The stakes are rising in lawsuits against big banks over allegations they rigged benchmark interest rates, as some large investors may opt out of a massive class action and strike out on their own.
Competing lawsuits could drive up the legal costs for the banks, which are accused of colluding to manipulate the global benchmark Libor rate that sets prices on $350 trillion (224 trillion pounds) of derivatives and other financial products.
Barclays PLC (BARC.L) agreed on June 27 to pay $453 million to U.S. and British authorities to resolve the rate manipulation allegations, becoming the first bank to settle the investigation. The scandal led to resignation of Barclay's chairman, chief executive officer and chief operating officer in the past week.
Some investors are discussing "opting out" of several pending class-action lawsuits against a group of bank defendants as a way to remain in control of their cases, plaintiffs' lawyers say. Doing so could give them more power in directing the course of the litigation, or negotiating a potential settlement with the bank defendants on their terms.
Already, Charles Schwab Corp (SCHW.N) has filed its own lawsuit against the banks stemming from the Libor allegations rather than join one of the proposed class actions, which allow plaintiffs to pool resources, sue collectively and then divide jury awards or settlements among the group. All of the pending cases have been consolidated before a federal judge in New York.
More than a dozen banks, including Citigroup (C.N), HSBC (HSBA.L) and UBS UBSN.VX, have been caught up in the probe and have been sued in proposed class-actions by plaintiffs including the city of Baltimore and Frankfurt-based Metzler Investment GmbH, which manages 47 billion euros in assets. The plaintiffs brought antitrust claims against the banks, saying they were bilked of potentially billions of dollars.
The lawsuits have been organized into classes of investors, which would include those harmed by the alleged collusion even if they did not sue. The classes, which would need to be approved by U.S. District Judge Naomi Buchwald, cover plaintiffs who purchased Libor-linked securities from the banks, those who traded through exchanges securities tied to Libor and those who invested in securities that paid interest based on Libor.
The litigation has several procedural hurdles to clear over the next year to 18 months, beginning with motions to dismiss that the defendant banks filed on Friday. The banks argued the cases should be thrown out because they failed to show the defendants acted jointly to restrain competition.
"Their only complaint is that the reported rates were allegedly inaccurate, causing (U.S. dollar) Libor to be lower than it otherwise would have been," the banks said in court papers. "Whether that is true or not, it has nothing to do with competition, among defendants or anyone else."
Several attorneys not involved in the litigation said the alleged manipulation did not easily lend itself to forming classes, because many plaintiffs would have been affected differently at different times.
"You don't really need a class here," said Daniel Brockett of law firm Quinn Emanuel Urquhart & Sullivan in New York, who has represented large institutional investors in litigation. "Most investors are huge institutions that can bring their own claims."
Brockett's firm could stand to gain if it lands an opt-out plaintiff as a client.
"I can tell you a lot of major investors are looking at this because the facts that came to light because of Barclays are pretty damning," he said.
Thomas Hatch, who represents institutional investors at the law firm Robins, Kaplan, Miller & Ciresi, said investors were examining the possibility of opting out as a way to direct their own cases, rather than ride along with a class action.
Multiple lawsuits would likely cost the banks more to fight, and their legal headaches could be prolonged if they end up resolving some lawsuits but fighting others.
Barclays, Citigroup, HSBC and UBS declined to comment on the litigation. Lawyers for plaintiffs in the proposed class-action cases did not return phone calls or emails seeking comment.
Opting out of class actions can bring huge rewards for plaintiffs. For instance, the state of Alaska said in 2007 that its $60 million securities fraud settlement with Time Warner Inc (TWX.N) was 50 times what it would have recovered as part of a class action against the company. The case involved allegations that the media company misled investors about AOL, with which it merged in 2001.
Under a class-action settlement, Time Warner agreed to pay $2.65 billion. Opt-out settlements cost it at least an additional $795 million, according to Oakbridge Insurance Services, which provides executives with liability coverage.
Still, going it alone can be risky -- there is no guarantee that a plaintiff will be more successful alone than suing as part of a class. The Libor-rigging case also could drag on for years, and opting out could be prohibitively expensive for all but the wealthiest investors, such as insurance companies and large pension funds.
Attorneys who represent a class work on a contingency basis. Plaintiffs who opt out would need large potential claims to attract their own contingency-fee lawyer. If not, they'd need the money to pay for legal counsel.
"You have to have huge damages and huge liability and huge settlements to even think about opting out," said Adam Savett, founder of TXT Capital, a firm that advises plaintiffs on whether to remain in class actions.
The Libor litigation involves claims that trillions of dollars of securities were potentially affected. In addition, the cases are brought under antitrust laws, allowing courts to award treble damages.
Charles Schwab claims it bought about $660 billion of fixed-rate and floating-rate securities affected by the alleged Libor manipulation. The financial services company does not put an exact figure on damages, but says in court documents that Libor-rigging banks reaped "hundreds of millions, if not billions, of dollars in ill-gotten gains" at Schwab's expense.
One critic of the banks' practices said the litigation could come to rival the billions of dollars that banks have spent to resolve mortgage-related lawsuits.
"This is the dark horse candidate to become the next big capital issue for the banks, at least for the banks involved in the Libor manipulation scandal," said Manal Mehta, a partner at Sunesis Capital, a hedge fund following litigation against the large banks. "It has potential to be astronomical."
(Reporting By Tom Hals in Wilmington, Delaware; Editing by Martha Graybow)