Barclays Plc investors, blindsided by the bank's $451.4 millionregulatory fine for trying to rig benchmark rates, saw the stockdrop 16 percent a day later. Other bank shareholders may be just assurprised.

Barclays, like other lenders that help set key rates for $360trillion in securities, has given investors scant guidance on theliability they face for alleged market manipulation. More than adozen banks are being probed by U.S., Asian and European regulatorsfor collusion in setting interbank lending rates. The others havemirrored Barclays on minimal disclosure.

“The automatic reaction from investors is: 'Who's next?'” saidTodd Hagerman, a New York-based analyst at Sterne Agee & LeachInc. who recommends investors remain “cautious” on the biggest U.S.banks. “It's fair to assume that legal and related professionalfees and associated reserves are going to continue to remainelevated, if not increase.”

Bank of America Corp., Citigroup Inc., Royal Bank of ScotlandGroup Plc and UBS AG are among the lenders whose participation insetting the London and Europe interbank offered rates, known asLibor and Euribor, are under investigation. None of the banks wouldsay if they set aside reserves to cope with potential liabilitiesand, if so, how much.

“I believe that Barclays had previously reserved for only aboutone-third of their ultimate liability” in regulatory fines, CharlesPeabody, a banking analyst at New York-based Portales Partners LLC,said in an e-mail. Other banks' reserves “will probably proveinadequate.”

Barclays's fines were the first in a two-year, inter-continentalinvestigation into manipulation of Libor and Euribor, benchmarksused globally for setting borrowing rates. Among the 18 lenders onthe U.S. dollar panel are the three biggest American banks,JPMorgan Chase & Co., Bank of America and Citigroup, as well asBarclays and Zurich-based UBS. The 16-member British pound panelincludes Barclays, UBS, JPMorgan and Frankfurt-based Deutsche BankAG.

“The two-year investigation into banks rigging Libor, which hastaken a toll on Barclays, has the potential to hurt Citigroup,JPMorgan and Bank of America,” Mike Mayo, an analyst at CLSA Ltd.in New York, wrote in a July 2 research note. The banks face risksof fines, lawsuits, negative news and new regulations, according toMayo.

“While there is no evidence that the three U.S. money-centerbanks did anything wrong, there is a heightened possibility ofscrutiny after recent events at Barclays,” Mayo said.

Limited Data

Barclays shareholders were notified of the Libor probe, whilegetting little information on how much money was set aside forpotential fines and legal costs. First-quarter operating expensesfor the firm's investment bank rose 4 percent to 2.14 billionpounds ($3.3 billion), reflecting a 115 million-pound increase inprovisions for legal and regulatory costs, partly offset bynon-performance cost savings, the bank said in an April regulatoryfiling. The company didn't specify whether any of the increase wasdue to Libor-related provisions.

The regulatory fine is just the beginning for London-basedBarclays, which is a defendant in some of the 24 interrelated Liborlawsuits that have been aggregated before U.S. District Judge NaomiReice Buchwald in Manhattan federal court.

“The global quantity of claims against Barclays as a result ofit having manipulated Libor, it could stretch from the hundreds ofmillions into the billions,” said Robert Hickmott, an attorney withLos Angeles-based Quinn Emanuel Urquhart & Sullivan LLP. Hesaid litigation in London may follow soon.

U.S. liabilities may be higher because American plaintiffs areallowed to ask for punitive damages for bad conduct, while theBritish are limited to compensatory awards, Hickmott said.

Criminal liability could be added to those regulatory fines andcivil lawsuits. The U.K. Serious Fraud Office said July 2 that itwould decide within a month whether to open a criminalinvestigation into Libor-fixing. The U.S. Justice Departmentalready is conducting a criminal probe into the attemptedmanipulation of interbank-offered rates.

Barclays, in its accord with U.S. authorities, agreed tocooperate with the joint British-American investigation in exchangefor a two-year non-prosecution agreement.

“Barclays's cooperation has been extensive, in terms of thequality and type of information and assistance provided, and hasbeen of substantial value in furthering the department's ongoingcriminal investigation,” the Justice Department said in a statementlast week.

'Completely Lacking'

“Specific disclosure on litigation reserves for any Libor suitsettlements is completely lacking in any regulatory filings,”Portales's Peabody said, referring to all banks. “My guess is thatlitigation reserves for civil suits from municipalities, classaction suits, etc. are non-existent.”

Lawsuits could be filed “by anyone stuck on the wrong side ofthese transactions,” said Anthony Maton, an attorney atWashington-based Hausfeld LLP, which is representing claimants inthe New York litigation and working on a British case to be filedlater this year. “Large corporate local authorities, other banksand financial institutions on the wrong side of the trades, pensionfunds, a very large variety of people that have been affected bythis.”

The U.S. Commodity Futures Trading Commission, one of theagencies investigating the Libor manipulation, said last week thatBarclays employees tried to manipulate Libor and Euribor by makingfalse interest-rate reports to increase derivatives-trading profitsand to decrease losses from 2005 to 2009.

Proving actual damages may be difficult for investors, said BradHintz, a Sanford C. Bernstein & Co. analyst.

“The large fine is for attempting to move the market, not formoving the market,” Hintz said. “The civil guys are going to haveto prove that the market was moved here.”

The extent of lenders' liability may be difficult to determine,Hintz said. Banks may argue that any derivatives trading lossesmust be determined on a net basis, because such trades typicallyare hedged.

Sterne Agee's Hagerman said he didn't think any of the big U.S.banks had set aside reserves for Libor-related costs.

For bank stock investors “it hasn't been top-of-mind,” he said.“I've only received a couple phone calls about it and the reactionhas been surprise.”

David Kovel, an attorney who represents euro futures traders inthe New York federal court litigation, proposes to represent aclass including anyone involved in such trading between August 2007and May 2010, a number of traders he said could be in thethousands. He declined to estimate the value of the allegeddamages.

'Large Impact'

“Even a 2- to 3-basis-point manipulation would have a largeimpact on the product and the investors in that product,” he said.A basis point is 0.01 of a percentage point.

Two days after the Barclays fine was announced, banks being suedin New York filed motions asking Buchwald to dismiss allegationsagainst them. Exchange-based plaintiffs' claims are barred by lapseof time and extra-territoriality, lawyers for lenders includingBank of America and Citigroup argued in one filing.

“It is of course a mathematical truism that the published indexwould have been different if higher or lower rates had beenreported by a sufficient number of banks,” lawyers for those samelenders said in arguing against antitrust claims in a differentfiling. “That might impact financial results to those who chose toincorporate the index in their transactions, but that is not arestraint of trade,” they wrote.

Barclays, in its own brief, joined the other bank defendants inasking Buchwald to throw out allegations against it, exceptingthose contending the exchange-based plaintiffs had made a case formarket manipulation.

Jeffrey Shinder, an antitrust attorney with New York-basedConstantine Cannon LLP who has been following that Liborlitigation, said potential bank liabilities could be “massive.”

“This is potentially the mother lode in terms of potentialdamages,” he said.

While it's not possible to predict a specific loss amount,damages could be in the tens or hundreds of billions of dollars ifthe lenders are found liable, Shinder said.

“Everyone in the industry knows if you knock down a few basispoints here and there billions of dollars shift betweencounterparties,” Shinder said. Adjusting Libor up or down affectsthe interest rates on scores of financial instruments. “This isprice-fixing,” he said.

Some Reserves

Bank of America has said that as of March 31, costs fromlitigation and regulatory matters could be as much as $4.2 billionbeyond its accrued liability. The firm said that it sets asideliabilities when losses are “both probable and estimable.” The bankhasn't said whether Libor liability fell into that category. BillHalldin, a spokesman for the Charlotte, North Carolina-based bank,declined to say whether it had.

U.S. laws generally require companies that issue securities todisclose information that people reasonably would need to makeinvestment decisions. Regulators typically provide guidance ontheir expectations without setting specific criteria on what shouldbe disclosed.

Authorities including the Securities and Exchange Commission andthe Financial Accounting Standards Board have taken steps in thepast two years to pressure banks to disclose more information aboutpotential costs from litigation as claims mounted in the wake ofthe subprime-mortgage crisis. FASB, based in Norwalk, Connecticut,sets accounting rules for public companies under authoritydelegated by the SEC.

Royal Bank of Scotland, which is majority owned by the U.K.government, acknowledged the ongoing international probe in aFebruary report and said it's cooperating with authoritiesincluding the CFTC and Justice Department, the Financial ServicesAuthority and Japanese regulators.

“It is not possible to estimate with any certainty what effectthese investigations and any related developments may have on thegroup,” Edinburgh-based Royal Bank of Scotland said in a statementat the time.

UBS and Credit Suisse Group AG, Switzerland's biggest banks,declined to say what, if any, reserves they had set aside forpossible Libor-related liabilities. Deutsche Bank, Germany'sbiggest lender, also declined to comment on whether it has setaside reserves.

Plaintiffs seeking to prove their cases against the banks may beaided by studies whose “results imply that the Barclaysmanipulation was probably successful and further imply that morethan just one bank was involved in the scheme,” Bernstein analystsled by Hintz said in a June 29 report. Barclays and regulatorshaven't said the attempted manipulation succeeded.

“This is a major regulatory issue for the Libor banks that willlikely generate significant civil claims over the next four to fiveyears,” the analysts wrote. “Investors should not minimize theimportance of this matter.”

The multidistrict case is In Re Libor-based FinancialInstruments Antitrust Litigation, 11md2262, U.S. District Court forthe Southern District of New York (Manhattan).

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