As dozens of lawsuits alleging banks manipulated a key lending rate emerge, many experts expect a wave of additional litigation against directors and officers, as well as errors and omissions claims.
Last week, London-based Barclays P.L.C. said it agreed to pay about $450 million in fines to settle investigations by the U.K. Financial Services Authority, the U.S. Commodity Futures Trading Commission and the U.S. Department of Justice that it and other banks manipulated the London interbank offered rate before and during the 2008 financial crisis, keeping it artificially low to make the banks' bottom line appear stronger.
Libor is the primary benchmark for short-term interest rates and is a factor in setting rates for corporate loans, mortgages and other lending.
While the topic gained wide discussion only in recent days, there apparently have been long-simmering concerns about the issue.
On Friday, the Bank of England released a 2008 memo on the topic from U.S. Treasury Secretary Timothy Geithner, then president of the Federal Reserve Bank of New York, to Mervyn King, governor of the Bank of England.
The memo included a list of recommendations with respect to the Libor rate that include efforts to “strengthen governance and establish a credible reporting procedure.”
Much of the litigation filed to date names entities as defendants, rather than individual directors and officers. This includes a now-consolidated complaint filed by Baltimore and others, In re Libor-based financial Instruments Antitrust Litigation, against 16 banks in New York federal court.
“I'm sure plaintiffs lawyers are looking at all the options,” said Kevin LaCroix, executive vp at OakBridge Insurance Services L.L.C. in Beachwood, Ohio, of the D&O and E&O litigation potential.
In a possible signal on that front, a proposed class action was filed last week on behalf of purchasers of Barclays-sponsored American depository receipts, which represent shares of foreign companies' stock. The suit names Barclays, two subsidiaries, former Chairman Marcus Agius and former Chief Executive Robert Diamond as defendants. Victor Gusinsky, Trustee, for the Vladimir Gusinsky Living Trust v. Barclays PLC et al., was filed in New York federal court.
The lawsuit states that Barclays' admissions with respect to the Libor rate manipulation caused the ADR stock price to fall, and that Messrs. Agius and Diamond “knew or recklessly disregarded” the “false and misleading statements” that were published concerning the company.
“I suspect that D&O insurance will be in place” to provide legal counsel, said New York-based Wolf Haldenstein Adler Freeman & Herz L.L.P. Partner Gregory M. Nespole in commenting on the case. But “I can't speak” to coverage as to any judgment or settlement.
“Very few mainstream public company D&O forms would provide coverage” for regulatory fines and penalties nor would antitrust litigation be covered under D&O policies, said Mr. LaCroix.
However, shareholder derivative lawsuits would be. “Just as a general statement, it's going to be huge,” Mr. LaCroix said in reference to future D&O litigation in connection to Libor.
David W. Steuber, a partner with Jones Day L.L.P. in Los Angeles, said, “What you would need to do is take a look at the allegations, who the parties are and what the allegations are against the various parties; and from there take a look at the insurance policies. If the claims are against various individuals in their capacity as a director or officer of a particular entity, then D&O would likely come into play.”
“There are probably going to be more securities derivative actions as the investigation is completed and fines are imposed,” said Alexander D. Hardiman, a shareholder at Anderson Kill & Olick P.C. in New York. Stock price drops are likely as result, “and that inevitably leads to shareholder derivative ligation, and that in turn is going to implicate D&O insurance,” Mr. Hardiman said.
There “could potentially be a large number of claims,” he said.
Thomas O. Gorman, a partner at Dorsey & Whitney L.L.P. in Washington, said there could be “some really significant impact and potentially some significant liability” since the Libor rate is used in so many different instruments.
Fred T. Insquith, a New York-based partner with Wolf Haldenstein, who spoke before his firm's litigation was filed, said, “Given the testimony that's coming out on the situation with Barclays bank, it's hard to imagine that people will not be named individually” in litigation. In Barclays, “decisions were made on the highest levels, and it wouldn't surprise me if that was true in many banks.”
E&O insurance may also come into play. Such litigation would be filed on behalf “of the customers of these banks if they feel they were harmed by the bank's delivery of professional services,” such as if they suffered as a result of interest rate-related losses because of manipulation, said Mr. LaCroix.
Furthermore, said Perry S. Granof, Glencoe, Ill.-based of counsel to law firm Williams Kastner, “You have the potential for fiduciary liability exposure” with respect to potential losses incurred by 401(k) funds, pension funds or other instruments that may have been linked to Libor rates.
It is not clear how the D&O coverage of the affected financial instructions is structured, said Mr. LaCroix. It is “hard to know how any given company's policy would respond to a particular set of claims.”
“I think some banks may be self-insured and others may have sizable self-insured retentions or captive programs,” said Edward Kirk, a partner at Clyde & Co. in New York. “They may just have high excess coverage from the market.”
As a result of D&O claims stemming from the Libor case, “we may experience a reduction in capacity for lower layers of D&O for banks,” Neo Combarro, London-based senior vp with Lockton Cos. L.L.C.'s financial risks team, said in an email. “However, the market continues to offer an abundance of capacity, so we would not expect adverse rate change.”
“One could assume underwriters may look to limit coverage and place more onerous conditions around disclosures and warranties on tier 1 banks. Certainly, underwriter due diligence and requests for disclosure may increase in light of recent events,” Mr. Combarro said.