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: March 19, 2019

Forthcoming Mandamus Petition in Gold Fixing Antitrust Case Puts Discoverability of Plaintiffs’ Statistical Market Analyses at Center Stage

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 or Peter J. Sluka at or call John or Peter at (212) 344-5400.

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Posted: March 12, 2019

SOS to GSEs: Your Bonds are A Beautiful Mess

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

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Posted: March 1, 2019

Antitrust Suit Alleges That Major Banks Colluded To Manipulate Prices Of Fannie & Freddie Bonds Between 2009 And 2014

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.

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.

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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.

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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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