Big Bank Lawsuit Revived When Court Finds Judge’s ‘Unknowing’ Conflict

A lawsuit accusing 10 banking giants of overcharging investors on corporate bonds has been resurrected.

The reason, as Reuters reported Tuesday (July 2), is because the 2nd U.S. Circuit Court of Appeals in Manhattan has overturned the trial judge’s earlier dismissal of the suit, saying the judge should have been recused as his wife held stock in one of the lenders.

The court ruled that although U.S. District Judge Lewis Liman “almost certainly unknowingly” had a conflict of interest, his fairness could be called into question as his wife owned $15,000 worth of stock in Bank of America, thus creating an “appearance of impropriety.”

According to the report, the ruling came nearly three years after reporting by The Wall Street Journal found that more than 130 judges had — since 2010 — violated federal law and ethics rules by hearing cases involving companies in which they or their family members owned stock.

In this case, investors had accused Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, NatWest and Wells Fargo of overcharging them on “odd-lot” trades, which are worth under $1 million and account for the bulk of corporate bond trades.

Liman had been assigned the case in April 2020 and dismissed it with prejudice — meaning it would not be brought again — in October of the following year, three months after his wife sold her Bank of America stock.

The judge had contended that the stock had not affected his decision, and the banks had argued that his lack of knowledge about the conflict didn’t require recusal or reopening the case.

In a similar case in April, the judge in a case involving the Consumer Financial Protection Bureau (CFPB) and the banking industry was allowed to remain after a judicial ethics panel determined he did not need to recuse himself because his son owned stock in Citigroup.

U.S. Circuit Judge Don Willett is hearing a suit brought by the U.S. Chamber of Commerce, the American Bankers Association and the Consumer Bankers Association challenging the CFPB’s plan to lower the late fees charged by issuers to about $8, from the current average of $31. The CFPB had suggested the judge may need to step aside because of his son’s stock.

“In some respects, the situation you describe is analogous to a judge who owns bank stock and is assigned to preside over the trial of a defendant charged with robbing that very bank,” the ethics committee wrote in reply to the CFPB.

“In that situation, the bank has an interest in restitution as a crime victim, but the commentary to the code makes it clear that a judge in such a case does not have an interest in the ‘subject matter’ of the trial.”

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