The Manipulation Monitor: A Guide to Financial Market Manipulation Antitrust Litigation

Commentary on Antitrust and Other Competition Law Litigation Relating to the Financial Services Industry.
Posted: February 25, 2019

City of Philadelphia Files Anti-Trust Class Action Arising From Whistleblower Allegations That Banks Fixed VRDO Interest Rates

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.

Posted: February 11, 2019

New LIBOR Suit Alleging Rate-Rigging Continued After 2014 Not Added to Existing LIBOR MDL

Law360 reports that the Southern District of New York has refused to join a new LIBOR class action filed by Putnam Bank with the ongoing LIBOR multi-district litigation that is being overseen by Judge Naomi Reice Buchwald. The existing LIBOR MDL concerns rate-rigging from 2007 to 2009/2010, when the British Bankers’ Association (BBA) was the LIBOR administrator, whereas Putnam’s action concerns rate-rigging from 2014 onward, after Intercontinental Exchange Inc., which owns the New York Stock Exchange, had replaced BBA as LIBOR administrator by. Putnam’s claims have been widely reported in the British press.

Posted: January 22, 2019

The VIX is Fixed?! Plaintiffs Would Like Some Discovery Real Quick

With apologies for the substandard rhyming in this title, this is a quick post to update you on the current status of the VIX Plaintiff’s motion for expedited discovery. On Friday January 11th, a minute entry on the docket showed that Plaintiff’s motion was denied, without prejudice, with an order with further court dates to be issued once the motion to discuss is fully briefed.

Note: If you’re looking for an overview of the VIX case more generally, take a look at this post for general background on the platform, and this one for a more detailed look at the complaint. Our review of the motion to dismiss can be found here.

Getting back to discovery: in a motion made October 24th, Plaintiff’s motion sought non-anonymized trading data that would allow them to identify the traders responsible for the manipulations detailed in their complaint (the “Doe Defendants”). The non-anonymized trading data that Plaintiffs sought was manipulators is in the possession of Defendants Cboe Global Markets, Inc., Cboe Futures Exchange, LLC, and Cboe Exchange, Inc. (“CBOE”), which operate the trading platforms on which the manipulation occurred. Their requests were, Plaintiffs argued, narrowly tailored to target their need to identify the Doe Defendants, and to minimize the burden on CBOE—they sought only the trading data necessary to identify the manipulators, and only for the settlement days during the class period (for most of the period, that was only once per month).

Plaintiffs posited that such expedited discovery was critical both because of concerns about the expiration of applicable statutes of limitations and repose, and because of risk that the yet-unnamed Doe Defendants may fail to preserve key evidence unless or until they are named. With respect to statute of limitations, Plaintiffs pointed to the two-year statute of limitations applicable to their securities and commodities claims under 28 U.S.C. § 1685(b) and 7 U.S.C. § 25(c), respectively. Anticipating that Defendants would argue that the statutes began to run no later than May 2017, when Griffin and Shams’ academic paper on the subject was published, Plaintiffs stressed the importance of permitting discovery that would allow them to identify the Doe Defendants and name them in an amended pleading prior to May 2019.

With briefing on the motion to dismiss not schedule for completion until January 2019—and therefore no discovery likely to be forthcoming until summer 2019 at the earliest—Plaintiffs expressed genuine concerned about the potential loss of evidence in the interim. While the CBOE should have the trading data needed to identify them, the Doe Defendants will have their own evidence not in possession of the CBOE; specifically, they raised topics like internal chats, emails, and text messages that would be central to proving scienter.

Opposing the discovery request, the CBOE Defendants argue that Plaintiffs’ requested discovery is not “merely” to identify the Doe Defendant manipulators, but “merits discovery, presumably to remedy the substantive defects in their complaint.” A typical request for “Doe Discovery,” Defendants argue, is targeted discovery to determine the wrongdoer’s name. They give examples such as requesting the name of the Internet user associated with a particular IP address, where the user was thought to have committed copyright infringement, or that a “plaintiff might allege that a particular quote, order, or trade was improper, and therefore ma seek targeted discovery to determine the identity of the individual who placed the quite or order that may have resulted in a trade.” Plaintiffs’ discovery request should not be granted, according to the CBOE Defendants, because they cannot point to particular quotes or trades tainted by the wrongdoing, and are instead asking for information about trades that might have been “susceptible” to manipulation, and are basing the determination of susceptibility merely on aggregate data. Echoing arguments made in their motion to dismiss, the CBOE Defendants insist that “such generalized suspicions are insufficient to state a claim for relief,” and posit the theory that the discovery now requested is in the nature of a fishing expedition, with Plaintiffs rummaging for data in hopes of determining “whether any manipulation has occurred, and if so, when.” Without a particularized discovery request, Plaintiffs’ request should not be granted, particularly because the motion to dismiss is still outstanding – if the motions are granted, there would be no discovery, and expedited production would thus place an unnecessary burden on the CBOE Defendants.

Plaintiff’s response brief focuses on rebutting the CBOE Defendant’s argument about improper “merits discovery.” On this point, Plaintiffs point out that the bulk of the CBOE’s motion to dismiss is devoted to defenses that are unique to the CBOE, and thus “irrelevant to the viability of the Doe Defendant claims or merits of [the] discovery motion.” The transactional data that Plaintiffs are seeking would not assist them in overcoming these CBOE-specific defenses; therefore, Plaintiffs argue, it is clear that the discovery is not being sought for the purpose of amending the pleadings as against CBOE, but only to identify additional wrongdoers. What’s more, the complaint alleges that the SOQ process was manipulated routinely and systematically, and that Plaintiffs’ econometric analyses flagged almost all of the settlements as having been manipulated; this is sufficient to justify expedited discovery, say Plaintiffs, because Courts have “repeatedly relied” on such analyses to uphold manipulation claims.

The response brief also emphasizes the “timeliness” purpose of the request: Plaintiffs face undue prejudice because of the increasing threat of timeliness defenses by the Doe Defendants if Plaintiffs are unable to amend the complaint to specifically name those defendant prior to May 2019. In support of this concern, Plaintiffs cited to Rabin v. John Doe Market Makers, Case No. 15-cv-00551 (E.D. Pa.), a seemingly on-point matter in which the plaintiff alleged harm from options trading manipulation, and sought discovery from the relevant exchanges to identify the defendants. Very helpfully to plaintiffs in both that case and the one at bar, the court allowed requested needed to identify manipulators on the grounds that denying such discovery could effectively shield others from liability.

Argument on this discovery motion was held on January 11, 2019, and the minute entry, described above, shows that Judge Shah denied the motion without prejudice. It remains to be seen what Plaintiff’s next steps to identify the Doe Defendants will be, but watch this space for further updates.

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 or Alexandra M.C. Douglas at or call John or Alexandra at (212) 344-5400.

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

Posted: January 14, 2019

HSBC Agrees To Settle SSA Bond Manipulation Suit

Law360 and Reuters are reporting that HSBC Bank PLC and HSBC Securities (USA) Inc. have agreed to pay $30 million to settle antitrust claims arising from allegations that a number of banks conspired to rig the SSA (Sovereigns, Supranationals, and Agencies) bond market between 2005 and 2015. Deutsche Bank and Bank of America previously settled claims; the remaining defendants include TD Bank, Barclays, BNP Paribas, Credit Agricole, and Credit Suisse. The action is pending in the S.D.N.Y. before Judge Edgardo Ramos.

Posted: January 2, 2019

The VIX is Fixed?! Defendants Request this Suit be Nixed

On November 19, 2018, the CBOE defendants filed a motion to dismiss the Consolidated Amended Complaint. That complaint, as well as an overview of the VIX index itself, were the subject of previous posts in this stirring series, and can be found at the following links:
The VIX is Fixed?! A Preview of the Tricks
The VIX is Fixed?! A Complaint is Remixed

Once you’ve caught up on all the (alleged) trixing and fixing, it’s time to take a closer look at the CBOE Defendants’ arguments in favor of nixing this vexatious VIX suit. While the majority of their argument is given over to refutation of Plaintiffs’ Rule 10b-5 claim, the seventy-two-page brief also covers Plaintiffs’ averred failure to state a claim under the Commodities Exchange Act (“CEA”), the purported preemption of Plaintiffs’ negligence claim, a general refutation of Plaintiffs’ aiding-and-abetting claim, and an overall argument against this manipulation’s very existence.

Regulatory Immunity

Cboe Options, the exchange on which SPX and VIX options are traded, is a registered “national securities exchange” under the Securities Exchange Act (“SEA”). Cboe Options further has status as a “self-regulatory organization” (“SRO”), which means that it must comply with the provisions of the Act, and enforce compliance with its members. SROs are subject to oversight and control by the SEC, and the SEC has broad powers to sanction SROs that fail to meet their statutory obligations. Like other SROs, the Cboe Option’s responsibilities under the Act and related SEC supervision come with what Defendants’ describe as an “important corollary:” Cboe Options is “immune from suit for conduct falling within the scope of the SRO’s regulatory and general oversight functions.” This immunity does not make Defendants unaccountable, they insist – it merely vests the SEC, rather than private plaintiffs, with the authority to hold them accountable for their failure to carry out their regulatory responsibilities.

In order for this regulatory immunity to apply, the claims made by the Plaintiffs must relate to the proper functioning of the regulatory system. Defendants insist that they do so relate, noting that Plaintiffs allege that Cboe Options should have designed the SOQ process differently to better guard against manipulation, and then should have policed the market more effectively to root out the manipulation that the do assert occurred. Both tasks—guarding against and responding to manipulation—are what Defendants describe as “core regulatory and oversight functions of an exchange.” Specifically, they point to 15 U.S.C. § 78f(b)(5), which requires an exchange to have and enforce rules “designed to prevent fraudulent and manipulative practices.” Defendants also point to NYSE Specialists, a decision which emphasized the fact that a plaintiff’s “own characterization of [its] claims” can “implicitly concede that the [exchange] was acting within the realm of [its] oversight powers.”

Defendants further object to what they describe as Plaintiff’s efforts to “circumvent” regulatory immunity. The first of these is proprietary products: Plaintiffs suggest that immunity does not extend to the initial design of products susceptible to manipulation. This cannot survive, Defendants insist, because Cboe’s regulator, the SEC, specifically approved the offering of VIX options, including the protested surveillance procedures. The crux of Plaintiffs’ claims, Defendants argue, is that Cboe Options should have either stopped listing the product with the flawed settlement mechanism, or pursued disciplinary action—it is Cboe’s performance as a regulator within the existing system, not how that system was initially designed, that is the source of Plaintiff’s injuries. Second, Plaintiffs point to statements by Cboe Options that, allegedly, “promoted VIX Options and VIXX Futures as an accurate and reliable means for investors to take positions on market volatility.” Defendants argue that allegations of fraud based on these statements are also barred by regulatory immunity because such statements could only be found to be false if Defendant’s market-policing efforts were deficient—and those judgments are exactly what is protected by regulatory immunity. Plaintiffs also raise Cboe Option’s status as a “profit-seeking entity,” which Defendants claim to “irrelevant to immunity” under NYSE Specialists, which held that “[importing] a motive element to absolute immunity. . . would be incomparable with the doctrine’s purpose.”


Defendants also argue that Plaintiffs’ claim is precluded by the Securities Exchange Act because they seek to impose liability based on Cboe Options rules that the SEC approved. This is not appropriate, Defendants insist, because the Supreme Court has recognized that a regulator’s approval of conduct may preclude plaintiffs from bringing a suit under federal law based on the same conduct. In support of this theory, Defendants cite that court’s decision in Providence, where SCOTUS declined to extend immunity to the activities at issue, but noted as a “distinct potential ground for dismissal” circumstances under which a “plaintiff challenges actions of an SRO that are in accordance with the rules approved by the SEC, the challenge may be precluded because it would conflict with Congress’s intent that the SEC…make the rules regulating those markets.” It may be the case that “may” is the operative word in that, quote, however, and the Providence court declined to resolve the issue as it had not been briefed by the parties. Defendants go on to note that the CFTC and SEC issued a join order concerning the VIX Index, and, to do so, reviewed “the calculation and methodology” of the Cboe’s volatility indexes, concluding that VIX futures “show not be readily susceptible to manipulation because of the composition, weighting, and liquidity of the [SPX] options” in the VIX Index.

Failure to Plead Elements of Rule 10b-5

    • Fraudulent Acts

Next up, Defendants argue that Plaintiffs have failed to make allegations sufficient to adequately plead the elements of a claim under Rule 10b-c. Looking first at fraudulent acts, Defendants claim that Plaintiffs have not adequately alleged any misleading statements, nor have they adequately alleged culpable failures in disclosure. The statements cited by Plaintiffs are not, Defendants argue, misleading or inaccurate in any way: “most describe the basic properties of the VIX Index and the opportunities that VIX derivatives offer . . . .” Not only are these statements not all that different from what the SEC has itself said about VIX derivatives, but none of these statements, Defendants insist, either states or implies that VIX derivatives are immune from third party manipulation—nor would any “sophisticated investor” take such statements to provide that type of assurance.

Plaintiffs also allege that Cboe Options “published the wrong, manipulated prices to the market,” and that these prices constituted materially misleading statements. Defendants argue that these allegations are deficient for two reasons: one, Plaintiffs do not identify a statement in which the Cboe defendants warranted that the final settlement values were free of manipulation; and, two, even if a manipulated settlement value could constitute a false statement, Plaintiffs allege only general facts, and do not provide any details to suggest that each, or any particular, VIX settlement was manipulated. All the allegations Plaintiff make are made on the basis of aggregate data, and they therefore fail to state with particularity any reason to believe that individual statements corresponding to a final settlement value were false.

With respect to failure to disclosure, Plaintiffs argued that Cboe Options made a culpable omission insofar as it knew of (or recklessly disregarded) systematic manipulation, and committed fraud through it’s failure to disclose that fact. While Defendants conceded that an allegation of fraud based on non-disclosure can stand when there exists a duty to speak, they argue that such a duty simply did not exist. First, Rule 10-b imposes a duty not to “omit to state a material fact in order to make the statements made . . . not misleading.” Relying on Matrixx Initiatives, Defendants interpret this statementt mean that a duty not to tell “half-truths” only arises when there is some affirmative statement made that is materially misleading absent further disclosure. This raises a further issue of particularity, as Defendants claim that Plaintiffs failed to allege any specific, misleading half-truths—against, they say, the only statements identified in the complaint concern general properties of the VIX derivatives, and are characterized as misrepresentations, not half-truths, and are generally “too vague to be actionable.” Defendants then go on to point out that the duty to disclose only arises when a “fiduciary or similar relationship of trust” exists. In this case, Plaintiffs do not–and, according to Defendants, cannot—allege that Cboe Options owes them any fiduciary duty.

    • Scienter

Defendant’s brief now shifts to the second element, scienter. Under the PSLRA, Plaintiffs must “state with particularity facts giving rise to a strong inference that defendants acted wit the required state of mind.” The required state of mind is one with an intent to deceive, and, Defendants posit, Plaintiffs have failed to meet this standard. One of Plaintiff’s central arguments in support of scienter is their unfettered access to the raw data required to appropriately identify the manipulation they alleged, together with their consistent engagement in “market surveillance.” This is insufficient, Defendants argue, for three reasons. First, Plaintiffs never allege that any official responsible for making the misleading statements would have “had reason to analyze the trading data, or, indeed, would have had the technical capacities to do so.” This is necessary under the corporate scienter rule, Defendants argue, because someone who actually spoke for the defendant must hold the intent to deceive as to the alleged manipulation. Second, Plaintiffs’ scienter theory based on access to trade data assumes that a competent observer would be able to recognize manipulation. This is both inaccurate, Defendants say, and contrary to Plaintiffs’ own assertions that no one suspected manipulation prior to the publication of an academic paper in May 2017. They point specifically to Plaintiff’s request that the statute of limitations be tolled on the grounds that even a reasonably diligent person would not have had cause investigate the possibility of manipulation – though it is worth pointing out that Plaintiffs made such assertions from the perspective of an investor, not as an entity with unlimited access to the relevant data.

Plaintiffs further argued that Cboe’s economic interest in the VIX derivatives also supported an inference of scienter. Defendants dispute this on the grounds that “allegations of a generic motive to protect the company are an insufficient basis for inferring the requisite scienter,” and, further, that the importance of the VIX derivatives simply provides a greater motive to “aggressively police” any manipulation – not to turn a blind eye to it. Defendants insist that, under FRE 407, Plaintiffs also cannot infer scienter from the Cboe’s subsequent measures, nor can they use it to infer that prior standards were deficient. A similar argument applies, Defendants say, to any reliance on the disciplinary proceedings brought by Cboe Options with respect to VIX options.

    • Reliance

On the topic of reliance, Defendants first argue that Plaintiffs cannot simply assert reliance “upon the fairness of the VIX SOQ process,” because it is not an allegation of any specific, actionable misstatement or omission. Nor should Plaintiffs’ reliance should be presumed under Affiliated Ute, Defendants argue, because Cboe Options had no duty to disclose. The “fraud-on-the-market” doctrine is also inapplicable, say Defendants, because that doctrine assumes that one is investing in the same entity that carry out the market manipulation; because Plaintiffs are investing in VIX derivatives, and not in Cboe Options itself, “even if a Cboe defendant had withheld information about manipulation of [the VIX] markets, Plaintiffs have alleged no reason to believe that “the market’s” belief about whether trading was or was not being manipulated was priced in to the prices at which Plaintiffs bought and sold those derivatives.”

    • Loss Causation

In their final push against the merits of Plaintiffs’ 10b-5 claims, Defendants attack their allegations of loss causation. This point is again tied to the specificity of Plaintiffs’ allegations of misrepresentation; Defendants argue that Plaintiffs have not plausibly alleged that they have suffered a loss as a result of a misrepresentation by Cboe Options because Plaintiffs have not tied any particular statements made by the Cboe defendants to a specific loss suffered by Plaintiffs. Moreover, Plaintiffs’ allegations are not even sufficient to establish loss causation based on manipulation by third parties, or so Defendants say, because Plaintiffs do not allege—either in general or in a particular transaction—that the manipulation about which they complain caused settlement prices to go up or down, and whether such changes would have in fact harmed them. Citing Sonterra Capital Master Fund, Defendants insist that manipulation causing unspecified effects is simply insufficient to state a claim.

Failure to State a Claim Under the CEA

The CEA implicates a different regulatory scheme, but, according to Defendants, Plaintiffs claims fail for much the same reasons. Cboe Futures, like Cboe Options, is a self-regulatory organization. It has duties under the CEA to oversee its markets and enforce standards of conduct. Plaintiffs CEA claims fail, Defendants argue, first because there is no private right of action under § 5, and, second, with respect to claims under § 22, because plaintiffs failed to allege a failure to enforce any specific rule, that such lapse in enforcement caused specific losses, or that such lapse was motivated by bad faith.

With respect to the Section 5 claims, Defendants cite to Sam Wong, a Second Circuit case holding that “wrenching the provisions out of § 5 out of context to create and exchange duty . . . and implying a private right of action…would disregard the framework Congress established” in support of their position that the core principals of § 5 are not enforceable via private cause of action.

On the § 22 claim, Plaintiffs’ claim rests, according to Defendants, on failure to enforce two rules that broadly prohibit fraudulent acts and manipulation of the market. This fails, per Defendants, for a reason we’ve heard repeated often: Plaintiffs failed to provide a factual basis to suggest that a specific order or trade was made with the intent to manipulate VIX futures. Evaluation of a rule violation is only possible when an SRO can evaluate the specific circumstances to determine if enforcement is warranted and if Plaintiff suffered losses, and it is “impossible to evaluate an SRO’s alleged failure to exercise its delegated enforcement powers absent similarly discrete allegations.” Similarly, Defendants point out that, under the CEA, Plaintiffs must allege that their losses were caused by a failure to enforce; without identifying specific instances of enforcement failures, they cannot allege that their asserted losses are the result of such failed enforcement.

Defendants also dispute whether or not Plaintiffs successfully alleged but-for or proximate causation such that they could establish that bringing the enforcement actions would have spared them their unidentified losses. And again, following the same lines, without identifying specific failures of enforcement, Plaintiffs cannot allege that their losses were caused by such failure. Defendants posit that, in order for plaintiff’s losses to have been the but-for result of a failure by Cboe Futures to enforce Rules 601 or 603, the disciplinary hearing that typically arises from such a manipulation would also have had to result in a refund of past transactions. Because plaintiffs do not allege that enforcement would have resulted in such a refund, such enforcement would not have averted Plaintiff’s losses. Defendants also posit, perhaps tenuously, that “there is no plausible causal link between such hypothetical disciplinary proceedings and future market activity.” On proximate causation, Defendants insist that a claim for damages will generally not proceed beyond the “first step” of a multi-link chain of cause and effect; in this instance, that would impose liability on the actual manipulators, not on Cboe Futures, because the “hypothetical deterrence effects” that Cboe’s potential disciplinary actions could have generated are too attenuated to support liability.

Defendants also argue that Plaintiffs have not adequately alleged bad faith with respect to Cboe Future’s lapse in enforcement. Congress has permitted a cause of action against exchanges for certain regulatory failures in the futures context, but only where an SRO acts in bad faith in it’s failure to perform its regulatory duties. Defendants note that the Second Circuit has found that this requirement is to be “strictly applied,” and thus Plaintiffs’ allegation of bad faith should be held to the particularity requirements of Rule 9(b) – a position the Seventh Circuit supports. To plead bad faith, Plaintiffs would need to allege facts supporting both willful blindness and an ulterior motive in the failure to enforce. This is not, according to Defendants, a bar they have reached. First, Plaintiffs themselves point out that the Cboe Defendants brought disciplinary proceedings with respect to volatility products, including the VIX index; this makes it implausible that the same Defendants were willfully avoiding the truth. Second, citing Zimmerman and Brawer, Defendants explain that, because “mixed motives” are a common feature of SROs—they, or their members, often have an interest in the markets they regulate—an interest in “generating increased trading volumes and revenues” is not sufficient for a claim of bad faith. Even if Plaintiffs have alleged an ulterior motive, Defendants argue, they have not provided sufficient basis for the Court to infer that this ulterior motive was the dominant one.

Plaintiff’s State-Law Negligence Claim Should be Dismissed

Defendants urge dismissal of Plaintiff’s negligence claim on grounds of immunity, preemption, and merit. With respect to immunity, Defendants argue that the same regulatory immunity that they insist barred the federal claims also bars state-law claims. In their favor, they cite a D.C. Cir. case, In re Series 7, which held that “the comprehensive structure set up by Congress is suggestive of both an intent to create immunity for [regulatory] duties, and of an intent to preempt state common law causes of action.”

Defendants also found a supportive case cite for their preemption argument, quoting the Seventh Circuit’s decision in Am. Agric. Movement Inc. for the position that the CEA preempts state-law claims that “bear upon the actual operation of the commodity futures markets.” Based on this, they argue that Plaintiff’s claim that the VIX futures settlement process was susceptible to manipulation would have a direct impact on trading or the operations of a futures market, and is thus preempted. Defendants also argue that Plaintiffs claims concerning options traded on Cboe Options are preempted in a similar manner by the Securities Exchange Act.

Aiding and Abetting under the CEA

Defendants dedicate brief page to Plaintiff’s aiding and abetting claim, which they note “is not clear . . . has anything to do with Cboe,” as it “appears to be charging that the John Does aided each other’s manipulation.” In an abundance of caution, however, Defendants take the time to note that, while Section 22 does create a cause of action against aiders-and-abettors, that is limited to entities “other than a registered entity.” Because Cboe Futures is a registered entity, the claim cannot apply. Defendants also argue that aiding and abetting cannot apply to Cboe Options or Cboe Global either, as Plaintiffs allegedly fail to establish that those entities had the requisite knowledge of the principal’s intent to violate the CEA, nor did they have the individual intent to further that violation. Citing Bosco, Defendants observe that “it would be most unlikely” that Cboe would “want to help an intermediary defraud [their] customers, for scandals such as a fraud can only hurt the Exchange.”

Inadequate Allegations of Manipulation

Finally—yes, really—Defendants argue that a “major defect” cutting across Plaintiff’s claims is their failure to adequately allege that a manipulation has, in fact, occurred. To this end, Defendants note that “price manipulation is a species of fraud” (under In re London Silver Fixing) and therefore subject to the heightened pleading standard of Rule 9(b). Plaintiffs must therefore describe the “who, what, when, where, and how of the fraud” with particularity—and, according to Defendants, have failed to do so. Plaintiffs fail, for example, to identify those responsible for the manipulation, or even the types of market participants responsible. And instead of describing the mechanism for any particular fraud, they “merely allege that two possible mechanisms are consistent with the aggregate data.” For a description of those methods—banging the close and manipulating the zero bid rule—check out our earlier posts in this series. Defendants further argue that Rule 9(b) prohibits Plaintiffs from using the discovery process to remedy this pleading defect.

Defendants then attack Plaintiff’s reliance on the Griffin and Shams paper, noting Griffin’s (disclosed) affiliation with an expert consulting firm that may profit from litigation on the same topics covered by his article, and that the paper itself states (after exploring and debunking several potential alternate explanations for the data) that it “cannot fully rule out all potential explanations without more granular data. Defendants also state that Plaintiffs have overlooked an innocent explanation to the aggregate data on trading volumes: strategy orders, which are routine and permissible, and, because the relate to a market participant’s positions in expiring volatility index derivatives, would explain the observed elevated trading volume.


While Defendants have put forward a strong brief, it will be some time before we know if it offered enough in the mix to defeat this VIX (lawsuit). Watch this space for our forthcoming installments—we’ll provide an update on the discovery motions currently in play next, and, of course, a close look at Plaintiff’s inevitable opposition to this motion.

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 or Alexandra M.C. Douglas at or call John or Alexandra at (212) 344-5400.

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

Posted: December 19, 2018

SSA Swindling? – Part III – Repleading After Dismissal – Is Plaintiffs’ Statistical Analysis Enough to Save Plaintiffs’ Claims?

This week, we return to In re SSA Bonds Antitrust Litigation, No. 1:16-cv-03711-ER (SDNY) (“In re SSA“), an action first introduced in our June 27, 2018, post, which gives a full account of the alleged collusion in the Consolidated Amended Complaint. In this post, we revisit Judge Ramos’ August 24, 2018, Opinion and Order granting the Motion to Dismiss Plaintiffs’ Consolidated Amended Complaint, previously covered in our September 4, 2018 post, and look to the Second Consolidated Amended Class Action Complaint (“SCAC” or “Second Amended Complaint”) filed November 13, 2018, after Plaintiffs were granted leave to replead and shore up deficiencies in their pleading of injury-in-fact.

Brief Overview of the Alleged Collusion

In brief, Plaintiffs are buy side funds, such as pension and retirement funds and asset management companies. They alleged that the Defendants, large dealer banks including but not limited to Bank of America, Barclays, and Credit Suisse, used their position as major players in the supranational, sub-Sovereign, and agency bonds (“SSA”) market to manipulate the bid-ask spread on SSA bonds. Plaintiffs based their allegations primarily on about 150 chats, phone calls, and other correspondence among individuals employed at the dealer-banks regarding certain deals. These 150 communications were produced by Bank of America and Deutsche Bank, who settled for a combined $65.5 million in August of 2017.

The Southern District Dismisses Without Prejudice and with Leave to Replead

In late August of 2018, Judge Ramos granted Defendants’ motion dismissing Plaintiffs’ Consolidated Amended Complaint for failure to state a claim because Plaintiffs failed to allege injury-in-fact sufficient to establish antitrust standing. Judge Ramos however granted Plaintiffs leave to replead until later in the fall of 2018. Judge Ramos based his decision primarily on the fact that, as Plaintiffs had not allegedly purchased any of the deals in question, the 150 communications on which Plaintiffs relied were not sufficient to plausibly allege a widespread conspiracy which harmed Plaintiffs, and therefore Plaintiffs had not alleged injury-in-fact sufficient to establish standing. In reaching his conclusion, Judge Ramos noted that deficiencies could potentially be shored up with, “statistical analysis of market prices and quotes or allegations based on government enforcement actions [which] may suffice to allege the expected impact of a manipulative tactic on a given market and the expected frequency of manipulation.” In re SSA Bonds Antitrust Litig., No. 16 CIV. 3711 (ER), 2018 WL 4118979, at *7 (S.D.N.Y. Aug. 28, 2018) (Citing In re London Silver Fixing, Ltd., Antitrust Litig., Nos. 14 MDL 2573, 14 Misc. 2573 (VEC), 2018 WL 3585277, at *27 n.36 (S.D.N.Y. July 25, 2018)). However, Plaintiffs only pleaded generalized academic literature, and did not plead statistical analysis, applying this literature to the facts of their case. Moreover, while Plaintiffs cited media reports that the government was investigating collusion in the SSA bond market, the reports did not go into sufficient specifics to help Plaintiffs plead injury-in-fact. Thus, “[b]ecause ‘Plaintiffs [did] not even present evidence that they traded at ‘artificial prices,’’ they have alleged ‘no actual injury …, let alone a connection between Defendants’ unlawful conduct and that non-injury.’” Id. (Citing Harry v. Total Gas & Power N. Am., Inc., 889 F.3d 104, 116 (2d Cir. 2018)).

The Second Consolidated Amended Class Action Complaint Provides Statistical Analysis, but Is it Enough?

While Judge Ramos indicated that statistical analysis may be enough to plead injury-in-fact, he stopped short of discussing at length what that statistical analysis should say in order to be sufficient. Judge Ramos at best indicated that the absence of an alleged analysis of spreads paid during and after the period of collusion was fatal. Plaintiffs revisited statistical analysis in the Second Amended Complaint noting that estimating the extent to which prices were effected by collusion could be quantified using a comparison of bid-ask spreads, as previously noted, or using an analysis of the profit margins and spreads on similar types of bonds or investment vehicles. SCAC ¶ 507.

For their analysis, Plaintiffs turned to the publicly available data from Bloomberg, which provides market-wide pricing data of the US SSA market but not data at the trade or quote level. SCAC ¶ 509. First, Plaintiffs performed a regression analysis, which, according to the Plaintiffs, included a “Collusion Indicator” or “a variable indicating whether or not the pricing information is being drawn from the core conspiracy period . .. to detect if bid-ask spreads were higher (or lower) during the alleged core conspiracy period than before or after, after controlling for [factors] that can legitimately cause spreads to vary across bonds and over time.” Those factors included: “(a) the default risk of the bond; (b) the coupon rate of the bond; (c) the time since issuance of the bond; (d) the time to maturity for the bond; (e) the issue size of the bond; (f) the total size of other issues outstanding from the same issuer; and (g) the inverse of the bond’s price. These factors are consistent with what other studies have found to be important drivers of the bid-ask spread for bonds.” This regression analysis found to a statistically significant degree, that the “Collusion Indicator was positively associated with spreads, which indicates that the alleged presence of the conspiracy is associated with higher bid-ask spreads, while its comparative absence is associated with lower bid-ask spreads.” SCAC ¶¶ 512-522.

Using this Bloomberg data, Plaintiffs also allegedly performed regression analysis to create a predictive model during the alleged conspiracy period of what bid-ask spreads “should” be based only on “legitimate economic factors” and compared that predictive model with real life market-wide data for that same period, finding that bid-ask spreads were “always higher during the core conspiracy period—and only during that period— than what can be explained by legitimate economic factors.” SCAC ¶¶ 523-525. A second predictive model was also allegedly created to predict the yields on SSA bonds rather than the spreads. While this model and actual market data were allegedly synchronized before and after the conspiracy period, with the predictive model explaining 96% of spreads and movements during those years, this yield-based predictive model was worse at predicting actual outcomes during the alleged conspiracy period by an allegedly statistically significant degree. SCAC ¶¶ 526-527. Third, Plaintiffs allegedly created a predictive regression model to predict the volatility of yields that were not explainable by legitimate economic factors, and measured this “excess” volatility, finding that when compared to real world data this excess volatility was low during the pre and post conspiracy time frame, but higher during the core conspiracy period, “consistent with Defendants pushing yields artificially low when selling, then pressing yields artificially high when buying, causing yields to bounce around more than what the economic model can account for during the core conspiracy period.” SCAC ¶¶ 528-529. Fourth, Plaintiffs allegedly created a volatility based predictive model to determine whether bid-ask spreads were higher. This again allegedly showed abnormally high bid-ask spreads during the core-conspiracy period. SCAC ¶¶ 530-531.

Plaintiffs allegedly also compared pricing behavior to determine whether bid-ask spreads were higher during the conspiracy period. They allegedly were. SCAC ¶ 533. Similar spread-based analysis was allegedly performed for US Treasury Bonds and foreign sovereign debt, again allegedly showing inflated bid-asks spreads during the core conspiracy period when compared to these other debt instruments. SCAC ¶¶ 534-537. Variation based analysis on bid-ask spreads in SSA was also performed allegedly showing that bid-ask spreads were most predictable day to day during the core-conspiracy period. This test was also run using the U.S. Treasuries as a control, and even controlling for change in the treasury market, the bid-ask spreads in USD SSA bonds showed greater diversity of spreads after the end of the core-conspiracy period when compared to before that date. SCAC ¶¶ 538-543. On the flip side, while the conspiracy was allegedly keeping bid-asks spreads consistently higher, the yields of SSA were allegedly more volatile during the core-conspiracy period based on analysis of market data. SCAC ¶¶ 544-548. Finally, Plaintiffs allegedly analyzed multiple bonds from the same issuer, which allegedly should have had a high level of yield correlation, and while yield correlation was allegedly high during the class period, it was lower when compared to the pre and post-class period. SCAC ¶¶ 549-551.

Plaintiffs thus have now allegedly analyzed many different metrics with the intent of showing that they have suffered an injury-in-fact as a consequence of Defendant’s alleged conspiracy. It will be interesting to see whether, if the Second Amended Complaint is again challenged, these metrics and “legitimate market forces controlled” models will be enough to state a claim on which relief can be granted, or if Plaintiffs still have failed to allege Defendants causation of injury-in-fact.

This post was written by Lee J. Rubin.

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 or Lee J. Rubin at or call John or Lee at (212) 344-5400.

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Posted: December 4, 2018

26% Fee Award To Attorneys In ISDAfix Antitrust Litigation

Law360 reports that the judge overseeing an antitrust lawsuit alleging that a group of financial firms manipulated global swaps and options benchmark ISDAfix has awarded plaintiffs’ counsel $126.4 million in fees and $18.4 million in expenses, representing 26% (net) of settlements valued at $504 million. The defendant banks included Bank of America, Barclays, Citigroup, Credit Suisse, Goldman Sachs, RBS, UBS, and others.

Posted: November 30, 2018

“Fixing” with the Fix? – Part II – Are “Umbrella Purchasers” “Efficient Enforcers?”

This week we return to the world of precious metals to compare and contrast whether “umbrella purchaser” Plaintiffs (“Umbrella Plaintiffs”) were “efficient enforcers” for the purposes of anti-trust standing. The precious metals actions are respectively: In re: Commodity Exchange, Inc., Gold Futures and Options Trading Litigation, 1:14-md-02548-VEC (S.D.N.Y.) (“In re Gold”); In re: London Silver Fixing, Ltd., Antitrust Litigation, No. 1:14-md-02573 (S.D.N.Y.) (“In re Silver”); and In re: Platinum and Palladium Antitrust Litigation, 1:14-cv-09391 (S.D.N.Y.) (“In re Platinum and Palladium,” collectively “the Precious Metals Fixing Litigations”). Each of the Precious Metals Fixing Litigations allege similar manipulation of the “fix,” the daily benchmarking auction for precious metals, which allegedly influences the value of physical precious metals, spot, and associated derivatives, including futures and options (“Precious Metals Investments”).

The initial motions to dismiss in In re Gold, In re Silver and In re Platinum and Palladium are decided in In re Commodity Exch., Inc., 213 F. Supp. 3d 631 (S.D.N.Y. 2016) (“Gold MTDD I”), In re London Silver Fixing, Ltd., 213 F. Supp. 3d 530 (S.D.N.Y. 2016) (“Silver MTDD I”), and In re Platinum and Palladium Antitrust Litigation, 1:14-cv-09391-GHW, 2017 WL 1169626 (S.D.N.Y. Mar. 28, 2017) (“Platinum and Palladium MTDD”) respectively. In Gold MTDD I and Silver MTDD I, it could be said that Judge Caproni avoided answering the question of whether umbrella purchasers were efficient enforcers, noting that the record was not yet sufficiently developed, and choosing to answer that question at the class certification stage. In the Platinum and Palladium MTDD, Judge Woods answered the question at the motion to dismiss stage in the negative, holding that Umbrella Plaintiffs were not efficient enforcers so as to afford them antitrust standing. Judge Caproni later joined Judge Woods, at least for the Sherman Act and Clayton Act claims brought against banks that did not participate in the daily fix auction (“Non-Fixing Defendants”). Judge Caproni dismissed those claims, on the basis that those Umbrella Plaintiffs who transacted in physical silver and silver denominated financial instruments lacked standing as efficient enforcers. See In re London Silver Fixing, Ltd., Antitrust Litig., 2018 WL 3585277 (S.D.N.Y. 2018) (“Silver MTDD 2”). However, that was largely decided on the basis that the claims against the Non-Fixing Defendants were not benchmarking claims.

Brief Overview of the Alleged Collusion

For a review of the full allegations in the complaints in these three actions, please refer to our July 20, 2018 post. In brief, Plaintiffs, a number of individuals, businesses and funds, allege that Defendants, several large broker dealer banks including Barclays, Deutsche Bank, Bank of America, and HSBC, among others (the “Fixing Banks” or “Fixing Defendants”), manipulated the fix, a daily benchmarking auction, through The London Gold Market Fixing Limited, The London Market Fixing, Ltd. and The London Platinum and Palladium Fixing Company, (the “Fixing Companies”), the companies responsible for the promotion, administration and conduct of the fixing process. The fix, being a benchmark, allegedly influenced pricing in Precious Metals Investments. As a consequence of those Defendants allegedly fixing the fix, Plaintiffs transacted at prices that were less advantageous than they would have otherwise, had those Defendants not manipulated the Fix. Plaintiffs in some more recent complaints also allege that some Banks that did not participate in the daily fixing were part of a broad conspiracy with the Fixing Banks.

What is an Efficient Enforcer?

The Second Circuit has a two issue test to determine whether a plaintiff has antitrust standing to assert a claim pursuant to the Sherman Act. A party seeking to make such a claim must show that they have “suffered antitrust injury” and that they are “efficient enforcers of the antitrust laws.” Gelboim v. Bank of Am. Corp., 823 F.3d 759, 772 (2d Cir. 2016) (“LIBOR – Gelboim”), cert. denied, 137 S. Ct. 814 (2017). (LIBOR – Gelboim is a decision first introduced in our June 6, 2018, and August 20, 2018 posts as part of the In re LIBOR cases). Further, The Second Circuit has identified four factors that bear on the efficient enforcers analysis: “(1) the ‘directness or indirectness of the asserted injury’; (2) the ‘existence of more direct victims of the alleged conspiracy’; (3) the extent to which [plaintiffs’] damages claim is ‘highly speculative;’ and (4) the importance of avoiding ‘either the risk of duplicate recoveries on the one hand, or the danger of complex apportionment of damages on the other.’” Platinum and Palladium MTDD at 20 citing LIBOR – Gelboim at 777-78. The first element “is essentially a proximate cause analysis[.]” Silver MTDD at 552.

What is an Umbrella Purchaser?

“Plaintiffs who do not have direct dealings with the defendants, but purchase products allegedly affected by defendants’ price fixing, are referred to as ‘umbrella purchasers.’” Platinum and Palladium MTDD at * 22. “In the typical umbrella liability case, plaintiffs’ injuries arise from transactions with non-conspiring retailers who are able, but not required, to charge supra-competitive prices as the result of defendants’ conspiracy to create a pricing umbrella.” Id. What often breaks the causal chain for Umbrella Plaintiffs are the non-conspiring sellers’ independent pricing decisions with reference to the sale of Precious Metals Investments. See Gold MTDD at 656; Silver MTDD at 555; and Platinum and Palladium MTDD at 22.

Judge Caproni Punts the Question

In Gold MTDD I at 656 and Silver MTDD I at 354-55, Judge Caproni noted that, in contrast to the typical umbrella theory case, the Plaintiffs were alleging manipulation of the benchmark which determines the price for the entire market, rather than just manipulating segments or regional portions of the market. Nevertheless, Judge Caproni joined the Second Circuit in LIBOR – Gelboim at 779, by articulating an overall queasiness with the idea of bankrupting several of the largest financial institutions in the world, and vastly extending the potential scope of antitrust liability, by forcing banks, who control only a small percentage of the ultimate identified market, to pay treble damages for a number of indirect transactions affected by their benchmark manipulation. However, like in LIBOR – Gelboim at 779, where the Second Circuit remanded the efficient enforcer determination back down to the Southern District, Judge Caproni, having articulated skepticism over this issue, stopped short of deciding this matter at the pleading stage, noting that the record was not yet sufficiently developed, electing to decide the matter at the class certification stage. See Gold MTDD I at 656; Silver MTDD I at 355.

Judge Woods Dismisses the Umbrella Purchaser Plaintiffs’ Claims

Around half a year later, Judge Woods faced the issue head on, deciding that Umbrella Plaintiffs lacked antitrust standing as they were not efficient enforcers. See Platinum and Palladium MTDD at 22. Judge Woods relied heavily on the decision on remand from LIBOR – Gelboim: In re LIBOR-Based Fin. Instruments Antitrust Litig., No. 11 MDL 2262 (NRB), 2016 WL 7378980, at *16 (S.D.N.Y. Dec. 20, 2016) (“LIBOR VI”) (holding that “where a plaintiff’s counterparty is reasonably ascertainable and is not a defendant bank, a plaintiff is not an efficient enforcer”), which was decided after the Gold MTDD I and Silver MTDD I, but before the Platinum and Palladium MTDD.

Of significant importance in coming to this decision was that the Plaintiffs who “did not purchase directly from defendants . . . made their own decisions to incorporate [the Benchmark rate] into their transactions, over which defendants had no control, in which defendants had no input, and from which defendants did not profit. To hold defendants trebly responsible for these decisions would result in ‘damages disproportionate to wrongdoing.’” Platinum and Palladium MTDD at 22; quoting LIBOR VI at 16; quoting LIBOR – Gelboim at 779. Also particularly concerning was the fact that damages would be complex and potentially speculative, especially because of risks of intervening causative factors, and that apportionment of damages for these Umbrella Plaintiffs could be difficult, potentially leading to risks of duplicative recovery. Platinum and Palladium MTDD at 22-24. That being said, like in similar benchmarking cases, these Umbrella Plaintiffs would have been damaged in the same way and to the same extent as direct purchasers from the Fixing Banks. Id. at 23.

Judge Caproni Dismisses Umbrella Purchaser Claims Against Non-Fixing Defendants

Because the relationship between the Non-Fixing Defendants and Umbrella Plaintiffs was even more attenuated than between the Fixing Banks and the Umbrella Plaintiffs, Judge Caproni dismissed the claims brought by the Umbrella Plaintiffs against the Non-Fixing Defendants on the pleadings. See Silver MTDD II at 12-18. Of paramount significance was the fact that “Plaintiffs’ claims against the Non-Fixing Banks [did] not depend on benchmark manipulation; rather, [Plaintiffs alleged] a comprehensive scheme of market manipulation, involving rigged bid-ask spreads and coordinated trading in unspecified silver markets.” Id. at 13. “In a benchmark-fixing case the impact of the manipulated benchmark on the financial instruments traded by the plaintiff is relatively clear. For example, and as relevant here, the Fix Price is the price for physical silver, and the price of physical silver has a 99.85% correlation to the price of silver futures traded on COMEX. . . . Even in cases in which the benchmark is not the sole determinant of prices, there is frequently a mathematically-defined relationship between prices in the affected market and the benchmark. . . . By contrast, the effect of the Defendants’ coordinated trading and information sharing is undefined, both in the manipulated market (which, as noted previously, is not specified) and in related markets.” Id.

That being said, the impact of LIBOR VI and the Platinum and Palladium MTDD on the benchmarking claims in In re Gold and In re Silver still remains largely unknown. It could be argued that Judge Caproni intended in Silver MTDD I to split with Judge Woods, stating in Silver MTDD II, without special caveat for Umbrella Plaintiffs, that in Silver MTDD I, “the Court concluded that Plaintiffs were ‘efficient enforcers’ because they sold silver investments on days the Fixing Banks allegedly manipulated the Silver Fixing.” Silver MTDD II at 2.

This post was written by Lee J. Rubin.

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 or Lee J. Rubin at or call John or Lee at (212) 344-5400.

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

Posted: November 28, 2018

JPMC, Citigroup Provisionally Settle EURIBOR Rigging Claims

Law360, Yahoo Finance, and MSN Money are all reporting that JP Morgan Chase and Citigroup have reached an agreement to settle claims that they rigged the European Interbank Offered Rate (“EURIBOR”) for $182.5 million. Deutsche Bank, Barclays, and HSBC have settled similar claims in the same action for a combined $309 million. The settlement will require judicial approval.