When looking back at the last fifteen years, one can easily be amazed by the various shapes and forms taken by bad or wrong behavior in financial markets.
Financial markets are essentially based on trust. Investors are harmed when they made investment decisions based on misleading information and other forms of misrepresentations. They only find out about their trust having been abused when the provider of the information, the goods or services can no longer hide the truth, like Bernard Madoff in December 2008.
When can investors suffer losses
But such bad behavior can sometimes be more difficult to identify or does not reveal itself easily. Investors have recently been confronted with a new kind of malpractice that could have been ongoing for a long period of time without anybody noticing it. An investor suffers losses when it purchases, sells or simply holds securities based on misleading information which has artificially influenced the market in one direction or another. But there are other ways of influencing the price or cost of financial investments or services. This is when actors in the financial markets agree to behave in a coordinated way in order to neutralize the consequences of a competitive environment or to put it more simply: to manipulate the market.
Once a market is manipulated, it is no longer a proper market.
We have already heard and read about examples of (alleged) manipulations of large segments of the financial markets: collusions in order to influence benchmark rates such as the LIBOR, the EURIBOR, and the Japanese yen LIBOR which have led to substantial fines imposed by regulators and now even the foreign exchange market that is being investigated. The amounts at stake are substantial: billions - even trillions - have been lent, borrowed or exchanged and financial derivatives have been used based on benchmarks or rates that were manipulated by a small group of market participants.
Efforts and pressures of antitrust regulators
If it hadn’t been for the efforts and pressures by antitrust regulators and the decision of certain participants in those cartels to reveal their existence, investors may have never found out about such deceptive behavior. For this kind of manipulation can be extremely insidious. Particularly in complex financial markets. Several banks have agreed to settle with regulators. In December 2013, the European Commission fined banks €1.7 billion for participating in cartels in the interest rate derivatives industry which have been revealed by some of those banks who could therefore avoid monstrous fines.
Infringers were severely punished. But what about the investors who had suffered losses because of the manipulations of prices, benchmarks or rates?
The European Commission has repeatedly insisted on the possibility for the victims of cartels to claim compensation for their losses. But recovering losses for the victims is not the role of the Commission and the majority of victims still find it difficult to litigate against cartelists. They do not have the same powers as the Commission to access key information and documents and civil or common law can sometimes be difficult to apply to cartel situations, particularly in the context of financial markets. Another obstacle can be the disproportion between the amount of the losses and the investment and risks related to litigation. While practical solutions exist to deal with the latter, the first two obstacles can be more challenging. Luckily, things are changing.
The European Parliament recently approved a directive that should facilitate private actions for damages resulting from a breach of antitrust regulations. The directive will significantly improve the situation of victims of cartels, including investors confronted with cartels in the financial sector.
Investors will not only have an easier access to relevant information and documents with respect to the cartel but the directive will also put the plaintiffs - the victims of the cartel - in a much more comfortable position in the litigation: final decisions finding infringements of competition law will “irrefutably” establish such infringement for the purpose of bringing a private action for damages within the same Member State while decisions from another EU Member State will be considered as “prima facie” evidence; new rules on limitation periods will give time to the victims to take action.
As cartels can last for many years before being discovered or revealed — the cartel in the EURO interest rate derivatives had operated between September 2005 and May 2008 — it was necessary to prevent such lapse of time from extinguishing the right of action of the victims; there will be rules on joint and several liability of the participants in the cartel for the harm caused by their infringement of competition law; the directive will make it a lot easier to quantify the losses and to prove causation as the courts will be empowered to estimate the amount of the losses if it is practically impossible or excessively difficult to precisely quantify it. The directive will further introduce a rebuttable presumption that the cartel infringements cause harm.
This directive is a welcome development for investors who are victims of “financial cartels”.
What they now need is trust in their ability to actually enforce their own private rights. No directive and no antitrust regulator can do that for them.th investors’ criticism.
Written on May 5, 2014 by
Chief Investment Officer
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