LIBOR Roundup: Fraud, Misrepresentation and New Directions in Civil Proceedings

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.

On-site ESMA Inspections: Chancery Division Gives Procedural Guidance

European Securities & Markets Authority (ESMA) v DTCC Derivatives Repository Ltd [2015] EWHC 1085 (Ch) (25 April 2015)

This is a first of a kind judgment given by Mrs Justice Rose. It involved the application of the European Securities and Markets Authority (ESMA) for authorisation to conduct an inspection at the premises of a trade repository, the DTCC Derivatives Repository Limited (DTCC), in England. Rose J began her judgment by clarifying that DTCC was not suspected of engaging in misconduct and that the intended inspection was simply part of ESMA’s general supervisory functions. DTCC, which was notified, agreed to cooperate fully with the visiting ESMA officials but the agency nevertheless required the High Court’s authority to proceed with the inspection. In light of the novelty of the situation, the court handed down a short judgment to set out the principles that apply to the exercise of ESMA’s power. The court reiterated the Chancellor’s guidance that future applications for authorisation by either ESMA or the Financial Conduct Authority (FCA) under regulation 17 of the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013 (the Domestic Regulations) can be submitted for consideration on the papers in certain cases.

First, where the company subject to the inspection has been informed of the inspection and has indicated its intention to submit to the inspection. Second, where the application is made by ESMA, that the FCA has been informed and does not wish to be heard at a hearing of the application. Third, the application does not seek a power to seal business premises or books and records, does not include a request for records of telephone and data traffic and does not request the issue of a warrant. Her Ladyship also said that the judge or master, on considering the application, may indeed decline to deal with the matter on the papers and direct that a hearing should take place.

Flaux J Vindicated: Court of Appeal on Amendment, Implied Representations and the Efficiency of LIBOR

Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372

The appeals from the High Court in Graiseley Properties Ltd & Ors v Barclays Bank Plc [2012] EWHC 3093 (Comm) (Flaux J, see post here) and Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm) (Cooke J, see post here) were decided by the Court of Appeal (Longmore & Underhill LJJ, Sir Bernard Rix) in Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372. In a robust but concise judgment, the Court unanimously allowed the appeal from Cooke J and dismissed the appeal from Flaux J.

The critical question before the Court of Appeal was, in relation to the two cases mentioned above in which banks were seeking to recover sums due under loan or swap agreements, whether the borrowers should be allowed to amend their pleadings in order to allege that the banks had made implied representations in respect of the efficiency of or the non-manipulation of the London Interbank Offered Rate (LIBOR).

LIBOR: Disclosure and Open Justice

Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors (Rev 1) [2013] EWHC 67 (Comm) (24 January 2013).

This is another judgment in interim proceedings in LIBOR related litigation in England and Wales. It was handed down in between the other judgments examined in this miniseries and in this application Flaux J was confronted with a slightly different set of issues. Following the amendment proceedings, at a Case Management Conference on 13 in November 2012 the issue arose as to the extent of electronic disclosure made by Barclays (B) because regulatory notices (in the US and UK) for LIBOR manipulation anonymised individual employees and reviews of employees’ email accounts. One could not discern the employees whose email accounts had been reviewed by regulators as opposed to those employees referred to in the notices in setting LIBOR. Like their US counterparts, UK regulators had investigated the manipulation of LIBOR and had made various findings.

During the investigation B’s employees’ e-mails were reviewed but the regulators’ findings did not name people. During the disclosure process, B was required to identify and state the position of the relevant employees. To ventilate disclosure, Flaux J ordered B to divulge to Graiseley (G) and the Court two lists (a) the 25 employees who were the subject of the notices (“short list”) and (b) the 207 employees whose emails were scrutinised by regulators (“long list”, encompassing the “short list”).

Subsequently, the Court was invited by the Department of Justice (DOJ) to (i) keep the names of all 207 to protect a US criminal investigation and (ii) maintain anonymity in respect of 30 persons’ identities referred to in the statement of facts because publicly disclosing this information could undermine the US investigation.

UK Supreme Court: Case Preview: Securitisation and the Balance Sheet Test

BNY Corporate Trustee Services Limited and others (Respondents) v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and others (Appellants) UKSC 2011/0086 and BNY Corporate Trustee Services Limited and others (Respondents) v Eurosail-UK 2007-3BL PLC (Appellant) UKSC 2011/0199 shall be heard by the UK Supreme Court on 25 and 26 February 2013. Lord Hope of Craighead DPSC and Lord Walker of Gestingthorpe, Lord Mance of Frognal, Lord Sumption and Lord Carnwath of Notting Hill JJSC will hear these appeals. This hearing can be viewed online during Court hours here.

Facts

Interest-bearing Notes were issued by a special purpose vehicle, Eurosail-UK 2007-3BL PLC (“the Issuer”), formed to hold income-producing assets, namely mortgage loans. Due to the insolvency of Lehman Brothers (see the earlier case decided by the UK Supreme Court involving Lehman Brothers here), with whom the Issuer had entered into swap agreements, the Issuer suffered a significant deficiency in its net asset position. The terms governing the issue of the notes provided that on specified Events of Default an enforcement notice could be served, the effects of which included altering the respective priorities of the Noteholders for repayment of capital and interest. One such Event of Default involved the issuer being unable to pay its debts within the meaning of section 123(2) – definition of inability to pay debts; “a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities” – of the Insolvency Act 1986. The trustee of the Noteholders’ rights, BNY Corporate Trustee Services Ltd, commenced the current proceedings seeking a determination of whether that event of default had occurred.

UK Supreme Court: Does the FSA Need to Give a Cross-Undertaking as to Damages in Favour of Third Parties?

On 12 and 13 December 2012, the UK Supreme Court will be hearing an extremely interesting appeal. The case of The Financial Services Authority (a company limited by guarantee) (Respondent) v Sinaloa Gold plc and others (Respondents) and Barclays Bank plc (Appellant) UKSC 2011/0244 concerns cross-undertakings, damages, freezing injunctions and third parties. The issue thrown up by the appeal is whether the Financial Services Authority (FSA) should generally be required to give a cross-undertaking in damages to third parties affected by a freezing injunction obtained pursuant to its statutory regulatory functions over and above the costs incurred in complying with the order. See Supreme Court’s judgment here. 

I. Background

The FSA regulates financial services and markets under the powers and duties conferred upon it by the Financial Services and Markets Act 2000 (FSMA). In December 2010, the FSA commenced proceedings in the Chancery Division against the three named defendants, Sinaloa Gold (S), PH Capital Invest (PH) and Mr Glen Hoover (GH), whom it alleged were involved in what is commonly referred to as a “boiler-room fraud” involving the sale of S’s shares.

VTB v Nutritek: Piercing the Corporate Veil: UK Supreme Court Preview

The truly important and absorbing case of VTB Capital plc (Appellant) v Nutritek International Corp and others (Respondents) UKSC 2012/0167 has made it to the UK’s court of final recourse which granted permission to appeal on 26 July 2012. The case is going to be heard for three days by Lords Neuberger, Mance, Clarke, Wilson and Reed JJSC from 12 to 14 November 2012 . There are a lot of issues in this case. Notably a couple of juicy ones are (1) whether the court can pierce the corporate veil and treat a person as a party to a contract if that person uses a puppet company to enter into a contract with a third party in order to perpetrate fraud on that third party and (2) when determining whether England is clearly the appropriate forum, is there a presumption that a defendant who has committed a wrong in England ought to answer for that wrong in England. For some reason this case is not being broadcast live. Maybe it is just too high profile and controversial to show live. Too bad …  because upon appeal to the UKSC, even Special Immigration Appeals Commission dealing with national cases are aired. 

Facts

VTB (“V”), a London-based bank (the appellant) entered a facility agreement with a Russian company (“R”) in 2007. Under that agreement, V loaned R $225m to fund the purchase of six Russian Dairy Plants (“the dairy companies”) from the first defendant (Nutritek, “D1”: the “defendants” (at first instance) also became the “respondents” in subsequent proceedings). R subsequently defaulted on the loan. In 2010, V began claims in deceit, alternatively conspiracy to defraud, against the defendants. In May 2011, Chief Master Weingarten granted permission to serve the claims on the defendants out of the jurisdiction. In August 2011, V obtained a worldwide freezing order against Konstantin Malofeev or “D4”: see below.

Rubin and New Cap: Massive UK Supreme Court Ruling on International Insolvency, Enforcement and Jurisdiction

Rubin & Anor (Joint Receivers and Managers of the Consumers Trust) v Eurofinance SA & Ors [2010] EWCA Civ 895 and New Cap Reinsurance Corporation Ltd & Anor v Grant & Ors [2011] EWCA Civ 971 were interesting cases and threw up important issues in international insolvency law. The UK Supreme Court has decided these cases as Rubin & Anor v Eurofinance SA & Ors [2012] UKSC 46. Broadly, the court’s judgment shed much needed light whether a foreign court’s order or judgment to set aside anterior transactions such as preferences or transactions at an undervalue (or avoidance proceedings) were (1) recognisable and enforceable in England and Wales and (2) enforceable through the international assistance provision of the UN Convention on International Trade Law (“UNCITRAL”) Model Law – which is implemented through the generally applicable Cross-Border Insolvency Regulations 2006 (“CBIR”) – or the assistance provisions of section 426 of the Insolvency Act 1986 (“IA86”) which applied to a limited number of countries including Australia. The Supreme Court held that the Dicey Rule, set out below at the end of this post, which arises from the operation of common law and  Foreign Judgments (Reciprocal Enforcement) Act 1933  (“the 1933 Act”), applied to foreign judgments in avoidance proceedings in insolvency.

Background in the Court of Appeal

I. Rubin & Anor (Joint Receivers and Managers of the Consumers Trust) v Eurofinance SA & Ors [2010] EWCA Civ 895

Rubin and others, the appellants (A), were receivers who appealed against Nicholas Strauss QC’s [2009] EWHC 2129 (Ch) decision to dismiss their application for enforcement of a New York judgment against Eurofinance and others, the respondents (R) who cross-appealed against the recognition of the New York proceedings as foreign main proceedings and the recognition of the appointment therein of A as foreign representatives. R had created a trust, operating under English law, and conducted a sales promotion scheme in Canada and the US. Money from the scheme received by the trust was distributed to R and others.

Case Comment: SerVaas Incorporated v Rafidian Bank & Ors

SerVaas Incorporated v Rafidian Bank & Ors [2012] UKSC 40. SerVaas (S), the appellant US judgment creditor (incorporated in Indiana) appealed against the Court of Appeal’s decision that monies due to the Republic of Iraq under a scheme of arrangement for distribution of assets relating to Rafidian (R), the Iraqi respondent bank, were immune from execution by reason of section 13 of the State Immunity Act 1978. S had entered into an agreement for supplying equipment and machinery to the Iraqi Ministry of Industry a couple of years prior to Saddam Hussein’s 2 August 1990 invasion of Kuwait. (R’s UK assets were frozen under the sanctions that followed in the wake of the invasion.)

In the two decades since (1) this case has been litigated in the Paris Commercial Court – which found in S’s favour for US$14,152,800; (2) the Netherlands subsequently recognised that judgment and S recovered US$966,515 against Iraq’s assets there; and (3) US$6,736,285 was paid to S by the UN claims commission for loss suffered due to the Gulf War. In a complicated series of developments from 2003 until 2008 involving a debt cancellation agreement and debt restructuring under the Iraqi Debt Reconciliation Office, a scheme of arrangement for the distribution of assets held by the Provisional Liquidators to R’s creditors was ultimately sanctioned. Claims in the sum of US$253.8 million were admitted in the scheme (“the Admitted Claims”).