ICE Benchmark Administration
, which took over LIBOR from the BBA in 2014, has published a roadmap for LIBOR and banks will no longer be able to manipulate the interbank rate once a new system comes into place this summer connecting the IBA’s computers to banks’ trading systems. “We built new systems to do the surveillance which run about 4m calculations every day, looking for collusion, or aberrant behaviour, or possible manipulation,” explained the IBA’s president Finbarr Hutcheson. He expressed confidence that traders will no longer be able to lie to improve their trading positions and said that anomalies would be investigated and reported to the FCA. The banks have paid billions in fines in relation to the benchmark’s manipulation. The Wheatley Review 2012 engineered and guided LIBOR’s transformation because the distorted benchmark, underpinning more than US$350 trillion in outstanding contracts, was “not fit for purpose”. But of course, the review’s author Martin Wheatley was ousted from office because of his overt aggressiveness, or his “shoot first” and “ask questions later” policy for bad banks. Under IBA oversight, daily LIBOR rates will be rooted in market transactions “to the greatest possible extent” by using a “waterfall” system devised to begin with transactions but relies on human input in circumstances when trading volumes decline.
IBA is extremely confident that the move will bring rectitude to the scandal ridden financial sector. Hutcheson said that coupled with the earlier changes, the roadmap will ultimately make LIBOR “one of the world’s most trusted, scrutinised and robust financial benchmarks.” Insofar as benchmark rigging from the old days is concerned, after the settlement (2014) in the series of reported judgments in the Graiseley Properties case, new claims have been brought and a series of fresh judgments were published in litigation arising out of disputes between the Property Alliance Group – a property developer with a portfolio worth about £200 million – and the Royal Bank of Scotland. RBS has been in the spotlight recently because of the fact that it has failed to generate profit for eight successive years and that its losses since the global financial crisis 2008 have exceeded £50 billion which is more than the £45 billion of taxpayers’ money used to bail out the ailing institution.
Excluding fines imposed by the US Department of Justice and individual states, the bank’s total provisions for civil cases amount to £3.8 billion. It has recently taken a £1.5 billion provision to cover civil claims totalling £32 billion brought mainly by Federal Housing Finance Agency. Moreover, RBS’s privatisation, which is Britain’s biggest, is plagued by problems and events have also given rise to Andrew Tyrie (the chair of the Treasury Select Committee) making demands for a review by the National Audit Office in relation to the sale of the bank’s shares. But of course somewhat inexplicably, the bailed-out bank paid its top bosses £17.4 million in rewards for failure despite an annual £2 billion loss (2015) – the bank’s CEO Ross McEwan netted £3.8 million in a pay deal.
Such hard facts are of particular concern because the government still faces the uphill challenge of privatising the bank. The roundup below sheds light on emerging developments in civil proceedings.
Litigation Context
Between 2004 and April 2008, PAG and RBS entered into four interest rate derivatives or swaps. Each product used 3 month GBP LIBOR as a reference rate and an important facet of the case is the allegation by PAG that various misrepresentations made by RBS in connection with the setting of LIBOR induced the swaps or that the swaps themselves contain implied terms in connection with the conduct of RBS relating to LIBOR. The case is set for trial in May 2016 and is expected to last 6-8 weeks. The judgments below shed light on this ongoing LIBOR litigation in England and Wales. Apparently, the value of the claim is £29 million.
Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2015] EWHC 321 (Ch) (19 February 2015)
AS noted, the action was concerned with interest rate swaps entered into by PAG and RBS for which the reference rate used was GBP LIBOR. RBS denied misconduct and applied for an order that it was not required to permit inspection by PAG of a document attached to the bank’s deferred prosecution agreement (see here) with the US DoJ. Along with numerous others, RBS had achieved settlements with regulators for benchmark manipulation. In the DPA, the bank admitted misconduct relating to the Japanese Yen and Swiss Franc LIBOR. The said document contained a list of benchmark rates, in addition to the Yen and the Swiss Franc rates. However, a footnote to the DPA said that the document was to be held in confidence, and it had been placed under seal by a US court.
Distinguishing Graiseley Properties Ltd v Barclays Bank Plc [2013] EWHC 67 (Comm), see here, because those proceedings involved a confidential document for which the confidentiality related to ongoing criminal investigations by a competent authority in a foreign state, and the authority had specifically asked for the document to remain confidential, Birss J held that the document was potentially of real significance and its disclosure was likely to assist the company and the court in dealing with the case. Whilst it was a confidential document, confidentiality was not a reason not to order disclosure and inspection and RBS was required to produce the document for inspection within four weeks. However, neither party could refer to the document in open court without the court’s permission.
Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2015] EWHC 322 (Ch) (19 February 2015)
PAG applied for an order for disclosure of five reports produced by RBS to the Japanese Financial Services Agency. However, RBS argued that the JFSA objected to the inspection of the reports on the basis that it would be detrimental to the regulation of financial services in Japan. The bank also maintained it would be in conflict with Japanese law if it were ordered to produce the documents for inspection. The reports were potentially highly relevant to the claim and it was inferable that the reports addressed alleged manipulation of LIBOR by bank staff.
The JFSA’s interests in maintaining financial stability were not in play as RBS’s Japanese yen and Swiss Franc LIBOR misconduct was a matter of public record and the question of the extent of the LIBOR manipulation was a matter of public interest. Applying Graiseley Properties Ltd v Barclays Bank Plc [2013] EWHC 67 (Comm), the court weighed the foreign regulators’ anxieties against the obvious and compelling public interest in establishing the full extent of the manipulation. RBS was ordered to produce the reports for inspection and once produced they would be subject to CPR rule 31.22 which prevents their use apart for the purposes of the proceedings. A further safeguard meant that permission would be needed before any reference was made to the reports in open court.
Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2015] EWHC 1557 (Ch) (08 June 2015)
In determining the extent to which RBS had to disclose documents to PAG, which is suing the bank for misrepresentation, it was correct that as the subject of a FCA investigation the bank had a right to withhold inspection of communications that were part of genuine settlement discussions between them and the authority by analogy with the without prejudice rule. However, if the basis on which a final notice was decided was itself in contention in civil proceedings, for example if the subject positively relied on what was absent from the notice, the content of those settlement discussions would be admissible evidence.
RBS submitted that it was entitled to withhold inspection of the special committee documents based on legal advice privilege, as the committee had been formed solely to receive legal advice. It moreover argued that its communications with the authority during the FCA’s investigation were covered by without prejudice privilege. PAG submitted that the bank had waived any privilege that might have existed concerning six of the documents because it had shown them to regulators. The court said at para 114:
RBS really cannot have it both ways. It cannot on the one hand rely on the absences from the regulators’ findings as indicating the limits of its misconduct and yet on the other hand seek to maintain as privileged what it put to them.
As seen above, RBS admitted involvement in rigging the LIBOR for Japanese Yen and Swiss Franc LIBOR but denied misconduct in setting the GBP LIBOR. The court had previously ordered the bank to disclose material relating to all LIBOR currencies – the said material consisted of around 25 million documents. To limit disclosure, RBS was ordered to disclose high-level documents from its executive steering group but it claimed legal advice privilege over them.
Snowden J held that RBS had been entitled to claim legal advice privilege over documents prepared by its lawyers in the context of regulatory investigations which were part of a continuous sequence of communication between them, whose purpose was the impartation of legal advice. RBS argued that the documents consisted of confidential memoranda in the form of tables, prepared by its lawyers to advise and update on the progress of and issues thrown up in the regulatory investigations, and confidential summaries of meetings, also produced by RBS’s lawyers, giving their views on the investigations. The documents were produced to the court for inspection to determine whether the privilege claim was well-founded.
After disclosure relating to the issue of LIBOR had occurred, PAG wanted to amend the particulars of claim by, among other things, giving further details of its allegations of LIBOR misconduct on the bank’s part and adding a plea that the bank had made representations concerning LIBOR fraudulently. Birss J held that where allegations of the mis-selling of swap contracts by a bank are made, it is appropriate to allow the claimant to amend the particulars of claim by, among other things, adding a plea that the bank had made representations concerning LIBOR, the reference rate used under the swap contracts, fraudulently.
Permission was granted to PAG to amend its particulars of claim against RBS to plead fraudulent misrepresentation. Birss J commented that the contents of disclosures were “striking”. PAG alleged that given the “number of employees involved and their seniority the allegations show an approach and attitude within RBS to the manipulation of LIBOR that goes well beyond isolated instances of wrongdoing and amount to an ongoing regime within RBS in which misconduct relating to LIBOR was practised and condoned”.
This was only an interim application to amend, but the mere fact that the judge considered PAG to have set out, sufficiently, full particulars of the allegation to justify an amendment, is of significant note. Proving the allegation is, however, another matter – yet to be tested at trial. The court held that PAG’s case was plainly properly arguable. The material relied on and set out in the amended particulars provided enough prima facie support for an inference of fraud and dishonesty at the highest level in RBS. The material showed that, arguably, members of RBS’s board were aware that LIBOR was “broken” during a period in which the bank was selling swaps to the claimant referable to LIBOR.
RBS applied for disclosure of evidence which PAG contended was privileged. Birss J held that in circumstances where a litigant had secretly recorded meetings he had had with two of RBS’s former employees, the recorded conversations and their transcripts were not privileged information. In light of Three Rivers DC v Bank of England (Disclosure) (No.4) [2004] UKHL 48, Birss J held that the test for establishing litigation privilege was whether the recordings and transcripts had been produced for the “dominant purpose” of conducting litigation. On the other hand, applying Grant v Southwestern and County Properties Ltd [1975] Ch 185 and Parry v News Group Newspapers Ltd Times, November 22, 1990, litigation privilege could not apply to a verbatim recording of a conversation made for use in litigation, or the transcript of such a recording, unless the conversation itself was privileged.
The court held that although the litigant had arranged the meetings with the dominant purpose of gathering evidence for his claim, as was required in establishing litigation privilege, he had actively deceived the employees, who believed they were meeting to discuss future business. Consequently, the dominant purpose requirement was not made out.
Property Alliance Group Ltd v Royal Bank of Scotland Plc [2016] EWHC 207 (Ch) (27 January 2017)
RBS applied to transfer proceedings to the Financial List. Sir Terrance Ethertorn, chancellor of the High Court, found that the claim (for around £29 million) alleging that RBS had acted improperly in relation to fixing LIBOR was transferred to the Financial List of the High Court as it was in the nature of a lead case that would have repercussions elsewhere. PAG specifically alleged that the bank had made express/implied fraudulent misrepresentations and that it had breached its duty of care to ensure the truth of its representations, giving rise to a right to rescission and damages under various heads.
PAG relied on a 2013 government report raising serious concerns about the strategies RBS had used to improve its financial position. RBS denied that there was a customer agreement as alleged, and relied on its terms of business, including that PAG had undertaken to seek independent advice, and, denying the PAG’s reliance, that it had not held itself out as a financial advisor in any fiduciary capacity. RBS also contended that the developer was estopped from resiling from its contractual representations.
The chancellor said the definition of a Financial List claim under CPR 63A included both cases where the amount claimed is over £50m and those raising “issues of general importance” to the financial markets. He explained that the allegations by PAG “concerning the alleged improper conduct of RBS in relation to the fixing of LIBOR rates” involved “important issues of general market significance”. The court said:
43. … It is well-known, that there are others who have claims, and are now or are likely in the future to be litigating, in relation to similar issues arising out of the alleged rigging of LIBOR rates. It seems reasonably clear that the judgment following trial in the present proceedings will have an impact on other cases already launched and those which will be launched in the future. It is also likely that decisions about provisions in the agreements between RBS and PAG limiting RBS’s exposure to claims for negligence will have relevance elsewhere in the markets.
44. Allied to those considerations is the point that if, particularly in relation to the LIBOR allegations, this case is to be viewed in a general sense as a test or lead case, which will be followed by others suitable for and likely to be commenced in or transferred into the Financial List, it is desirable that it be dealt with by a judge of the Financial List in order that the judgment following trial carries appropriate weight and respect in the financial markets.
Graiseley Properties v Barclays
It will be interesting to see whether the instant litigation will end up like the Graiseley case, which was settled out of court in April 2014 because the parties decided to bury the hatchet. It saved the then Barclays CEO Bob Diamond the embarrassment of being cross-examined as a witness. The case was withdrawn and Barclays agreed to settle the £40 million claim brought by Guardian Care Homes (Graiseley is Guardian’s parent). Issuing identical statements both Barclays and Graiseley had said:
In order to support the ongoing viability of Graiseley’s care home business, the parties have signed a restructuring of Graiseley’s debt. This reflects the impact of changes in conditions to the sector over the past few years. Graiseley has withdrawn the litigation.
Comment
Just for completeness, it is also worth noting that in the case of Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2016] EWCA Civ 119 (03 March 2016), the Court of Appeal (Longmore, Christopher Clarke and Sales LJJ) considered two claims for recovery of sums under credit facility and interest rate swap agreements which were pegged to LIBOR as a reference rate in calculating interest.
In earlier proceedings, the defendants had been given permission to amend their defences to plead misrepresentation about the accuracy of LIBOR but had been refused permission to make certain other amendments to their defences. Delivering the judgment of the court, Longmore LJ held that Teare J had been right to refuse to allow the guarantor to argue that the claimants had failed to disclose unusual features of the credit agreement or relationship and that the guarantor should therefore be discharged from its liability. Among other things, the court held that the terms of the facility agreement precluded the application of the doctrine of unusual features.
Asad Ali Khan, BA, MSc, MA, LL.B (Hons), LL.M
Global Corporate Law 
[…] but questioned its current usefulness. Among other things, LIBOR related misconduct resulted in civil claims and fines. And, of course, in the criminal context it resulted in “clustered criminality” of […]