Southern District Of New York Denies Certification To Two Putative Classes And Grants Partial Certification To A Third In LIBOR Rate Manipulation Litigation
On February 28, 2018, Judge Naomi Reice Buchwald of the Southern District of New York denied class certification to two proposed classes in the LIBOR rate manipulation litigation, while granting partial certification to a third class. In re LIBOR-Based Fin. Instruments Antitrust Litig., No 1:11-cv-02613-NRB (S.D.N.Y. Feb. 28, 2018). At issue in this thorough 366-page decision were three proposed classes: (1) the “exchange-based” class, (2) the “lender” class, and (3) the “over-the-counter” or “OTC” class, all seeking to recover damages based on alleged manipulation of the London Inter-bank Offered Rate (“LIBOR”).
The plaintiffs in the exchange-based action alleged violations of the Commodities Exchange Act and proposed to certify an exchange-based class comprised of traders of Eurodollar futures (EDF) contracts and options on EDF contracts who transacted on the Chicago Mercantile Exchange. The Court refused to certify this class on the grounds that the named plaintiffs could not adequately represent the class, issues individual to each class member were likely to predominate over issues common to the class, and that a class action was not superior to other means of adjudication. First, the Court found that the adequacy of representation requirement of FRCP 23(a)(4) was not met because the proposed class members’ divergent exposures to EDFs on different trading days created a conflict between class members that undermined the class representatives’ incentive to fully pursue the all the putative class members’ claims. The named plaintiffs would only be incented to represent the class’s interests on trading days when they held a net trading position that was harmed by any market manipulation, and they would be disincented from representing the class’s interests on days when their net trading position benefited from the manipulation. Second, the Court found that although the question whether the defendants had the ability to influence published LIBOR was common to the class, trader-based LIBOR manipulation occurred on a day-by-day basis and was “inherently episodic.” As a result, whether defendants intended to manipulate LIBOR on any particular day and whether that manipulation caused artificial EDF prices were questions that were necessarily individual to each class member based on the particular day they held a net trading position adversely effected by LIBOR manipulation and not susceptible to class-wide proof. Further, any damages calculation would require individualized analysis to the extent plaintiffs’ gains from the manipulation would need to be netted against their losses, another factor militating against predominance. Finally, the Court held that a class action was not superior to individual actions, including because class members had conflicts of interest with each other in that each had a “strong interest” in controlling the prosecution of individual actions where they could tailor the inquiry into the issue of trader-based manipulation on the days where they had adversely-affected net trading positions, as well as the manageability challenges presented by the individualized issues that would need to be resolved.
The plaintiffs in the lender action alleged state-law tort claims and proposed to certify a class comprised of all U.S. lending institutions “that originated loans, held loans, purchased whole loans, purchased interests in loans or sold loans with interest rates tied to USD LIBOR.” The Court denied certification of this class, finding that the sole named class representative could not adequately represent the class and that individual issues would predominate over issues common to the class. First, Mordchai Krausz, the son of named plaintiff Berkshire Bank’s CEO, had an agreement with the law firm serving as interim class counsel to receive 15% of any of the net fees the firm received from its participation in the litigation; this agreement was not disclosed until the class certification stage. The Court found that the existence of this relationship between Berkshire and class counsel was enough to raise at least an appearance of impropriety: the share of fees Krausz was likely to receive if the class action was successful—more than $300,000—was significantly more than the approximately $45,000 in damages Berkshire alleged in its complaint that it was seeking to recover, and Krausz’s limited role in the litigation (he had neither entered a notice of appearance nor signed any pleadings or filings) would be disproportionate to the fees he would recover. Second, as with the exchange-based class, the Court found that multiple individualized issues would predominate over the issues common to the class. The Court found that the issue of each class member’s reliance on LIBOR was not common to the class and instead was an individual question that required assessment of plaintiff-specific evidence. Further, the questions of whether a particular class member’s claim was subject to a statute of limitations defense and which state’s law governed its claim were individual questions that predominated over the questions common to the class as a whole. Thus, the Court held that, even absent the problems with counsel and the putative class representative discussed above, class certification was not appropriate both because common questions did not predominate and a class action would not be superior to individual actions.
The plaintiffs in the OTC action alleged violations of the Sherman Act, as well as state-law claims for unjust enrichment and breaches of the implied covenant of good faith and fair dealing, and proposed to certify a class consisting of all US persons or entities who purchased a LIBOR-based instrument that paid interest indexed to US dollar LIBOR from one of the LIBOR panel banks. The Court granted certification as to the antitrust claims, but denied certification as to the state law claims. As to the antitrust claims, the Court held that common questions would predominate over any individualized ones. First, the Court readily concluded that the allegation of a conspiracy to fix LIBOR was susceptible to common proof. With regard to injury and damages, the issue was more complex. Among things, defendants argued that the issues of “absorption” and “netting” required individualized analysis and could not be resolved by proof common to the class. Absorption refers to the principle that parties negotiating a LIBOR-based swap transaction consider both the current level of LIBOR and the anticipated level of LIBOR; if LIBOR is artificially suppressed at the time of the initial transaction, then both the expected future price and the purchase price would have reflected the lower LIBOR level, both of which need to be considered in assessing the harm, if any, caused by the alleged suppression. The concept of “netting” recognizes that losses to a class member as a result of the alleged manipulation must be offset by any gains the class member received as a result of the alleged manipulation. For example, the Court noted, a class member who engaged in hedging transactions to reduce LIBOR exposure would receive “an unwarranted windfall” if only the transactions in which it was injured, and not those in which it was benefited, by the alleged suppression, were considered. The Court agreed that these issues would require individualized analysis with regard to damages, but that individualized issues as to the quantum of damages alone were not sufficient to defeat predominance under Rule 23.
The Court then turned to the issue of whether “injury” could be proven on a class-wide basis. The OTC plaintiffs argued that a class member suffered an injury-in-fact once it incurred an injury, even if it suffered no loss after netting, and that the question of antitrust injury could be addressed by class-wide evidence that the published LIBOR rate was suppressed and impacted all class members. On the other hand, OTC defendants argued that a class member suffered a sufficient injury-in-fact only if the net impact of LIBOR manipulation resulted in it suffering damages greater than zero. The Court found, however, that the “definition of injury does not ultimately alter the predominance balance” because these individual questions of fact were already taken in account in the damages analysis and “should not be double-counted in the predominance inquiry simply because they bear on two closely related legal elements.” Because the Court found that the only individual questions “relate to damages – or injury in a manner that essentially overlaps with damages,” the Court held that common issues predominated and the class could be certified as to the antitrust claims.
As to the state-law contract claims, the Court noted that the different ISDA Master Agreements and accompanying transaction-specific schedules were governed by different choice of law provisions, which raised individualized questions of choice-of-law. With regard to the unjust enrichment claims, the Court held that they were not governed by the ISDA Master Agreement’s choice-of-law provisions at all. Instead, under New York’s choice-of-law rules, the Court would be required to apply the law of the state in which each individual class member resides or has a principal place of business. Because of the need to apply the law of multiple states with many significant variations among them, the Court found that these individual choice-of-law issues defeated predominance, and denied class certification as to these claims.