The Federal Deposit Insurance Corp., acting as receiver for 38 failed banks, recently launched a lawsuit against 16 major banks and the British Bankers' Association, alleging unlawful manipulation of Libor, the London interbank offered rate.

The FDIC claims that by colluding to artificially suppress Libor, the defendant banks — including such titans as Bank of America, JPMorgan Chase and Citigroup — damaged the 16 failed banks. As support, the FDIC notes Libor's importance in setting interest rates on global financial products, alleges that the defendant banks manipulated Libor to make their finances appear healthier and profit from bets on interest-rate derivatives, and identifies the general harmful effects of the alleged Libor manipulation — namely "interfere[nce] with the competitive process in the markets for money…."

The FDIC's 113-page complaint appears foreboding. But what appears to be lacking is evidence that the defendants' alleged Libor manipulation caused damages to these failed banks.

Take, for example, the FDIC's breach-of-contract claims asserted on behalf of 10 of the failed banks. According to the complaint, those failed banks entered into interest-rate swap contracts with the defendant banks that were tied to Libor, effectively allowing them to exchange a variable interest rate for a fixed rate on the principal and protect against interest-rate fluctuations. The FDIC claims these swap contracts contained representations that the parties were complying with all applicable laws and that all information provided was true and accurate.

The agency's complaint says that the failed banks suffered damages when the defendant banks breached and defaulted on the swap contracts "through their fraudulent and collusive conduct, their failure to disclose fraudulent and collusive conduct, their intentional misrepresentation and manipulation of [U.S. dollar] Libor, and their underpayments… tied to the artificially suppressed [U.S. dollar] Libor."

Basically, the FDIC is claiming the defendant banks breached their swap contracts because the contracted-for interest rate should have been higher. But will the FDIC be able to demonstrate that interest rate was actually the result of Libor manipulation? How will the FDIC prove the amount of damages — how much higher the contracted-for interest rate would have been had it been the product of an objective Libor?

The fraud claim likewise suffers an immediately recognizable proof hurdle — it depends on reliance that may not have existed. According to the FDIC, the defendant banks made false representations via their Libor submissions. The failed banks purportedly relied on those claimed false submissions when buying Libor-based financial products from the defendant banks and suffered damages in the form of "higher prices for Libor-based financial products and lower interest rate payments from defendants and others from Libor-based financial products."

But critical to this claim is whether the failed banks actually relied on Libor when buying those financial products. It is less than clear whether the failed banks would have been in any position to demand better terms — or would have been able to obtain better terms — but for the defendant banks' alleged Libor manipulation.

Yet another likely problem is proving the British Bankers Association's collusion with the defendant banks and its assertion of conspiracy claims. The FDIC believes that the trade group knew about Libor's importance; touted Libor as objective and accurate; yet knew that the defendant banks were manipulating the rate. But to plead civil conspiracy, the plaintiff must clearly demonstrate an agreement between the BBA and the banks to manipulate Libor. The factual allegations cannot merely be consistent with the existence of an illegal agreement; they must "plausibly suggest" an illegal agreement. Charging the BBA with merely ignoring the alleged Libor manipulation falls short of plausibly suggesting an agreement.

In short, the FDIC's complaint asserts unethical and illegal behavior but not much else. The FDIC will need to prove more than what it alleges. It will need hard evidence tying the alleged LIBOR manipulation damage to the failed banks — rather than to the financial industry in general — to establish a basis for recovery. Whatever the result, this lawsuit is likely to drag on for years while setting a precedent for — or against — future lawsuits over alleged Libor manipulation.

Stephen Rasch is a partner and Julie Abernethy is an associate in the Dallas office of Thompson & Knight LLP.