Probably the first of many case to be taken against the banks for the Libor scandal as Baltimore City looks set to be first up. The difficulty is going to be the burden of proof whereby Baltimore has to show that the allege fixing in London directly affected Baltimore. This could open the floodgates to similar lawsuits from other US cities.
Baltimore is lead plaintiff in a class action lawsuit that alleges that banks including Barclays, Bank of America, HSBC, JP Morgan and UBS conspired to fix a set of key interest rates – the London Interbank Offered Rate, or Libor – costing the city millions in the process. So far, the Libor scandal has played out mostly under the radar in the US. But now it is gaining traction in Washington, and Baltimore’s suit is putting a human face on a scandal legal experts predict could end up being the most costly of the credit crisis.
Firefighters, services for the elderly, school programmes – all these and more are being cut as a direct result of the actions of colluding bankers, Rawlings-Blake claims.
According to the court documents, Baltimore bought “tens of millions of dollars worth of interest-rate swaps” during the period when the alleged fixing took place. The suit, filed with top Washington law firm Hausfeld, alleges that between August 2007 and May 2010 the defendants conspired to suppress Libor below the levels at which it would have been set had they accurately reported their borrowing costs. Those manipulations had “severe adverse consequences” for Baltimore and others, according to the suit. Other cities are watching carefully and a raft of litigation is expected in the US.
The city had no choice but to fight, said Rawlings-Blake. “We are faced with closing fire companies, closing recreational centers … We have services that have been cut year after year; services that people depend on. Opportunities for young people, the cleanliness of the city: everything is affected by the budget,” she said.
Ultimately the US may take an Anti-trust case similar to that taken against the tobacco industry.
Stephen Bainbridge, a professor of law at UCLA, said the case was “one of the worst examples of abuse of trust that I can remember in 25 years of following corporate governance”. Given the scale of Libor’s influence, Bainbridge said, this could emerge as “the defining financial scandal of the meltdown”.
Bainbridge believes the justice department may build an anti-trust case against those involved that could ultimately lead to a settlement as large as that agreed in the US’s massive suit against the tobacco industry. Anti-trust laws allow three times the damages for those convicted of collusion.
But he believes a suit like Baltimore’s may prove harder to prove. The city’s lawyers will have to prove direct “loss causation” – in other words, that bankers allegedly fixing rates in London directly hit Baltimore’s bank balance.
“Proving that chain of events can be difficult,” said Bainbridge.