting defendants’ argument that plaintiffs had forfeited their right to amend by not seeking leave to do so in response to defendants’ motion to dismiss.