Investment funds accuse banks of rigging interest rate benchmark

Section:

By Dan McCrum
Financial Times, London
Tuesday, April 19, 2011

http://www.ft.com/cms/s/0/b2f28160-6a13-11e0-86e4-00144feab49a.html

Three investment funds have accused a group of US, European, and Japanese banks of conspiring to manipulate the benchmark interest rate used to calculate the cost of billions of dollars of debt.

The 12 banks named in the suit filed in a New York federal court are accused of harming investors by selling derivatives based on artificial prices between 2006 and 2009.

The suit revolves around the London interbank offered rate, or Libor -- the estimated cost of borrowing for banks between each other set daily by the British Bankers' Association.

... Dispatch continues below ...



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FTC Capital, based in Vienna, and two FTC Futures Funds registered in Luxembourg and Gibraltar contend in the complaint that the banks "collectively agreed to artificially suppress the Libor rate."

"During the most significant financial crisis since the Great Depression, U.S. dollar Libor rates submitted by contributor banks did not vary markedly, nor did they increase or decrease sharply," the complaint said.

The plaintiffs are seeking unspecified damages and class action status for derivative investors harmed in a jury trial.

"We believe the suit is without merit," Citigroup said.

The other banks named in the suit either declined to comment or spokesmen could not be reached.

They are Bank of America, Barclays, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds Bank, Norinchukin Bank, Royal Bank of Scotland, UBS, and West LB.

The lawsuit comes as regulators in the US, Japan, and UK are investigating whether some of the biggest banks acted in concert to manipulate the benchmark interest rate.

Libor, which measures the rate banks charge each other, is used as a reference for about $350,000 billion in financial products, making it one of the world's most closely watched indices. Very small changes can have a huge knock-on effect on products such as interest rate derivatives and loans that are pegged to the rate.

"Because different banks were experiencing different levels of severe stress, the banks should have been receiving markedly different borrowing rates. None of this was reflected in the Libor rates reported," said the complaint.

The complaint argues that the banks had two motives for suppressing Libor: "to avoid having the market doubt their financial stability" and "to take advantage of insider trading opportunities their inside information would provide in the Libor-based derivative market."

The process to set dollar Libor involves 20 banks submitting their borrowing costs every day at about 11am.

The top and bottom five are discarded and the rate is then calculated from an average of the remaining 10.

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