Manipulating the Benchmark

Last December, the law firm of Koskie Minsky LLP filed a proposed class proceeding with the Federal Court of Canada. The plaintiffs’ statement of claim named around three dozen major banks and their affiliates and subsidiaries, alleging that they conspired to manipulate the price of supranational, sub-sovereign and agency (SSA) bonds. 

It was the most recent salvo in a spate of class-action lawsuits — brought in Canada by a consortium of law firms on behalf of investors — that have charged major financial institutions in Canada and internationally with conspiring to manipulate benchmark rates: of the foreign exchange (forex, or FX), gold, silver, and SSA bonds. 

In June the Ontario Court of Appeal overturned a decision that had prevented class counsel from adding two more defendants to the list: TD Group and BMO. To date only the FX class action has been certified, and for settlement purposes only. 

“There was a fair amount of press reporting over a period of time that indicated there were various investigations into conduct into certain financial institutions regarding benchmark products,” says Daniel Bach, a litigation partner at Siskinds LLP in Toronto, one of the firms representing plaintiffs in the benchmark class actions, in explaining how the class actions originated. “We were contacted by various investors, and then we conducted a review of what was known to the market, to the public, and commenced litigation.”

The benchmark controversies began with the Libor scandal in 2012, says David Sterns, a civil litigator and partner at Sotos LLP in Toronto, another firm in the consortium representing plaintiffs in the actions. The scandal originated with a series of fraudulent actions connected to the Libor (London Interbank Offered Rate), when it was discovered that banks were falsely inflating or deflating their rates in order to profit from trades.

“That attracted a lot of regulatory and class-action interest,” says Sterns. “You can probably say that the regulatory action in the other countries … is what sparked the interest in bringing class actions on behalf of investors in these benchmark cases.”

The allegations against the banks in the benchmark class actions that are currently seeking certification in Canada allege something akin to price-fixing. 

“They’re all price-fixing cases, against major domestic and international banks,” says Kirk Baert, a partner at Koskie Minsky LLP in Toronto, a firm in the consortium of firms representing plaintiffs. “They all relate to what I would call commodities: foreign exchange, gold, silver. And the common thread is the way they buy and sell these commodities is not on the up and up. They buy and sell in a way [that is] to the detriment of their customers.”

At the heart of the cases is “the bid-ask spread manipulation, and the benchmark fixings,” says Sterns. “The bid-ask spread … allegation is that these banks would communicate with each other, and say, ‘I’ve got a customer, I’m going to quote, what’s everyone think?’ In the FX world, we know that from pleas that have been agreed to by some the defendants,” including in the United States.

“This was pervasive,” he adds. “You had traders in a very small market, sharing information, disclosing confidential claims, agreeing on how wide the spread would be, and agreeing that a particular client of one bank would be quoted a certain amount, and other [banks] wouldn’t compete with that. … On a basic level, it’s no different than two sellers getting together and deciding to raise prices.”

Approximately twelve defendants have so far agreed to settle in the FX case, with about $110 million in settlements agreed to. In July, class counsel received approval of their plan of allocation and are about ready to start the claims process, Bach says.

“In a conspiracy class action, when you’re suing a lot of people engaged in a conspiracy, typically the institution that settles first is giving some money [in settlement to plaintiffs], but primarily it is giving information about the conspiracy,” Bach adds. What typically happens is that at one point, one party decides they want out of the conspiracy and comes to a law firm to provide information, he says. “That’s often called an icebreaker settlement.”

This helps a case develop in terms of what is understood of the underlying conduct, he adds. According to the filed statements of claim, this has included traders in “chat rooms” discussing benchmark manipulation with each other.

In the FX case, the non-settling defendants will have until early December to file their responding material in certification motions, says Baert, and the hearing will take place next June in front of Justice Paul Perell of Ontario’s Superior Court of Justice. 

“On the presumption they won’t admit they’re part of a conspiracy, it will all come down to whether they were part of the price-fixing groups,” based on evidence, for example, provided by Bloomberg terminals that traders were allegedly using to fix pricing, he says.

The US case in the alleged forex/FX benchmark manipulation has settled largely with “the same body of defendants that we have settled with,” says Bach. In the gold and silver benchmark cases, settlement has been reached in the US but not in Canada, nor have certification dates been scheduled.

“I would not be surprised to know that something was also happening in the UK and Australia,” Bach adds. “It’s a global alleged conspiracy for each of these three cases [forex, gold and silver benchmarks]; the harm is felt everywhere. … If the alleged conspiracy is international, the market is international.”

Andrea Laing, a litigation partner at Blake, Cassels & Graydon LLP in Toronto who acts for class action defendants, notes that these types of lawsuits are relatively new. 

“They were sparked by certain regulatory investigations, starting in the 2012 timeframe in connection with Libor,” she says. Since then, there have been a number of cases related to benchmarks, along with regulatory investigations into these activities, primarily in the UK and US. This regulatory activity has also sparked civil litigation in the form of class actions.

“In Canada, we’re seeing copycat class actions when Canadian plaintiffs’ lawyers … have seen fit to pursue actions that that are premised on class action claims being brought in the US,” Laing explains. “We’ve started to see a number of these cases in Canada over the last four years. It’s an illustration of how Canada is affected by global regulatory and litigation trends; eventually we see some form of [that activity] here.”

Enforcement activity in benchmark manipulation has been greater in the United States than in Canada, say counsel for the classes, with some complaining that the Competition Bureau’s lack of enforcement has resulted in the class action bar picking up the torch on behalf of plaintiffs.

“I’d say we do no enforcement” in Canada, says Baert; compared to the United States and other jurisdictions, “our regulatory action is almost toothless. I’m not sure why our regulators couldn’t have done exactly what we did when we accumulated information in the FX cases.” In the US, he adds, “a much more viable threat” exists to financial institutions manipulating benchmarks from the federal government and its Securities and Exchange Commission. 

But although there has not been “much overt enforcement activity in connection with benchmark issues in Canada,” Laing says, she notes other responses including draft regulations. British Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island, and Yukon, along with Canada on the federal level, are engaged in trying to develop a common securities regulator through the Cooperative Capital Markets Regulatory System initiative. Ontario’s Capital Markets Act and the federal Capital Markets Stability Act have already been drafted, though they are not yet in force. 

Both would make benchmark manipulation a specific offence, Laing adds.

There are two forms of benchmark that tend to be at issue in class action litigation: submission-based and transaction-based. Submission-based benchmarks are developed by individual market participants submitting figures at daily or regular intervals, which are used as inputs to develop a benchmark rate. The latter “is based on market activity; whatever the market price is at a certain point in time will become a benchmark. We’ve seen class actions premised on both … forms in Canada,” Laing explains.

“There have also been changes in policies, procedures and compliance mechanisms around the way various benchmarks are set,” she says. Class-action lawsuits in benchmark cases may be “a trend right now, but I don’t think we’ll see endless benchmark class actions in Canada; the issues that provoked them have been addressed through these various mechanisms.”

As well, since this is a new form of class action that has not been analyzed to any meaningful extent by Canada’s courts, there are many questions about how this litigation will play out, Laing says. Benchmark cases are essentially a hybrid between securities class actions and competition class actions, she notes, and a benchmark is not itself a product, but an “input” that can affect how derivatives and financial products are priced. 

“It is not like a conventional product, the pricing of which tends to be at issue in a competition class action, so novel defences and arguments arise.”