Forensic approach required by investors seeking redress over FX manipulation
Benchmark fixing and manipulation has created the potential for a large volume of FX-related litigation, but the claims process is both arduous and expensive.
Since regulators typically require 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 they have usually found behaviour that has caused loss that is actionable for somebody, somewhere.
The next stage is to identify whether a particular body – a pension scheme, fund or other entity – has sustained loss and, if so, the extent to which it has done, says Signature Litigation partner Abdulali Jiwaji.
“A forensic approach is required,” he says. “You need to take it day by day and trade by trade. You need to be able to point to a particular buy/sell order which you placed with a bank in respect of which the rate was adversely impacted by improper conduct on the part of that bank, most likely by its traders acting in collusion with traders at other banks.”
If a claim for rescission could be established, clients could potentially be put back in the position they were pre-FX transaction, with recovery of all losses under those trades
Stephen Elam, Cooke, Young & Keidan
The Financial Conduct Authority may have deemed it impracticable to quantify the financial benefit that various institutions might have derived directly from their breaches of its principles for business, but the ability to link losses to manipulated rates is a key element for any client interested in building a case.
However, showing the connection between the improper activity and the rate at which that particular trade went through will not be straightforward, cautions Jiwaji’s colleague and senior associate, Daniel Spendlove.
"Regulators and prosecutors have access to a wide range of evidence from different banks, which allows them to demonstrate the impact of the improper conduct,” he says. “For private litigants, gathering the evidence to support a claim may be a challenge and they will need to work towards early and comprehensive disclosure of the key records from the defendant bank.”
Bank clients who engaged in FX transactions at the relevant benchmark rates (the WM/Reuters and European Central Bank fixes) need to determine the types of transactions, the losses suffered and when, says Stephen Elam, banking litigator at Cooke, Young & Keidan.
“Regulators have identified failings between 2008 and 2013, so potential claims may cover a significant time period and include historical FX transactions. It is important for clients to analyse the products and transactions involved – and related losses – in order to assess what might be claimed.”
Obvious claimants are larger fund manager and pension funds that regularly trade large FX volumes and where substantial losses could arise from a small movement in manipulated benchmark rates. Clients with other FX-linked products (particularly derivatives) that reference the benchmark rates might also have grounds to claim.
Elam, who warns that quantification of losses will be complex and require expert input, says there are parallels with Libor manipulation claims where claims for rescission of the transactions have been made. “In theory, if a claim for rescission could be established, clients could potentially be put back in the position they were pre-FX transaction, with recovery of all losses under those trades. If losses are restricted to those resulting from the movement in benchmark rates, they may be much smaller.”
Potential claimants must also carefully consider the cost of any action. According to John Norton, senior associate at Giambrone, the kinds of customers likely to take action over losses suffered as a result of fraudulent trader behaviour are those with the resources to go up against the largest banks in the world.
“Legal costs can go into the millions and the banks involved have heavy-hitting, big City law firms representing them,” he says. “Partners at these firms can charge up to £500 an hour and if a claimant is unsuccessful, not only do they have to pay their own lawyers but those of the other side too. Their lawyers also need a good knowledge of how the financial markets work – this is not an environment for the faint-hearted.”
Jiwaji agrees that only large, well-resourced institutions such as pension funds and other asset managers are likely to have traded in sufficient volume to make a claim worthwhile and to be able to bear both the upfront costs of the intensive investigation that will be necessary to build a claim and the continuing costs of complex litigation of this nature.
“Smaller, less-resourced parties may club together to bring what is colloquially known as a ‘class action’, but these types of action are less common in the UK than in the US and quite difficult to advance when each claim turns on its own individual facts,” he says.