Posted on 01 November 2013.
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
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FEDERAL NATIONAL MORTGAGE ASSOCIATION,
BARCLAYS BANK PLC; UBS AG; THE ROYAL BANK OF SCOTLAND GROUP PLC; THE ROYAL BANK OF SCOTLAND PLC; DEUTSCHE BANK AG; CREDIT SUISSE GROUP AG; CREDIT SUISSE INTERNATIONAL; BANK OF AMERICA CORPORATION; BANK OF AMERICA, N.A.; CITIGROUP INC.; CITIBANK, N.A.; J.P. MORGAN CHASE & CO.; J.P. MORGAN CHASE BANK, N.A.; COOPERATIVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., BRITISH BANKERS ASSOCIATION; and BBA LIBOR, LTD.,
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Plaintiff Federal National Mortgage Association (“Fannie Mae”), by its counsel, alleges as follows:
1. This case arises from the pervasive—and, as to four Defendants, admitted—manipulation of the London Interbank Offered Rate for the U.S. dollar (“USD Libor” or “Libor”). Defendants’ wrongful conduct caused Fannie Mae, a government-sponsored enterprise charged by Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets, to suffer hundreds of millions of dollars in direct, foreseeable damages.
2. Libor has served as the benchmark interest rate for hundreds of trillions of dollars of financial instruments. For years, the British Bankers Association (BBA) calculated Libor each day based on the rates that sixteen major banks, including Barclays, UBS, RBS, Deutsche Bank, Credit Suisse, Bank of America, Citibank, JPMorgan, and Rabobank (collectively the “Libor Panel Defendants”) reported as their costs of borrowing. Under BBA rules, each contributing bank was required to submit quotes at which the bank believed it could borrow unsecured interbank funds in the London market.
3. During the relevant period, Fannie Mae entered into and performed on a huge volume of transactions—including interest-rate swaps and purchases of mortgages, mortgage-backed securities, and variable-rate loans—pursuant to which it was to receive or pay an interest rate that was indexed to Libor. In Fannie Mae’s interest-rate swaps, which were governed by written contracts promulgated by the International Swaps and Derivatives Association (ISDA), Fannie Mae’s counterparties (which included every Libor Panel Defendant except Rabobank) promised, among other things, that they would calculate, value, and settle transactions at a legitimate, honest Libor rate—that is, a rate determined in good faith and in compliance with the legitimate benchmark-setting process established by the BBA. In connection with all of Fannie Mae’s Libor-indexed transactions, the Libor Panel Defendants and BBA represented, among other things, that Libor was based on honest submissions that were consistent with the published definition of Libor.
4. Unbeknownst to Fannie Mae, Defendants’ promises and representations regarding the legitimacy of Libor were false. Convincing evidence now demonstrates that the Libor Panel Defendants, with active assistance from each other and the BBA, wrongfully suppressed Libor during the relevant period.
5. Four banks—Barclays, UBS, RBS, and Rabobank—recently settled regulatory actions alleging Libor manipulation and entered into non-prosecution or deferred prosecution agreements. In the settlement documents, these Defendants admitted making false and misleading Libor submissions. First, Barclays acknowledged that it “often submitted inaccurate Dollar LIBORs that under-reported its perception of its borrowing costs and its assessment of where its Dollar LIBOR submissions should have been.”1 Second, UBS conceded that it “used false benchmark interest rate submissions, including U.S. Dollar LIBOR, to protect itself against media speculation concerning its financial stability during the financial crisis.”2 Third, RBS “inappropriately considered the impact of LIBOR and RBS’s LIBOR submissions on the profitability of transactions in its money market trading books as a factor when making (or directing others to make) . . . USD Libor submissions.”3 Fourth, “Rabobank swaps traders requested that certain Rabobank LIBOR and Euribor submitters submit LIBOR and Euribor contributions that would benefit the traders’ trading positions, rather than rates that complied with the definitions of LIBOR and Euribor.”4
6. The remaining Libor Panel Defendants—Deutsche Bank, Credit Suisse, Bank of America, Citibank, and JPMorgan—are all the subject of regulatory investigations regarding alleged Libor manipulation. The United Kingdom’s Serious Fraud Office recently charged a former UBS and Citigroup trader with conspiring with employees of eight banks, including Deutsche Bank and JPMorgan, to “dishonestly seek to manipulate [Libor] . . . with the intention that the economic interests of others would be prejudiced and/or to make personal gain for themselves or another.”5 In response to the charges, the former trader has stated that other senior-level executives at Citigroup were aware of and condoned his actions.
7. Like those banks that have admitted wrongdoing, the other Defendants’ Libor quotes were consistently lower than comparable benchmarks. From 2002 to 2006, for example, the spreads between the Defendants’ Libor quotes and the Eurodollar Deposit Rate varied between 0.01% and 0.03%. From 2007 until the middle of 2010, the spreads not only turned negative, but were significantly inverted with values ranging from -0.24% to -0.33% on average. The spreads between admitted-manipulator Barclays’ Libor quotes and the Eurodollar Deposit Rate were generally the smallest among the Libor Panel Defendants.
8. A comparison of the Libor Panel Defendants’ quotes with their credit default swap spreads tells the same story. From August 2007 to June 2010, approximately 80% of Citibank’s quotes fell below the median Libor quote for the day while on the same day its credit default swap spread was above the median. The same was true for approximately 40% of Bank of America’s submissions, about 30% of UBS’s submissions, a little less than 30% of RBS’s and JPMorgan’s submissions, and 20% of Deutsche Bank’s and Barclays’ submissions.
9. The Chairman of the United States Commodity Futures Trading Commission (CFTC) recently described the Libor scandal in the following blunt terms:
[A]s law enforcement actions brought by the CFTC, the FCA and the U.S. Justice Department, among others, have shown, LIBOR and other benchmarks have been readily and pervasively rigged. Barclays, UBS and RBS paid fines of approximately $2.5 billion for manipulative conduct relating to these rates. At each bank, the misconduct spanned many years. At each bank it took place in offices in several cities around the globe. At each bank it included numerous people – sometimes dozens, among them senior management. . . . And in each case, there was evidence of collusion with other banks. In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehood more widely. Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputations.
10. Fannie Mae estimates that it suffered approximately $800 million in damages as a direct and foreseeable result of Defendants’ concerted suppression of Libor. Fannie Mae sustained these damages on swaps, mortgages, mortgage-backed securities, and other variable-rate transactions with Defendants and other counterparties. Of its total damages, Fannie Mae estimates that it lost $332 million on interest-rate swaps with Barclays, UBS, RBS, Deutsche Bank, Credit Suisse, Bank of America, Citibank, and JPMorgan.
11. Fannie Mae now seeks relief for all of the damages that it suffered as a result of Defendants’ unlawful actions and asserts claims for breach of contract, breach of the implied duty of good faith and fair dealing, fraud, aiding and abetting fraud, and conspiracy to commit fraud.
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