The School District of Philadelphia is considering filing suit against Wall Street banks, City Paper has learned, for illegally manipulating a major interest-rate index underpinning complex derivatives that have cost cities and schools billions of dollars.
"The School District is currently in the process of analyzing whether or not the agency has a sufficient basis for pursuing claims against financial institutions which may have been involved in the manipulation of Libor," a district spokesperson wrote in a short statement issued to CP.
Philadelphia and other cities have filed similar lawsuits, contending that such "interest-rate swaps" — billed as a protection against rising borrowing costs — were tilted in banks' favor through the fraudulent rigging of the London Interbank Offered Rate, or Libor.
The School District took out swaps with Wachovia (purchased by Wells Fargo in 2008), Merrill Lynch, Goldman Sachs and Morgan Stanley. But a lawsuit could name more banks as defendants. Philadelphia's lawsuit names banks that were direct counterparties and also those that are accused of rigging Libor, including Citi, JPMorgan, RBC, Bank of America, Barclays, Credit Suisse, Deutsche Bank, RBS and UBS.
It is unclear when the district, which is run by the state-controlled School Reform Commission, will decide whether to file suit, and what damages might ultimately be sought.* The city could seek tens of millions of dollars, says Quinn Emanuel attorney Steig D. Olson, one of the lawyers representing the city. The precise damages at stake — a matter of figuring out how particular Libor manipulations affected particular swap deals — will be determined through discovery.
The final damages will likely be contested. And profoundly complex.
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