Litigating to recover losses resulting from foreign exchange (FX) manipulation is new ground for pension scheme trustees and their advisers. But for Signature Litigation LLP’s financial markets litigation team, which includes partner Abdulali Jiwaji (above, left), senior associate Daniel Spendlove and associate Anuj Moudgil (above, right), it is yet another area where regulatory enforcement can lead to civil claims against big financial institutions.
With experience in investigations relating to the Libor scandal, the ‘London Whale’ rogue trader affair and other large-scale financial cases, the firm is well placed to comment on the potential for claims on FX.
For Signature, regulatory action is not a guarantee of success but an indicator for potential claims. With regulators typically requiring a higher burden of proof to proceed with enforcement action than the balance of probabilities required in civil actions, the publication of fines against financial institutions means regulators have usually found behaviour that has caused loss that is actionable for somebody, somewhere. The next stage is to identify whether a particular body, be it a pension scheme, fund or other entity, has sustained loss, and if so, the extent to which it has done so.
Jiwaji says: “A number of benchmark-rigging scandals have hit banks in recent years, attracting opprobrium from the media and massive fines from regulators.
“Most recently, in November 2014, regulators in the UK, US and Switzerland imposed fines of £2.6bn on six banks for their roles in manipulating FX benchmark rates.
“However, the storm may not be over yet as further regulatory actions and consequential civil claims are likely to follow.”
So how were institutions manipulating FX rates?
Jiwaji explains: “FX benchmark rates, or ‘fixes’, are of crucial importance to the financial markets, used as reference rates.
“Fixes are calculated by reference to trading activity. For example, the 4pm WM/Reuters, known as the WMR, is calculated based on activity during a one-minute window, 30 seconds before and after 4pm. For the sake of convenience, many clients simply place an order with their bank to transact at whatever price the fix happens to be.
“Thus, the bank may make a profit if the price at which it trades in the market, as part of its legitimate risk management activities, is more favourable than the price at which it trades with its client – that is, the fix price. The Financial Conduct Authority acknowledges in its recent findings that generating profits in this manner can be legitimate.
“However, traders at some banks went further by sharing information about client orders and positions with traders at other banks using electronic messages. They pooled resources and co-ordinated trades with the aim of pushing the prevailing currency exchange rates in a favourable direction to increase profits.
“In many cases, the resulting movement of the benchmark rates would have been relatively small. Accordingly, the parties most likely to have been materially affected were large institutional investors, such as pension funds and investment managers, which make large trades sufficiently frequently so that even a small movement in the fix can have a material impact,” he says.
In January 2015, in the US, one bank reportedly settled an FX-related claim brought by a group of investment and pension funds. This, says Moudgil, means that organised and well-resourced claimants may see some success.
He says: “In the UK, potential claimants will be taking stock, digesting the recent regulatory findings and looking out for further regulatory findings in the UK and elsewhere, including in relation to individuals.
“It is likely that FX-related amendments will be made to existing claims, and that, as with Libor, the courts will be required to rule on the viability of claims over the course of the year ahead. The outcome of those first few decisions from the courts will bear heavily on the appetite for, and tempo of, similar claims.”
Weighing the odds
So given the fact that many big – and small, for that matter – pension schemes may have suffered loss on account of this behaviour, how should those advising them determine whether they have a case to pursue?
Jiwaji says: “Schemes understand better than anyone what their FX exposure is on their portfolio. We suggest they look at what is in the public domain with regard to FX manipulation and what the findings have been from the regulatory interventions in the US and UK.
“Where a regulator has taken action against a bank or individual within an organisation, this gives a concrete basis to suggest that that organisation’s actions may not have been conducted in the client’s best interests.”
So if a scheme, or any other organisation, sees a body they have been interacting with has been found to have been the subject of regulatory intervention, how should they go about building a claim?
“Bringing a case becomes very forensic, which is what has happened with Libor as well. To support a claim, you have to look at the specific impacts on your organisation and explain to a court or arbitrator what consequential losses have been sustained.
“In UK courts, you have the opportunity to seek early disclosure of evidence. You can push for disclosure targeted at particular individuals your organisation dealt with, and material relating to regulatory investigations, both internal and external, against the parts of the business you suspect of wrong-doing,” he says.
One may think ‘He would say that’, but Jiwaji, who used to work for a big firm, argues that smaller niche players are less conflicted when it comes to targeting big financial institutions than top 10 law firms.
“Larger law firms find it difficult when they are asked to act against large financial institutions. They will generally be on the panels of five or six banks, at least. You have to pick which side you are on as banks are mistrustful of those who operate on the plaintiff’s side. It won’t make you popular,” he says.
So which sorts of pension scheme may want to consider whether they have a claim against financial institutions that have manipulated numbers against them?
Jiwaji says: “These are the schemes where FX rates make a difference to their investment performance. But bringing a case involves a heavy investment of time. You probably would not consider it unless the claim was going to be at least in the low single-figure millions. The incremental impact of FX manipulation over a number of years for a multi-billion-pound scheme could be significant.”
Jiwaji says litigants often play a waiting game until one player moves and achieves success.
“With Libor, it took one or two cases to come through and that encouraged others to bring in claims. With FX manipulation, some signal from the courts would make a difference.”
Jiwaji also highlights the potential risks to trustees and persons of responsibility within providers, who may want to protect themselves by making sure they have taken all reasonable steps to recover money where it was recoverable, noting that directors’ and officers’ liability insurers are being targeted by litigants.
“They will be looking for claimants who are victims of lack of action by those who have control. The world is becoming a scary place for senior managers,” he says.
It may be early days for pension scheme managers but, given the scale of regulatory findings against banks, it would appear foolhardy for those with large FX exposure to overlook what could have been a significant loss.
Heads of claim – Signature LLP senior associate Daniel Spendlove
Various heads of claim could be available for clients who may have suffered losses.
Focusing on the contractual relationship between the bank and client, claimants may advance a claim for breach of implied representation or fraudulent misrepresentation. For example, a claimant may argue that there was an implied representation on the bank’s part that it was not currently dishonestly manipulating the fix, had not done so in the past and would not do so in the future.
Similar arguments were raised in recent cases in connection with Libor manipulation and, although still to be adjudicated on, the Court of Appeal deemed them at least to be arguable. The claimant may also argue that disclosure of confidential information and engaging in benchmark manipulation constituted breach of express or implied contractual terms, including that the bank would not intentionally act to the detriment of the claimant.
The sharing of information about client orders may give rise to a claim for breach of confidence. Such a claim may be attractive as, if successful, a court can order a bank to disgorge the profits it derived as a result of the breach. Further, in some limited circumstances, a claimant may attempt to make a claim under the economic tort of conspiracy.
These claims will require the investment of time and resources from an early stage in order to build a foundation that is strong enough both to withstand attack – from strike-out applications and the like – and to support proactive steps such as applications for pre-action disclosure, targeting, for example, the material generated by internal and regulatory investigations.
The claimant must also make good its case on loss. It will need to establish roughly what its position might have been but for the manipulation, and may have to deal with the point that it might have, at times, indirectly benefited from the manipulated fix.
A history of complex financial litigation
Signature Litigation LLP and its lawyers have experience acting for:
- Railtrack institutional shareholders, including Fidelity, Invesco and Morley Fund Management, in a dispute with the UK Government regarding its decision to force the railway company into administration.
- Investors in a dispute with Aberdeen Asset Management and UBS in connection with alleged breaches of duty relating to the setting-up and management of an investment fund.
- Advising a major corporate in multi-jurisdictional proceedings against major investment banks in relation to potential claims of misselling with regard to complex FX hedging products.
- A former JP Morgan trader in relation to a number of investigations and proceedings arising out of the ‘London Whale’ matter.
- Advising a financial institution in respect of issues arising from the manipulation of major financial indices, including Libor.