Reuters and the Wall Street Journal are reporting that an Illinois Federal judge has dismissed claims against Cboe Global Markets Inc. arising out of alleged manipulation of the CBOE’s VIX volatility index. Judge Manish Shah held that common-law negligence claims were preempted by federal law, and that the plaintiffs had failed to plead violations of federal anti-trust and securities laws by the exchange itself. Leave to replead the federal claims was granted.

When we last checked in on In re SSA Bonds Antitrust Litigation, 16-cv-3711 (SDNY), we focused on Judge Ramos’ granting the Defendants’ motion to dismiss Plaintiffs’ Consolidated Amended Complaint for failure to state a claim because Plaintiffs failed to allege injury-in-fact sufficient to establish antitrust standing. Now, Plaintiffs have re-pled their claims and several Defendants have moved to dismiss a second time. One issue in this second round of motions to dismiss is whether the culpable individual traders are subject to the jurisdiction of the New York Court federal court. Judge Ramos’ forthcoming ruling on these complex jurisdictional questions will shed light on the extent to which global banks can insulate their traders by locating their desks overseas.

Summary of the Allegations

For a more detailed summary of the allegations, visit our June 27, 2018 post, which gives a full account of the alleged collusion in the Consolidated Amended Complaint.

In short, Plaintiffs, buy side funds and institutional investors, allege a broad conspiracy where Defendants—major banks and the individual traders employed by those banks—leveraged their positions as major players in the supranational, sub-Sovereign, and agency (“SSA”) bond market to manipulate the bid-ask spread on SSA bonds. Plaintiffs’ Consolidated Amended Complaint relied upon statistical analyses and 150 Bloomberg chat messages between traders at the Defendant banks that—according to Plaintiffs—are “smoking gun” evidence of a coordinated effort to manipulate the SSA market in their favor, to the detriment of investors.

Now, Plaintiffs’ Second Consolidated Amended Complaint (“SCAC”, Dkt. No. 506) brings allegations to the table: additional chats and communications obtained as part of settlements with certain defendants. But the jurisdictional issue—one that Judge Ramos has not reached in his previous rulings—remains perhaps Plaintiffs’ largest hurdle in getting their complaint past a motion to dismiss.

The Trader-Defendants’ Jurisdictional Challenges

Since Plaintiffs’ second amended complaint, individual defendants, traders Manku, Heer, Pau, McDonald, and Gudka, (collectively, the “Trader Defendants”) have all moved to dismiss for lack of personal jurisdiction. These Trader Defendants all worked for U.K.-based offices of defendant banks during the relevant timeframe, and none of them are alleged to have transacted in SSA’s with any of the named plaintiffs. (See Dkt. Nos. 538, 543, 541).

The Trader Defendants make similar arguments: First, New York’s long arm statute does not apply to them. As relevant here, New York’s long arm statute requires the Plaintiffs to allege that each Trader Defendant, in person or via an agent “transact[ed] any business within the state,” and (ii) that the cause of action “arise[s] from” that transaction. See Best Van Lines, Inc. v. Walker, 490 F.3d 239, 249 (2d Cir. 2007). Although Plaintiffs allege that each Trader Defendant engaged in transactions with unnamed, New York-based class members, Plaintiffs do not state any such transaction with specificity. In other words, Plaintiffs cannot cite any transaction between a Trader Defendant, on the one hand, and a named Plaintiff, on the other. See SCAC ¶ 111 (alleging only that Manku “was personally responsible for USD SSA transactions that were done at artificial prices with members of the Class in the United States (including in New York)”). Second, the Trader Defendants argue that even if Plaintiffs could allege facts sufficient to satisfy New York’s long arm statute, Constitutional limitations prevent the Court’s exercise of jurisdiction over them. The Trader Defendants each argue that the SCAC fails to allege conduct expressly aimed at the forum. Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 86 (2d Cir. 2018). The SCAC’s allegations that the defendants knew or reasonably should have known that the brunt of the injury of their misconduct would be felt in the forum are not sufficient. Id.

In response, Plaintiffs argue that the Trader Defendants splice singular allegations in the SCAC and in so doing, miss the forest for the trees. Each Trader Defendant, Plaintiffs maintain, is alleged to have promoted and priced USD SSA bonds to and for U.S.-based investors. Indeed, Plaintiffs allege that U.S.-based salespeople at the defendant banks would actively refer U.S.-based clients to the Trader Defendants. As to the Trader Defendants’ argument that they did not transact with any of the named Plaintiffs, Plaintiffs insist that the Court may consider the transactions of absent class members in New York. In any event, Plaintiffs argue, the Trader Defendants manipulated the prices for all SSA transactions, including those in which the named Plaintiffs participated.

Regarding Defendants’ purposeful availment of the U.S. marketplace, Plaintiffs’ argue that the entire “purpose and goal of the conspiracy was for the conspirators to ‘avail’ themselves of the opportunity to rip off U.S. customers to increase profits.”

Practical Considerations

Briefing on the jurisdictional issues was complete in March, and Judge Ramos’ forthcoming decision merits close attention from those pursuing manipulation cases in global markets. On the one hand, holding that the Trading Defendants are subject to personal jurisdiction by virtue of their having interacted with unnamed class members in New York would significantly lengthen the jurisdictional reach of financial class action cases. On the other, sustaining the Trading Defendants’ jurisdictional challenge may incentivize global banks to locate their bond traders overseas.

More broadly, the Trader Defendants’ motion comes at an interesting time in the case. The remaining institutional defendants have also asked Judge Ramos to dismiss the case, lodging similar forum and jurisdictional arguments. Additionally, the Securities Exchange Commission and DOJ—two agencies interested in market manipulation cases—have not brought enforcement actions or criminal charges, which might suggest that they view the conduct as better-prosecuted abroad. Plaintiffs also recently obtained access to even more chat messages, provided as part of a settlement with HSBC. If the Court holds their jurisdictional allegations insufficient, will those chats provide grounds to seek another leave to amend?

As these and other issues unfold, we’ll continue to keep our eye on interesting developments in the SSA antitrust litigation.

This post was written by Peter J. Sluka.

We welcome your feedback. If you have questions or comments about this post, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at jlundin@schlamstone.com or Peter J. Sluka at psluka@schlamstone.com or call John or Peter at (212) 344-5400.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

LAW 360 (subscription required) reports that four bank defendants–UBS Group AG, SocGen, RBS PLC, and MUFG Bank, Ltd.–have been dismissed from a pending foreign exchange bid-rigging action in the S.D.N.Y. District Judge Lorna Schofield dismissed UBS Group AG because the complaint did not allege that it had participated in the alleged manipulation activity, and that the plaintiffs had conflated it with other UBS entities. SocGen, RBS, and MUFG Bank were all dismissed for lack of personal jurisdiction, on the grounds that none of their conduct was directed at New York such that they could “reasonably anticipate being haled into court” in New York. The action, Contant v. Bank of America, remains pending against other defendants, including Barclays, BNP Paribas, HSBC, Standard Chartered, and UBS AG.

Today, CNBC, Reuters, and the E.U. itself itself are reporting that the European Commission has fined Barclays, Citigroup, J.P. Morgan, MUFG, and Royal Bank of Scotland a total of 1.07 billion Euro ($1.2 billion) for rigging the spot foreign exchange market for 11 currencies. The bid-rigging was carried out by traders from the various banks communicating with each other over Bloomberg terminals. The fines covered two separate schemes, one taking place between 2007 and 2013, and the other between 2009 and 2012. UBS received immunity because it had reported the bid-rigging schemes to the Commission, thereby avoiding a fine of 285 million Euro.

In a related investigation, U.S. regulators have fined Barclays, BNP Paribas, Citigroup, J.P. Morgan, Royal Bank of Scotland and UBS more than $2.8 for the same conduct.

We’re back for another installment of the most-fun-to-name series of posts the Manipulation Monitor has to offer. Last time around, we reviewed Defendant’s valiant efforts to rid the world – or, at least, the Northern District of Illinois – of the scourge of VIX-related claims. Plaintiffs have some comments, of course, so we’re back again with VIX-the-fifth. Post the first through post the fourth are linked below – recommended reading before moving on to part two of this post:

Post the First: The VIX is Fixed?! A Preview of the Tricks
Post the Second: The VIX is Fixed?! A Complaint is Remixed
Post the Second: The VIX is Fixed?! Defendants Request this Suit be Nixed
Post the Fourth: The VIX is Fixed?! Plaintiffs Would Like Some Discovery Real Quick

Now that you’re caught up, or at least content to boogie on without background (way to live on the wild side, you crazy antitrust addict you!), let’s look at the opposition:

But Did It Ever Really Happen?

Plaintiffs begin by attacking Defendant’s final argument: that plaintiffs failed adequately to allege that flaws in the VIX franchise were ever exploited. To counter this proposition—which they note Defendants addressed only halfheartedly—Plaintiffs identify four key areas in which their Complaint demonstrates manipulation:

• Aggregation: “there is nothing wrong,” Plaintiffs argue, with providing aggregate analyses that highlight data patterns demonstrating manipulation; indeed, the practice avoids charges that only anomalous, “outlier” data points are being presented.
• Griffin & Shams: Plaintiffs next point out that, while they refer to the work done by these eminent academics, all the analyses outlined in their complaint were designed and conducted by Plaintiffs (or, presumably, Plaintiffs’ experts), using data obtained by the plaintiffs, and goes beyond the work of Griffin & Shams to included new methods of analysis.
• Griffin & Shams, Again: Plaintiffs also counter Defendants’ attacks on the academic paper, accusing defendants of “engaging in sleight of hand” by attacking only the academic paper rather than the analyses carried out by Plaintiffs. Moreover, to the extent that Defendants argue that the academics failed to “fully rule out all potential explanations,” Plaintiffs point out that that is simply not the pleading burden.
• Witnesses: To defendants’ claim that it is “striking” that Plaintiffs have failed to present a corroborating witness, Plaintiffs again note that at the pleading stage, before discovery, a smoking gun is unnecessary where statistical analysis can give rise to plausible claims.

Trust the Process (this used to be good advice)

Plaintiffs begin this section by outlining the requisite standard for pleading their claims under Rule 10b 5—something Defendants apparently failed to do—and quote recent Second Circuit authority for the principal that “the gravamen of a manipulation claim is the deception of investors into believing that prices at which they purchase and sell securities are determined but the natural interplay of supply and demand, not rigged by manipulators.”

Breaking this standard into its component parts, Plaintiffs first note that pleading deceptive or manipulative conduct for a market manipulation claim only requires them to allege, “to the extent possible, what manipulative acts were performed, which defendants performed them, when the manipulative acts were performed, and what effect the scheme had on the market for the securities at issue.” The what/who/when questions, Plaintiffs address by way of reference to the original complaint, and similarly summarize the effect on the market resulting from the rigged SOQ process. They further note that similar claims were found sufficient in other 10b-5 market manipulation claims, where exchanges engaged in manipulative conduct resulting in purchased by investors deceived into believing that the prices at which the relevant securities were bought and sold were determined by the market. Nor is it plausible to recast Plaintiffs Rule 10b-5(a) and (c) claims as 10b-5(b) misrepresentation and omission claims, Plaintiffs argue: the case law relied on by Defendants for that argument address only fact patterns where the sole fraudulent conduct at issue was misleading statements or omissions, rather than a situation such as Plaintiffs’ complaint describes, where a larger scheme that encompasses such conduct or statements.

CBOE’s argument that it cannot be liable because Plaintiffs do not allege that that entity personally engaged in manipulative trading is also erroneous, Plaintiffs insist, neither 10b-5(a) or (c) require such engagement for liability. Instead, all that is required is “any devise, scheme or artifice,” or “any act, practice, or course of business” used to perpetrate a fraud. Moreover, the CBOE was not “aiding and abetting” the fraud; Defendants ignore Plaintiffs allegations that CBOE was by way of its creation, maintenance, marketing, and expanding of the VIX franchise, a primary act in its own right.

Plaintiff’s next argument addresses scienter. This is a factor to be address collectively, Plaintiffs argue, considering “all of the facts alleged,” and whether they together “give rise to a strong inference of scienter,” not whether any individual allegation meets the requisite standard. To that end, Plaintiffs point out that the complaint directly alleges scienter, and that such allegation is supported by plentiful facts—such as CBOE’s admission that it oversaw every settlement, had complete access to all relevant data, and actively reviewed said data for potential VIX settlement manipulation. Where Plaintiffs access to more limited public data showed numerous signed of manipulation, CBOE’s more granular data gave it even more knowledge. To the extent that CBOE argues that scienter cannot be inferred based on a theory that “any competent observer would detect manipulation,” given that Plaintiffs allege that they were themselves in the dark until recently, it simply cannot stand: CBOE is not an outside investor, but “the ultimate insider act[ing] knowingly or recklessly.” Moreover, the allegations concerning CBOE’s financial motivations are not “generic,” and cannot be compared to the “generalized motives common to all corporate executives to protect their own interests”: the VIX franchise accounted for nearly half of the CBOE’s total revenues, and the importance of the franchise has repeatedly been acknowledged by the CBOE itself. And along the same lines, Plaintiff claim, Defendants’ claim that the importance of VIX would have led the CBOE to cure any problems discovered is both inappropriate to accept at the pleading stage, and without any justification showing that the SOQ process could be cured without diminishing the value of the “crown jewel” franchise.

Next, Plaintiffs address Defendants argument that they failed to sufficiently allege reliance, because Plaintiffs asserted that they relied on the integrity of the VIX SOQ process, rather than alleging reliance on a particular misstatement or omission. Because this is not a misrepresentation case, Plaintiffs explain, all that is required is that they meet the market manipulation case standard: an alleged reliance on the “assumption of an efficient market free of manipulation.” Because they satisfy this pleading requirement, Plaintiffs explain, the allegations adequately plead reliance. They also observe that pleading reliance in a manipulation case does not prevent them from also availing themselves of fraud-on-the-market presumption, noting that courts have uniformly held such presumption to be appropriate. Plaintiffs also explain that they meet the Affiliated Ute presumption, a standard associated with cases applying to failure to disclose, and that under such standard CBOE, as a party aware of the manipulation, had a duty to disclose.

Turning to causation and standing arguments, Plaintiffs rebut the CBOE’s assertion that Securities Exchange Act claims are not well pled by claiming that FRCP 8(a)(2) governs allegations of loss causation, and that the applicable standard thus only requires Plaintiffs to “provide [the] defendant[s] with some indication of the loss and the causal connection that the plaintiff has in mind.” Article III standing poses a similarly low threshold, according to plaintiffs, and requires only a “reasonable causality chain” to link Plaintiffs’ injury to Defendants’ actions. Plaintiff alleges that class members were forced to pay more as buyers, and accept less, as sellers, for VIX products than they would have in a fair market, and the complaint includes detailed allegations of the types of instruments causing harm in which each Plaintiff transacted. Together with their analysis demonstrating abnormal movement in market prices on settlement days, Plaintiffs insist that their allegations are both sufficient at the pleading stage, and substantially similar to allegations upheld in recent Rule 10b-5(a) and (c) cases. The causal connection prong, moreover, does not require a causal connection with a specific statement – Plaintiffs point to Defendants insistence on this point as yet another way they are attempting to force the square peg of market manipulation claims into the round hole of misrepresentation cases. Similarly, Plaintiffs ague that they are not obligated at the pleading stage to tie specific transactions to specific episodes of manipulation and amounts. In support, they cite to a 2016 case involving the ISDAfx benchmark which sets forth that, “at this stage, the appropriate question is whether the alleged manipulation…plausible caused each Plaintiff to suffer some loss under the terms of some derivative at some point.”

On the immunity prong, Plaintiffs counter Defendant’s assertions with the observation that immunity is only granted in “rare and exceptional” circumstances. The burden is on CBOE to demonstrate that self-regulatory organization immunity is appropriate, and it is a high bar: the conduct must be of a regulatory nature such that CBOE was effectively “standing in the shoes of the SEC.” The immunity cannot apply, Plaintiffs posit, where the self-regulated organization is acting in its own market as a regulated entity, not as a regulator—and this is where Defendants apparently fail. In creating, marketing, and selling the VIX derivative products, CBOE was not, according to Plaintiffs, acting as a regulator: it was behaving in every respect as a commercial actor, and the profits it earned while doing so show its role clearly. Plaintiffs highlight several cases on this point, including a comparison to In re Facebook, Inc., IPO Securities & Derivative Litigation, which permitted negligence claims related to the design, testing, and marketing of NASDAQ’s technology on the grounds that they were “undertaken to increase trading volume” – presumably, much like CBOE’s proprietary VIX products – and thus non-regulatory. Plaintiffs also pushed back strongly against Defendant’s assertion that the complaint’s inclusion of regulatory allegation was a “virtual concession” as to the applicability of regulatory immunity. Plaintiffs don’t see it that way. Instead, they argue that the Rule 10b-5 claims are not based on any of the regulatory-related allegations and are present only to serve Plaintiffs’ separate CEA claims. This is very different, Plaintiffs insist, from In re NYSE Specialist Securities Litigation, relied on by Defendants, because Plaintiffs in that case expressly based their securities claim – as opposed to the CEA claim here – on various categories of wrong doing described by Plaintiffs themselves as regulatory failures. Further, the Facebook litigation found that overlapping evidence between claims did not mean that all claims were immunized; accordingly, Plaintiffs CBOE “cannot cloak the entire VIX franchise with immunity merely because the CBOE might have stopped the manipulation with better policing.”

Further addressing questions of immunity and preemption, Plaintiffs next tackle Defendant’s position that, because certain of the CBOE’s rules regarding VIX products were reviewed or approved by the SEC or CFTC, Plaintiffs’ securities claims are barred by immunity. To counter this assertion, Plaintiffs point to the Second Circuit’s decision in City of Providence, where the court declined to grant immunity in respect of the exchange’s offering of proprietary data feeds and co-location services firms, notwithstanding the SEC’s repeated approval of those practices. Indeed, the SEC apparently felt strongly enough about the issue to submit an amicus brief echoing that its “mere approval” of a practice does not give rise to immunity. Defendants also argues that these approvals result in the preemption of Plaintiffs’ Rule 10b-5 claims by the Securities Act. Again, Plaintiffs see things a little differently, explaining that the case Defendants cite in support of this notion addresses preclusion of antitrust claims by potential conflicting securities laws, and further observing that the case has not, in eleven years, been imported to the Rule 10b-5 arena.

Finally (for this section, anyway), Plaintiffs find time to tackle timeliness troubles. Because their Rule 10b 5 claims do not arise from “independently actionable false statements,” Plaintiffs argue that are not limited by the fact that the SOQ process and the defective VIX index were originally designed more than five years ago. The claims are continuous – or, by the data, continuous through as recently as February 2018 – and the repose period has not yet run. And irrespective of the accuracy of that argument, Plaintiffs also point out that the question of repose is fundamentally factual, and thus cannot be decided on a motion to dismiss.

A Sufficient Degree of Plausibility is as easy as C-E-A

Shifting gears now to focus on the Commodities Exchange Act claims, Defendants’ first argument is that Section 5 of the CEA does not contain a private right of action. In response, however, Plaintiffs note that Section 22—conveniently titled “Private Rights of Action”—does contain such rights, including for Section 5 obligations.

Up next is the question of particularity: again, a lack of specific, manipulated quotes. Again, Plaintiffs work to distinguish Defendants’ case cites, including the slightly weaker argument that allegations in other cases that were upheld “where the complaints happened to be able to ‘name names,’ that does not mean those cases establish identifying quotes as a pleading prerequisite in a completely different fact pattern.” More convincingly, Plaintiffs also posit that, even if Defendants were correct that a specific quote might be required at the pleading state, such burden would likely—and has been regularly—lightened by the courts “where, as here, the information is exclusively in the defendants’ control.” Plaintiffs arguments in favor of their plausible pleading of causation follow a similar logical path: such detail is not reasonably required at the pleading stage, and all that needs to be provided is some indication of loss and the causal connection.

Plaintiffs further assert that they plausibly pled that CBOE acted in bad faith. Under the Seventh Circuit’s decision in Bosco, “bad faith” under the CEA has a unique meaning, one akin to “negligence.” Only where the exchange has full discretion is more than “mere negligence” required. The negligence standard applies in this case, Plaintiffs assert, because the claims are about the CBOE’s mandatory obligations regarding rules that the exchange “should know” were being flouted.

Beyond bad faith, Plaintiffs also address CBOE’s contention that an ulterior motive is necessary part of the pleading requirements. Spoiler alert: disagreement. Plaintiffs distinguish the Sam Wong & Sons case relied on by Defendants by noting that the case itself recognized the “common-sense fact” that, “if the action was not reasonable on its own terms, motivation is irrelevant.” Citing Bosco, Plaintiffs go on to note that the Seven circuit expressly held that, even when “more” than negligence is required, “more” can be satisfied by showing “either that the exchange acted unreasonably or that it had improper motivation.” Seems pretty clear that an ulterior motive, while critical for The Enchantress and her supervillain friends in the Marvel universe, is just not a necessity under the CEA. Despite their argument for irrelevancy, Plaintiffs still argue that such ulterior motive is plain here based on selfish financial gain. Perhaps CBOE is channeling Thanos after all?

Negligent or Not?

As Plaintiffs address the plausibility and proper assertion of their negligence claims in less than two pages, I will endeavor to do so here in less than two sentences. To briefly summarize, then: Plaintiffs withdraw their negligence claims respect to the VIX Options and SPX Options. VIX Futures, on the other hand, are not preempted by the CEA – because the CBOE “stepped outside its regulatory shoes”—and the CBOE’s argument that nothing it did was wrong or has been shown to cause damage is incorrect, because CBOE’s course of conduct regarding the VIX franchise creates a duty of care.

Conclusion

And that’s it, dear readers, for this month’s bloggy installment. As always, stay tuned for updates on the outcome of this motion to dismiss and, while you’re waiting, I recommend you peruse my other ramblings on related cases – SOS to GSEs is shaping up to be a fun series, and you can check out the first installment right here: SOS to GSEs: Your Bonds Are a Beautiful Mess.

This post was written by Alexandra M.C. Douglas.

We welcome your feedback. If you have questions or comments about this post, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at jlundin@schlamstone.com or Alexandra M.C. Douglas at adouglas@schlamstone.com or call John or Alexandra at (212) 344-5400.

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On March 22, 2019, the Ohio Carpenters’ Pension Fund filed a proposed antitrust class action in the Southern District of New York.

The complaint alleges that Bank of America and NatWest (f/k/a RBS) conspired to rig the bid-ask spreads of Eurozone government bonds between 2007 and 2012. The complaint specifically alleges that the defendants were (nominally) competing “primary dealers” for the sale of the bonds to investors, but that they colluded to increase their bid-ask spread collectively in order to avoid competitive disadvantage and potential loss of the issuers’ business.

On January 31, 2019, the European Commission issued a press release stating that it had formed the “preliminary view” that “eight banks participated in a collusive scheme that aimed at distorting competition when acquiring and trading European government bonds,” and that the collusion activity largely took place on internet chat rooms. This story was widely reported by financial press outlets such as Bloomberg. Although the Commission did not name the banks involved, NatWest/RBS has been identified as a likely subject of the investigation. A related lawsuit has been filed in the District of Connecticut.

When the emergence of big data and supercomputing drew complex statistical analyses—event studies, regression analyses, ANOVA methods and the like—out of the classroom and into the marketplace, those paying attention knew that courtrooms would not be far behind. Today, these complex statistical analyses give market-watchers (potential Plaintiffs) unparalleled ability to identify unnatural market movement and ferret out manipulation. When incorporated into a complaint, these analyses—and the reasonable inferences drawn therefrom—allow market manipulation cases to clear the motion to dismiss stage and progress to discovery, where the machinations behind those unnatural movements are (theoretically) laid bare.

Now, a suit in the Southern District of New York alleging gold price manipulation has brought the discoverability of those statistical analyses—and particularly, the analyses that potential plaintiffs perform, but ultimately do not rely upon in their complaints—into focus. Plaintiffs were ordered to produce the preliminary, uncited analyses performed by their consulting expert, and they have promised to petition the Second Circuit Court of Appeals for a writ of mandamus enjoining enforcement of that order. The Second Circuit’s ruling on that petition threatens to have far-reaching effects on the use of statistical analyses in a complaint and the scope of the attorney work product protection.

Summary of the Allegations

This case concerns an alleged coordinated effort to manipulate the gold benchmark. Plaintiffs, a number of individuals, businesses and funds, allege that Defendants, several large broker-dealer banks including UBS, Barclays, Deutsche Bank, Bank of America, and HSBC, manipulated the daily gold benchmark—the “fix”—by, inter alia, making spoof bids/asks or wash trades during the time period that the fix was calculated (the “PM Fixing”) to steer the fix in a specific direction, usually down. Plaintiffs’ theory of market manipulation stemmed from statistical analyses demonstrating that gold prices acted differently around the PM Fixing than they did at any other time of day. Specifically, Plaintiffs’ proffered statistical analyses showed that that gold prices went down around the PM Fixing more than they went up, and that when prices fell, they fell further than they increased. Moreover, when the gold price dropped during the PM Fixing, Defendants’ gold spot quotes were closer to one another’s quotes than other market participants and lower than other market participants. See Third Amended Complaint, In re Commodity Exch., Inc., No. 14-md-02548 (VEC) ¶¶ 123-283 (S.D.N.Y.) (ECF No. 183). These analyses supported the reasonable inference that Defendants were conspiring to manipulate the PM Fix.

The statistical analyses underlying the complaint’s theory of manipulation were the lynchpin of Plaintiffs’ claims. Without them, Plaintiffs’ claims could not have survived Defendants’ motion to dismiss. When it sustained Plaintiffs’ Consolidated Second Amended Class Action Complaint in October 2016, the Court recognized the importance of the analyses, observing, “[w]hether the detailed statistical analyses contained in the Complaint reveal ground truth about the activities of the Defendant banks who participated in the Gold Fix or are on the ‘lies, damn lies and statistics’ side of the dichotomy remains to be seen.” In re Commodity Exch., Inc., 213 F. Supp. 3d 631, 641 (S.D.N.Y. 2016).

The Discovery Demand

Consistent with their discovery obligations, Plaintiffs produced all the underlying data and analyses on which their complaint was based, including complete datasets, native copies of all graphs or charts, and all data inputs and outputs used to develop any graphs, charts, or analyses cited in their complaints. But Defendants demanded more. It was not enough, Defendants argued, that Plaintiffs produce the data underlying the conclusions set forth in the complaints; Defendants needed everything Plaintiffs’ experts prepared, including all analyses not disclosed in the complaint, all iterations of those analyses, and all data underlying those analyses. See Ltr. Mot. to Compel, In re Commodity Exch., Inc., 14-md-02548 (S.D.N.Y.) (ECF No. 361).

Defendants based their broad demand for all analyses prepared by Plaintiffs’ experts—whether or not they were cited in the complaints—on the argument that in drafting their complaints, Plaintiffs selectively relied on their experts’ analyses, and discovery of the entire corpus of their experts’ work was necessary to avoid the prejudice resulting from that selective utilization of the data. Essentially, Defendants argued that “if you torture the data long enough, it will confess,” and Plaintiffs must produce the entirety of that torture, not just the confession.

Plaintiffs opposed Defendants’ demand. Plaintiffs argued that the materials sought were subject to attorney work product protection, and that protection was not waived because Plaintiffs did not put those materials in issue. Moreover, Plaintiffs argued that since they did not intend to rely upon those analyses for class certification, summary judgment, or trial, Defendants’ demand sought materials that were irrelevant to the litigation going forward. See Ps’ Opp’n, In re Commodity Exch., Inc., No. 14-md-02548 (S.D.N.Y.) (ECF No. 365). As to Defendants’ claims that Plaintiffs utilized only a misleading selection of evidence, Plaintiff’s insisted that Defendants had everything they needed to challenge the verity of the conclusions set forth in their complaint; disclosure of materials beyond that was a bridge too far.

The Court’s Order

On February 25, 2019, Judge Caproni granted Defendants’ motion to compel. See Order, In re Commodity Exch., Inc., No. 14-md-02548 (S.D.N.Y.) (ECF No. 377). The Court considered the factors commonly considered in this jurisdiction when determining whether a party has waived work product privilege under Rule 502(a). Specifically, a waiver applies “to an undisclosed communication or information in a federal or state proceeding only if: (1) the waiver is intentional, (2) the disclosed and undisclosed communications or information concern the same subject matter, and (3) they ought in fairness to be considered together.”

The Court held that Plaintiffs, by making selective use of their experts’ analyses, waived work product protection as to the entirety of the experts’ work because it all concerned the “same subject matter” of gold price fixing.

The Court relied heavily on fairness concerns, largely echoing Defendants’ concerns that Plaintiffs were presenting a misleading slice of the analyses: “the withholding of information that would tend to undermine key statistical conclusions alleged in a complaint would, in this Court’s view, result in ‘a selective and misleading presentation of evidence to the disadvantage of the adversary.’ Fed. R. Evid. 502(a) Advisory Committee Note; Seyler v. T-Sys. N. Am., Inc., 771 F. Supp. 2d 284, 288 (S.D.N.Y. 2011). Intentional disclosure of only favorable statistical results is, by definition, selective and misleading. And in this case, such a selective disclosure would benefit Plaintiffs and prejudice Defendants, as Plaintiffs’ statistical presentation was central to the Court’s decision that Plaintiffs have plausibly alleged Defendants’ participation in price manipulation and an antitrust conspiracy.”

The Mandamus Petition

Just last week, Plaintiffs asked the district court to stay enforcement of its order to produce until a forthcoming petition for a writ of mandamus to the United States Court of Appeals for the Second Circuit can be resolved. Plaintiffs argue that mandamus is necessary to determine whether, under Federal Rule of Civil Procedure 26 and Federal Rule of Evidence 502(a), a plaintiff that includes non-testifying consultants’ economic analyses and data in a complaint retains work-product protection over those consultants’ economic analyses and data that were not utilized to support the allegations in the complaint.

Plaintiffs argue that the district court erred when it held that expert analyses not cited in the amended complaint were waived simply because they concern the same general subject of gold price fixing. See Mot. for Stay, In re Commodity Exch., Inc., No. 14-md-02548 (S.D.N.Y.) (ECF No. 380). Such a hair-trigger application of the subject-matter work-product waiver would subvert the Advisory Committee’s admonition that subject matter waiver be “reserved for . . .unusual situations” in which it is “necessary to prevent a selective and misleading presentation of the evidence.” Fed. R. Evid. 502 (a) Advisory Committee Note to 2011 Amendment. More importantly, it would chill litigants’ ability to discuss their case freely and critically with consulting experts. See Mfg. Admin. & Mgmt. Sys., Inc. v. ICT Grp., Inc., 212 F.R.D. 110, 118 (E.D.N.Y. 2002) (non-testifying expert is one “to whom an attorney may speak freely about litigation strategies and opinions without falling prey to the powerful jaws of mandatory disclosure.”).

Practical Considerations

Given the increased reliance on statistical analyses to both identify cases of suspected market manipulation and allow those cases to clear the motion to dismiss hurdle, Second Circuit guidance on the discoverability of those analyses will have far-reaching consequences in the investigation and litigation of market manipulation cases. Denial of Plaintiffs’ petition for a writ of mandamus threatens to upend the role that consulting experts play in preparation of the statistical analyses that underlie these and similar complaints, and it may seriously compromise the ability of attorneys to ferret out misconduct like the kind alleged here. On the other hand, granting Plaintiffs’ petition risks providing potential plaintiffs an undiscoverable forum to “torture” the market data until it yields an actionable case. Either way, this dispute over the uncited, unreferenced expert analyses merits close attention going forward.

This post was written by Peter J. Sluka.

We welcome your feedback. If you have questions or comments about this post, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at jlundin@schlamstone.com or Peter J. Sluka at psluka@schlamstone.com or call John or Peter at (212) 344-5400.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

Annnd we’re back. Have you missed the scintillating stories of mischief and manipulation spun by your favourite lawyers-turned-bloggers? If the answer to that isn’t a resounding yes, I’ll just assume you’re new around here.

You know what else is new to these parts? Government-Sponsored Enterprises! Yes friends, this is the start of a brand-new miniseries here on the Manipulation Monitor. In this series, I’ll be tracking the ins and outs of several new litigations against the “usual customers” (read: the big banks), this time in their roles as horizontal competitors and dominant dealers of bonds issued by Government-Sponsored Enterprises, or GSEs. Complaints to date include the following:

• City of Birmingham Retirement and Relief System, Electrical Workers Pension Fund Local 103, I.B.E.W., and Local 103 I.B.E.W. Health Benefits Plan, individually and on behalf all others similarly situated v. Bank of America N.A., Barclays Bank PLC, Barclays Capital Inc., BNP Paribas Securities Corp., Citigroup Global Markets Inc., Credit Suisse AG, Credit Suisse Securities (USA) LLC, Deutsche Bank AG, Deutsche Bank Securities, Inc., First Tennessee Bank, N.A., FTN Financial Securities Corp., Goldman Sachs & Co. LLC, J.P. Morgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., and UBS Securities LLC, 1:19-cv-01704;
• Alaska Electrical Pension Fund, on behalf of itself and all others similarly situated v. Bank of America N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Barclays Capital Inc., BNP Paribas Securities Corp., Citigroup Global Markets Inc., Deutsche Bank Securities, Inc. HSBC Securities (USA) Inc., HSBC Bank PLC, J.P. Morgan Chase Bank, N.A., Nomura Securities International, Inc., TD Securities IUSA) LLC, and Wells Fargo Securities LLC, 1:19-cv-01796-UA; and
• Lincolnshire Police Pension Fund, Individually and on Behalf of All Others Similarly Situated v. Bank of America N.A., Barclays Bank PLC, Barclays Capital Inc., BNP Paribas Securities Corp., Citigroup Global Markets Inc., Credit Suisse AG, Credit Suisse Securities (USA) LLC, Deutsche Bank AG, Deutsche Bank Securities, Inc., First Tennessee Bank, N.A., FTN Financial Securities Corp., Goldman Sachs & Co. LLC, J.P. Morgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., and UBS Securities LLC, 1:19-cv-02045.

The World as I See It: An Overview of the GSE Bond Market

These newly-filed class action complaints, which have been accepted as related by Judge Jed S. Rakoff of the Southern District, all allege violations of the Sherman Act arising from a conspiracy by the defendants to fix prices and restrain competition in the market for unsecured bonds issued by various GSEs, including the Federal National Mortgage Association (“Fannie Mae,” or “Fannie”), the Federal Home Loan Mortgage Corporation (“Freddie Mac,” or “Freddie”), the Federal Farm Credit Banks Funding Corporation (“FFCB”), and the Federal Home Loan Banks (“FHLB”). The City of Birmingham and Lincolnshire Police cases focus specifically on Fannie and Freddie bonds (“FFBs”), while Alaska Electrical takes a more general approach, attacking the markets for all unsecured bonds issued by Fannie Mae, Freddie Mac, FFCB, and FHLB, which I’ll refer to more generally as “GSE bonds.”

While GSE bonds are not backed by the “full faith and credit of the United States,” these bonds do benefit from their association with the government, and are generally regarded as secure investments by investors (including our various plaintiffs). These bonds are sold on a secondary market, with primary, pre-approved dealers like the Defendants serving as intermediaries. The dealers purchase bonds from the GSEs at issuance by way of auction or syndication and re-sell them on the secondary market to investors, making their profit on the mark-up.

The secondary market for GSE bonds is an “over-the-counter” (“OTC”) market, which means that investors are required to communicate directly with a salesperson or employee of the dealer, either by phone or digitally, in order to receive a price quote. The result is a highly opaque market: while investors may communicate with several different dealers seeking price quotes, they cannot see GSE bond prices in real time, and thus cannot evaluate prices quoted by multiple dealers without a substantial delay. The opacity is exacerbated by the fact than most dealers place short expiration times on the quotes they provide, making it impracticable to “shop around” to more than a small handful of dealers at a time.

On June 1, 2018, Bloomberg reported that four confidential sources revealed that the DOJ Antitrust Division is conducting a criminal investigation into collusion among dealers to fix FFB prices. Specifically, the investigation focuses on illegal activity of bank traders suspected of coordinating their actions to benefit the institutions they work for. All three complaints mark the reveal of this investigation as the first time plaintiffs learned of their anticompetitive conduct, arguing that, because of Defendants’ fraudulent concealment, plaintiffs and the classes they represent were not aware of the misconduct and could not have discovered it through an exercise of reasonable due diligence. Accordingly, all Plaintiffs assert that the applicable statute of limitations on their claims were tolled until that date.

Frank D. Fixer: Plaintiff’s Proof of Foul Finagling

The two FFB-specific complaints, City of Birmingham and Lincolnshire Police, rely on much the same evidence to back up their claims, while Alaska Electrical takes a slightly different approach in its analysis across various GSE markets. Let’s look at each in turn, shall we?

Fixing the FFBs – The Details in the Fabric

The City of Birmingham and Lincolnshire Police complaints identify three key ways in which they allege that prices and other economic data confirm the existence and impact of Defendants’ conspiracy. The economic facts that they lay out in their respective complaints are the result of an analysis conducted by the Plaintiffs, and identify anomalies in FFB pricing that are inconsistent with normal, competitive market conditions. Plaintiffs further claim that these economic facts are statistically significant with a confidence degree of 95% — that is to say, the results are at least 95% likely to have been caused by factors other than chance or co-incidence. Plaintiffs’ analysis covered the period between March 1, 2010 through December 31, 2017, and, as will be described below, identified sharp changes in the market following an April 27, 2014 report by the Financial Times that DOJ criminal prosecutors were travelling to London to question FX traders—thus confirming that criminal prosecutions would not be limited to LIBOR.

1. Fixing prices of newly-issued FFBs in the week following each new FFB issuance.

Freddie and Fannie issue new FFBs at set intervals; the most recently issued FFBs are known as “on-the-run” FFBs, while all other, older FFBs with similar characteristics are known as “off-the-run” FFBs. In a competitive market, it would be expected that the difference between what Defendants paid to Fannie and Freddie to purchase the FFBs and the price at which Defendants sell those FFBs to investors will particularly small immediately after new FFBs are issued, and particularly on the first day, as the impact of new information (such as changes in interest rates, Fannie/Freddie creditworthiness, or liquidity) is nearly non-existent. Indeed, Plaintiffs’ review of pricing data shows that, after the class period, the difference in price for FFBs sold on “offer day” (day of issue) was very small, averaging 0.4 cents. Before April 27, 2014, however, the difference was 3.2 cents – nearly eight times higher.

Similarly, Plaintiffs compared the price differential for the week after offer days; this review showed that the increase in price averaged only 0.73 basis points over the baseline after April 27, 2014; during the class period, however, it was nearly four times higher, with an average increase of 3.01 basis points over the baseline. Plaintiffs also compared the prices defendants charged for FFBs in the class period to those charged for U.S. Treasury securities with comparable maturities; these securities carry a similar amount of credit risk as FFBs, and are affected by the same market conditions and macroeconomic factors, but Defendants prices for FFBs on offer days was highly abnormal as compared to Treasury securities. Specifically, Plaintiffs found that the prices charged by Defendants for FFBs over the yield offered by U.S. Treasury securities was nearly double that to non-Defendant FFB dealers. Further, after April 2014, the difference between Defendants and non-Defendant dealers was negligible.

2. Fixing prices for on-the-run FFBs artificially higher in the period leading up to a new FFB issuance

As previously discussed, newly issued FFBs of a given type generally have similar characteristics of existing FFBs, except that they mature later. Accordingly, the prices of newly-issued FFBs are closely correlated with the prices of those previously-issued, and, in a competitive market, one would expect to see lower prices for FFBs that were about to go “off the run” than for newly-issued FFBs. This is because the market for on-the-run FFBs is generally more liquid than the market for off-the-run FFBs, with investors preferring to purchase more liquid FFBs so they have a higher likelihood of funding an investor at market price should they decide to sell. Accordingly, in the days leading up to a new issuance one would expect the prices for FFBS about to go off the run to drop as investors prefer to purchase from the new issuance. During the class period, however, Plaintiffs’ analysis showed that notes about to go off-the-run experienced a statistically significant price increase in the days leading up to the new issuance. By way of further comparison, and to isolate against any potential macroeconomic factors affecting pricing, Plaintiffs compared prices in transactions between Defendants and investors against transactions between Defendants for the same instruments. This comparison showed that the price inflation for notes about to go off-the-run only occurred in transactions between Defendants and investors. And, as with the pricing of newly-issued FFBs, price inflation for notes about to go off-the-run dissipated after April 27, 2014.

3. Quoting agreed-upon, artificially inflated bid-ask spreads to investors throughout the class period

The allegations in this section concern the profits that Defendants earned on all FFB transactions through the class period. In a competitive market – and I am aware I am over-using this phrase, but it’s a handy one – dealers would compete with each other by offering narrower bid-ask spreads to their customers. When a dealer charge wider spreads, either by lowering the bid price or by raising the ask price, that dealer should, in theory, lose customers to rivals offering tighter spreads. Offering tighter spreads would make economic sense for dealers, despite the lower profits, because it would give them a better chance to earn the customer’s business. Conspiracy to fix bid-ask spreads could be accomplished by agreeing to offer a particular quote or to agree to ask a minimum bid spread; in either case, the dealers are better off because they can guarantee a consistently higher profit margin without the fear of losing their customers to competition from rivals. Defendants were able to accomplish this, Plaintiffs posit, because they jointly underwrote more than 64% of all FFB underwriting during the class period.

In support of this theory of artificially widened spreads, Plaintiffs analyzed bid-ask spreads quoted by dealers in the FFB market during and after the class period, with the (again, statistically significant) result that bid-ask spreads were more than 1.85 basis points wider during the class period as compared to post-class. Moreover, this discrepancy held true despite market conditions. For example, a more liquid market would generally be expected to result in decreased spreads; in the FFB market prior to April 27, 2014, however, increased liquidity actually correlated with wider spreads.

To further confirm their theory, Plaintiffs also analyzed “riskless principal” transactions, where a dealer purchases an FFB after it has already agreed to sell the FFB to another customer (or vice-versa), and therefore never bears any liquidity risk or risk from other changes in market conditions. In these unique transactions, the average bid-ask spread prior to April 27, 2014 was 13.4 basis points; in the post-class period, this dropped to 11.9 basis points. These numbers further increased when Plaintiffs reviewed transaction data with known dealers, showing that the Defendant dealers had bid-ask spreads a full 43% wider than non-Defendant dealers for the relevant period.

Geek in the Pink on the Gulling of the GSE Bonds

In contrast to the FFB cases, the Alaska Electrical complaint posits a much larger class period, running from January 1, 2012 through June 1, 2018, and their analysis similarly covers a broader period.

One feature of the GSE bond market addressed in more detail in the Alaska Electrical complaint is the failure of Defendants to separate their syndication and trading markets, with the result that the same desk, and largely the same people, were responsible for both underwriting new GSE bond issuances and for trading in the secondary GSE market. That is to say, the same people who were in constant communication with other dealers for the purposes of syndication were the very same people responsible for trading the bonds later on – a situation ripe for collusion, and, I assume, a nightmare for any legal compliance practitioner. This overlap, Plaintiffs posit, resulted in the “fundamental agreement” that Defendants would not complete against each other in the market for GSE bonds, but instead cooperate to maximize their own profits at the expense of their customers, many of whom they shared in common. This was carried out in person, through electronic chatrooms such as Instant Bloomberg, instant messaging, and telephone.

To evaluate the results of the alleged conspiracy, Plaintiffs made use of “screens:” statistical tools based on economic models that make use of data such as prices, bids, quotes, spreads, market shares, and volumes to identify the existence, causes, and scope of conspiratorial behavior. Where the FFB plaintiffs, Plaintiffs largely relied on differences during and after the class period to identify evidence of conspiracy, the Alaska Electrical complaint largely compares the “expected” market, as generated by models, to the prices actually observed.

The first “screen” utilized by Plaintiffs was a regression analysis modelling dollar bid-offer spreads as a function of a variety of market fundamentals and bond-specific characteristics. The analysis uses these factors, which have been previously identified in literature as fundamental drivers of bid-offer spreads, to determine if basic economic factors could explain the observed movement in GSE bond spreads. This analysis very accurately predicted the level of GSB bond spreads both before 2012, and from June 2, 2018 to the present. For the period between January 1 2012 and June 1 2018, however, the exact same factors and bond-specific characteristics applied to the same universe of data by the model produced results that were markedly different from actual spreads. This confirms, per Plaintiffs, that during that period the market was “under assault” by forces not accounted for in the macroeconomic and bond-specific data – i.e., the Defendants’ conspiracy.

The second screen utilized by Plaintiffs was a different type of regression analysis, one which adds an additional variable into the analysis that identified the conspiracy period. With the “Collusion Indicator” set to “yes” for the class period, the analysis tests whether the indicator is statistically significantly positive or not. Given that we’re now on page five of this blog post, I doubt many will be surprised when I relate that this Collusion Indicator was found to be related to the actual spreads for the bonds to a statistically significant degree.

The third screen was performed to analyze how consistent the spreads were for GSE bonds across time. A conspiracy to maintain an advantageously high bid-offer spread on a consistent basis, irrespective of the larger economic landscape, would theoretically manifest itself in spreads that were relatively stable over time. What the analysis found was that the GSE bond spreads were more predictable from day-to-day during the class period (when they were allegedly being manipulated) than they were outside of the class period. This difference was, again, statistically significant, confirming that there was an artificial pressure being applied to the GSE bond market during the core conspiracy years.

An additional three screens were performed by Plaintiffs in the course of this analysis, showing, respectively, that (a) GSE bonds reacted differently to external stimuli during the conspiracy years – for example, the level of liquidity in the market had a statistically smaller impact on spreads for GSE bonds during the conspiracy than before or after it; (b) yields for the GSE bonds were less stable during the core conspiracy years than before or after, as a result of Defendants pushing yields artificially low when selling, and artificially high when buying, causing greater volatility; and (c) a basic comparison of bid-offer spreads on GSE bonds to comparable U.S. Treasury bonds of comparable maturity show that the difference is larger during the conspiracy period than before – despite the preceding period containing the U.S. financial crisis, which had significant effect in credit risk, and thus bid-offer spreads, for GSE bonds. Average GSE bond bid-offer spreads were wider in the conspiracy period, while average Treasury spreads barely changed.

Finally, the Alaska Electrical complaint also provides a review of relevant academic literature, concluding that the results of the econometric analyses described above are exactly what that literature predicts would result from a conspiracy not to compete. Chief among the evidence relied on here are studies demonstrating that increased competition among dealers reduces spreads and prices paid by investors in financial markets, as well as reduces transaction costs for bond market participants. These studies provide further evidence, according to Plaintiffs, that the market for GSE bonds were subject to a competition-reducing conspiracy for the class period.

The Remedy:

After their respective analyses, all complaints provide an overview of other current market-manipulation schemes before delving into the question of damages. The Alaska Electrical plaintiffs identified fairly broad categories of damages, but come down to losses suffered as a result of Plaintiffs’ payment of supra-competitive prices and bid-offer spreads for GSE bonds. In contrast, the City of Birmingham complaint – though not the Lincolnshire Police complaint – take their analysis a step further, identifying – in addition to general allegations of overcharge and underpayment – specific instances of purchases by Plaintiffs from the various defendants. If you’re a regular reader of this blog (and if you’ve made it so far into this post, you really ought to be), you may recall that many of the motions to dismiss briefs filed in these antitrust actions attack plaintiffs for failure to identify losses with adequate particularity; it will be interesting to see what the briefing looks like when Defendants are faced with this combination of up-front analysis and specific instances of affected transactions – though even here, Plaintiffs still don’t attach specific loss numbers to the transactions they’ve pinpointed.

With that, I’ll wrap up this blog post. Expect future posts on the motion to dismiss briefing, discovery disputes, class action certification, and any other interesting tidbits that may arise.
PS – bonus point to the clever reader who can guess what artist your favorite antitrust blogger was listening to whilst writing this missive . . . .

This post was written by Alexandra M.C. Douglas.

We welcome your feedback. If you have questions or comments about this post, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at jlundin@schlamstone.com or Alexandra M.C. Douglas at adouglas@schlamstone.com or call John or Alexandra at (212) 344-5400.

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On February 22, 2019, the City of Birmingham’s pension fund and various other benefit funds filed a proposed antitrust class action in the Southern District of New York. The complaint alleges that a number of major banks–Bank of America, Barclays, BNP Paribas, Credit Suisse, Merrill Lynch, Citigroup, Goldman Sachs, and Deutsche Bank, among others–conspired to manipulate the secondary market for unsecured bonds issued by Fannie Mae and Freddie Mac between 2009 and 2014. The defendants are the largest dealers in the $550 billion over-the-counter secondary markets, and the complaint alleges that they colluded among themselves to inflate the prices of bonds they sold and to deflate the prices of bonds they repurchased from investors, including the institutional investors who are the lead plaintiffs. Interestingly, the complaint relies on the fact that the bid-ask prices changed dramatically in April 2014 after the banks came under additional scrutiny due to the LIBOR manipulation scandal. The complaint also alleges that this conduct is the subject of an ongoing Department of Justice investigation. The SDNY antitrust action is before Judge Jed Rakoff.

Last week, the City of Philadelphia filed a proposed antitrust class action in the Southern District of New York. The action alleges that a number of major banks–Bank of America, Merrill Lynch, Citibank, Goldman Sachs etc.–conspired to artificially inflate the interest rates for a type of tax-free municipal bonds called Variable Rate Demand Obligations (VRDOs). The complaint alleges that the defendants were engaged by particular issuers as re-marketing agents (RMAs), and were required to (1) set weekly interest rates for each VRDO, and (2) repurchase and resell any VRDOs investors redeemed. Each issuer could discharge its RMA and choose another, so in theory the RMAs were competing for issuers’ business and were incentivized to set interest rates as low as possible for the issuers’ benefit. However, the RMAs colluded with one another in setting higher interest rates, which was to the detriment of the issuers who had to pay the interest, but to the benefit of the RMAs because higher rates would result in fewer investor redemptions. The complaint further alleges that this collusion was exposed by an industry whistleblower and that an SEC criminal investigation is also underway. More information about the whistleblower suit and the SEC investigation are available on line. The SDNY action is before Judge Lewis Kaplan.