Banks in Trouble: Investor Lawsuits Filed as Rate-Fixing Probe Widens


As the multi-fronted investigation into the alleged manipulation of foreign exchange rates widens, a dozen large investors have joined forces to sue the 12 banks accused of conspiring to rig global foreign exchange prices, according to a consolidate complaint seen by The Wall Street Journal. The class action lawsuit was filed Monday in the U.S. District Court of the Southern District of New York.

As the investor lawsuit shows, regulatory authorities are not the only source of legal woes for the banks allegedly involved in rate fixing.

The banks named in the lawsuit are Bank of America (NYSE:BAC), Barclays (NYSE:BCS), BNP Paribas (BNPQY.PK), Citigroup (NYSE:C), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), HSBC (NYSE:HSBC), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Royal Bank of Scotland (NYSE:RBS), and UBS (NYSE:BCS). Representatives for these banks either would not give comment to The Wall Street Journal or could not be reached.

According to the complaint, obtained by the Journal, the investors pursuing the lawsuit accused the banks of communicating “with one another, including in chat rooms, via instant messages, and by emails, to carry out their conspiracy” to rig foreign-exchange rates as far back as January 2003.

The investors filing the suit are: Aureus Currency Fund LP, a Santa Rosa, California-based investment fund; the city of Philadelphia and its board of pensions and retirement; the Employees’ Retirement System for the government of the Virgin Islands; the Employees’ Retirement System of Puerto Rico Electric Power Authority; Fresno County Employees’ Retirement Association; Haverhill Retirement System for the city of Haverhill, Massachusetts; Oklahoma Firefighters Pension and Retirement System; State-Boston Retirement System; Tiberius OC Fund, a Cayman Islands fund; Value Recovery Fund LLC, a Delaware fund; Syena Global Emerging Markets Fund LP, a Connecticut-based hedge fund; and the United Food and Commercial Workers Union.

The scandals that brought to light the manipulations of the London Interbank Offered Rate (Libor) have broad implications, including the discovery that benchmarks used to price oil, gold, and derivatives are equally vulnerable to abuse. Regulators — including the U.S. Department of Justice, the European Union, and the Swiss Competition Commission — have launched an inquiry into what might be the biggest rate-rigging scandal of all: The tampering of the $5.3 trillion per day currency market, long thought to be immune from manipulations because of its size.

As early as 2008, rumors were swirling that some banks — including Barclays, UBS, and the Royal Bank of Scotland – might have understated borrowing costs they reported for Libor during the 2008 credit credit crunch, a move that could have mislead the world about the financial positions of those banks.

Later that year, the International Monetary Fund made a similar supposition in its regular Global Financial Stability Review. But it was not until 2012 that the U.K.’s Serious Fraud Office and the U.S. Justice Department opened a criminal investigation into the manipulation of interest rates. Emails and instant messages revealed that traders participating in the rate-setting pool agreed to make submissions that suited their trading positions.

Libor is the benchmark used for pricing financial products from home loans to credit cards, and it is worth more than $300 trillion. The interest rates are estimated by leading banks in London and used in the U.S. derivatives markets. Benchmakers like Libor and WM/Reuters are both hard to understand and easy to manipulate. Making them even more easy to manipulate is that fact that the figures are set by the very institutions that have the most to gain from how they are priced.

After finding that traders manipulated Libor rates to boost bank profits, record fines for collusion were handed out to a number of institutions, including Barclays, Royal Bank of Scotland, and UBS.

Then, in June, Bloomberg reported that traders at some of the world’s largest banks have been rigging foreign exchange benchmarks for more than a decade. After the publication’s revelation, European Union officials said that Britain should investigate the manipulation of currency rates.

Regulators in Hong Kong and New Zealand are now examining the conduct of banks in the foreign exchange market as part of the broader global inquiry, Reuters reported Tuesday. “We’ve got an investigation but that’s all we’re saying because it’s an active investigation,” a spokesman for New Zealand’s Commerce Commission told the news service.

Indicative of the scope of the investigation are the suspensions or firings of 30 traders worldwide. Last week, UBS, the fourth-largest foreign-exchange bank, suspended as many as six currency traders, and a source told Reuters that Deutsche Bank’s director of institutional foreign exchange sales, Kai Lew, was placed on leave as part of an internal investigation. Together, UBS and Deutsche Bank handle approximately a quarter of the $5.3 trillion that passes through the foreign exchange market on an average day, according to a recent Euromoney poll.

According to the Reuters report, authorities are investigating whether traders at different banks worked together to influence currency prices, whether they made trades ahead of placing their customers’ orders, and whether they accurately represented to clients how prices were determined.

These new investigations were announced just a day after Swiss and British regulators made their own inquiries public. Switzerland’s competition commission, WEKO ,officially opened an investigation into JPMorgan Chase, Barclays, and Citigroup, while officials from Britain’s Financial Conduct Authority told Reuters that they will assess if banks cleaned up their operations following the Libor scandal.

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