City Sues To Recover LIBOR Losses

The City of Philadelphia has filed a lawsuit in the US District Court for the Eastern District of Pennsylvania against a number of Wall Street banks responsible for setting the London Inter-Bank Offered Rate (“LIBOR”), alleging the banks’ efforts to suppress LIBOR caused significant financial harm to the City of Philadelphia, and many others.

The suit was filed on behalf of the City by Quinn Emanuel Urquhart & Sullivan LLP, Obermayer Rebmann Maxwell & Hippel LLP and Boni & Zack LLC.

The complaint alleges by mid-2007 the banks were secretly conspiring to suppress LIBOR – an index that was used to set the parties’ obligations under certain financial instruments. By conspiring to lower the reported LIBOR rate, the banks artificially reduced the amounts they would have to pay to the City of Philadelphia and increased how much the City of Philadelphia had to pay, causing the City to lose the promised financial benefits of the instruments.

“Cities and others paid for those benefits in reliance on the trustworthiness of the LIBOR rate, and on other rates based on LIBOR. The systematic suppression of LIBOR, as our attorneys have uncovered, caused financial harm to the City of Philadelphia,” said Rob Dubow, the City’s director of finance.

“We believe that the suppression of LIBOR caused similar harm to other cities, counties, and state governments and authorities nationwide,” said Steig D. Olson of Quinn Emanuel. “This conduct, which was kept secret for years, impacted the City of Philadelphia and many other governmental entities at a time when budgets were already being strained by the financial crisis.”
“Defendants in this case worked together to suppress LIBOR, which had the immediate effect of raising the amount paid by the municipal party. This is because, when the banks suppressed LIBOR, their obligation under the floating-rate arm of the swap was reduced, and thus the net amount the state or local counterparty had to pay increased,” according to the complaint from the City of Philadelphia.

“This conduct is nothing short of naked price-fixing,” it said.

In the last 20 years, the interest-rate swap system has operated on hundreds of trillions of dollars’ worth of state and local bonds, according to the complaint.
Other local governments getting in on the suing include Baltimore, San Diego, Sacramento and Houston.

During the 2007-2009 period banks often communicated with each other in order to submit lower borrowing rates to be calculated. They did this to appear healthy — even though they were the opposite of that. Banks lent at lower interest rates, collected less profit in return and their clients — which often included cities and governments and financial institutions — in turn received less cash which went to the police, fire departments, etc.

The New York Federal Reserve Bank knew about the rigging and suggested a change in the process — but the British Bankers Association, which oversees LIBOR, was slow to respond.
Those cities which are suing are doing so both because of the inflated and deflated rates. Philadelphia is also claiming in its lawsuit that it had to pay “sometimes devastating” penalties to terminate its investment agreements — which includes nearly $110 million between 2009 and 2011.

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