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The Impact of LIBOR Scandal on D&O, E&O, and Fiduciary Liability


The Impact of LIBOR Scandal on D&O, E&O, and Fiduciary LiabilityThe Impact of LIBOR Scandal on D&O, E&O, and Fiduciary Liability

The LIBOR (London Interbank Offered Rate) scandal in which interests rates were manipulated could have far-reaching effects when it comes to directors and officers, errors and omissions, and fiduciary liability lawsuits. According to the Chicago Tribune, “some of the world’s largest insurers for corporate directors and officers could be on the hook for hundreds of millions of dollars in claims over the next few years to cover legal costs for people caught up in the LIBOR scandal.” Dozens of lawsuits have already been filed and many expect additional litigation against directors and officers, as well as errors and omissions and fiduciary liability clams.

What is LIBOR and what happened?

LIBOR is the primary benchmark for short-term interest rates and is a factor in setting rates for corporate loans, mortgages and other lending. Basically, the scandal is based on reports that global banks attempted to manipulate the interest rates by reporting false lending rates. Because the banks reported only the expected rate and not the actual lending rate in setting LIBOR, there was no real check on the reported rates. Reporting false rates would allow banks to lend at higher rates to make additional money. Also, banks suffering financial issues could hide their weakness by deflating their lending rates. More than a dozen banks today are under investigation by authorities in Europe, Japan, and the United States over the suspected rigging of LIBOR.

Barclay Agrees to Pay Fines, Suits Abound

In July, London-based Barclays P.L.C. announced that 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.

A proposed class action was later filed 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 (D&O). 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.

Furthermore, Errors & Omissions (E&O) insurance may also come into play. This could come from customers of banks who feel they were harmed by the bank’s delivery of professional services. For example, if they suffered as a result of interest rate-related losses because of the manipulation.

Some also feel that there is the potential for fiduciary liability exposure regarding potential losses incurred by 401(k) funds, pension funds or other instruments that may have been linked to LIBOR rates. Fiduciary Liability policies cover fiduciaries against costs arising from the administration and management of employee benefit and pension plans, including claims of negligent advice, careless plan management and errors and omissions.

It will take years to determine who and how individuals were affected with ongoing investigations taking place. We’ll be sure to keep you updated.

Axis Insurance Services, LLC provides companies with Directors and Officers liability, E&O coverage, and Fiduciary Liability. For more information about our products, please call us at (877) 787-5258.

Sources: Chicago Tribune, Reuters, Business Insurance, USA Today

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Blogged on: September 25, 2012 by Mike Smith
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