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: November 21, 2018

Stock Loan Lowdown: Is the Answer a Lemon?

Following the defeat of their motion to dismiss – you can review our riveting recap here – the Stock Loan Defendants each recently filed answers and affirmative defenses to the Amended Class Action Complaint. This brief post will take a look at the highlights of those answers and defenses, and provide a quick rundown of the current Case Management Order (“CMO”), filed on November 15th.

Now Requesting Answers on a Postcard

Ranging in length from 44 to 73 pages (pithiness points going to EquiLend), the contents of the seven filed answers demonstrate greater uniformity than that range would suggest. As would be expected, denials of allegations abound, as does the useful position of “lack [of] knowledge and information sufficient to form a belief” position.

Specific denials were made as regards statements by various officials of the Defendants: JPMorgan, for example, denies that John Shellard made statements attributed to him, including the comment confirming the existence of a “general agreement among Directors” of EquiLend, and “that industry advances should be achieved from within EquiLend.” Along the same lines, EquiLend denies that Brian Lamb stated that the goal of DataLend was to “kill” DataExplorers, while Morgan Stanley denies that their Gliobal Head of Bank Resource Management, Thomas Wipf, had stated that the institutions needed to “get a hold of this thing,” referring to AQS. On the other hand, with respect to the somewhat infamous (or, perhaps, as infamous as one can be within the world of stock loans) statement by Credit Suisse director Shawn Sullivan recommending that they “get all the members of the five families together,” Credit Suisse “admits that Plaintiffs purpose to quote certain communications . . . and refers to any such communication for their complete content and context.” Not that I envy the poor associate that will be doing the review, but it sounds as though there may be a few gems to be found in document discovery . . .

As far as defenses are concerned, JPMorgan, Credit Suisse, Goldman Sachs, UBS, and Merrill Lynch each raise affirmative defenses similar to the arguments made at the motion to dismiss level. These include items such as lack of standing; lack of or speculative and uncertain damages; failure to mitigate damages; statute of limitations, waiver, and estoppel; the nature of the alleged conduct as permissible competitive activity (a factor which Defendants point out that, despite it’s inclusion in their affirmative defenses, they view it as a factor for which Plaintiffs bear the burden of proof); the nature of the alleged conduct as pro-competitive activity; that none of the challenged actions or omissions substantially lessened competition within any properly defined market; that injuries to Plaintiffs, to the extent they exist, were caused by third parties and marketplace forces for which Defendants are not responsible; and a failure to plead fraudulent concealment with particularity. EquiLend presented a series of very similar affirmative defenses, but further added claims concerning lack of personal jurisdiction over EquiLend Europe Limited.

Under New Management

The Case Management Order now governing this matter requires all motions for joinder or to amend the pleadings be filed within three months. The ESI protocol is to be filed within thirty days, while initial request for production of documents are to be served by December 18, with a February 15, 2019, deadline for the parties to reach agreement or impasse on all issues related to the initial requests for production and custodians. Rolling production of documents is to begin late April, with substantial completion of document production to be accomplished by September 1, 2019. Is it too soon to make comments about “best laid plans”?

Fact discovery, including deposition of fact witnesses is currently set to close on May 1, 2020, while requests to admit are to be served by April 1, 2010. The class certification briefing schedule is also set for the same time frame – Plaintiffs’ opening motion and expert reports are due in March 2020, with the briefing schedule wrapping up with a reply due in September.

The Manipulation Monitor will continue to update the Stock Loan Lowdown series to report on any discovery disputes that may (will likely) arise, but we’ll otherwise be putting the stock loans stories to bed for the time being. For other magnetic tales of mischief in the markets, I’ll take a moment to recommend the Manipulation Monitor’s The VIX is Fixed?! series for those of you looking for your next read.

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: November 19, 2018

Alleged Manipulation of the Singapore Benchmark Rates

In this post, we cover the alleged facts and procedural history of FrontPoint Asian Event Driven Fund, Ltd. et al v. Citibank, N.A. et al., 16-cv-05263 (SDNY) (“Frontpoint”), as detailed in Plaintiffs’ Second Amended Complaint and an Opinion and Order Granting in Part and Denying in Part Defendants’ Motions to Dismiss (the “Decision”) issued on October 4, 2018 by Judge Hellerstein.


The allegations in Frontpoint concern alleged manipulation of the Singapore Interbank Offered Rate (“SIBOR”), a topic which we have not yet specifically covered on our blog, although it is similar in theory to the benchmark rate manipulation alleged in the In re LIBOR litigation, which have posted in depth on several times (see here and here and here and here and here). A separate post will cover which of Plaintiffs’ claims in the SAC Judge Hellerstein ruled in the Decision survived, which did not, and why.

Plaintiffs FrontPoint Asian Event Driven Fund, Ltd. and Sonterra Capital filed this action on August 1, 2016. The Court issued an order grating in part and denying in part Defendants’ motion to dismiss Plaintiffs’ First Amended Complaint on August 18, 2017. In that order, the Court granted Plaintiffs leave to amend; they accordingly filed their Second Amended Complaint (“SAC”). Defendants have moved to dismiss the SAC, on the grounds that Plaintiffs’ antitrust claims, RICO claims, and claims for breach of the implied covenant of good faith and fair dealing were inadequately plead, that Plaintiffs lacked antitrust standing, and that Plaintiffs lacked personal jurisdiction over certain of the Defendants.

The SIBOR Rate-Setting Process

The processes for formulating the relevant benchmark rates are similar to that of the London Interbank Offered Rate for the U.S. dollar in the In re LIBOR litigation, except here there are three benchmark rates at issue.

  • The “USD SIBOR” benchmark rate represents “”the cost of borrowing funds in the Singapore market and reflects the average competitive rate of interest charged on interbank loans denominated in U.S. Dollars”;
  • The “SGD SIBOR” benchmark rate represents “the cost of borrowing funds in the Singapore market and reflects the average competitive rate of interest charged on interbank loans denominated in Singapore Dollars”; and
  • “SOR” reflects the volume-weighted average price of foreign exchange swaps, where exchanges of SGD Dollars for US Dollars are agreed to be made in the future.

The Association of Banks in Singapore (“ABS”), a trade group, calculates USD SIBOR and SGD SIBOR (together, “SIBOR”) using daily submissions received by its agent Thompson Reuters from a panel of banks which Plaintiffs allege are made up of 17 members; each panel member submits “the interest rate at which it could borrow U.S. and Singapore dollars in the interbanks market.” Specifically, the daily submission by each panel member was supposed to be the “rate at which it could borrow funds, were it to do so by asking for and then accepting the interbank offers in reasonable market size, just prior to 11:00 AM Singapore time.” (SAC ¶ 169.)

Affiliates of Australia and New Zealand Banking Group, Bank of America, BNP Paribas, Citibank, Credit Agricole, Credit Suisse, DBS, Deutsche Bank, HSBC, ING Bank, JPMorgan Chase, Macquarie, Oversea-Chinese Banking Corporation, Royal bank of Scotland, Standard Chartered Bank, Bank of Toyko-Mitsubishi UFJ, UBS, and United Overseas Bank are alleged to have been members of the SIBOR panel during the relevant time period and are defendants in this action.

Plaintiffs’ Allegations

Plaintiffs allege that ABS’ own rules required that each rate be submitted without reference to other panel members’ rates, effectively requiring the banks to “independently exercise good faith judgment and submit an interest rate based on its own expert knowledge of market conditions . . . [and that] the daily submissions of each bank . . .remain confidential until after SIBOR was finally computed and published . . . “ (Id., ¶ 170.) Thomson Reuters, on ABS’ behalf, calculates the SIBOR rate for each tenor by averaging the middle half of all submissions. (Id. ¶ 164.) It then publishes the calculated SIBOR rate publicly.

Thomson Reuters similarly collects submissions from certain banks relating to the cost of borrowing Singapore dollars in foreign exchange swaps (the “SOR” benchmark rate), except it calculates that benchmark rate based on the volume-weighted average price of swap transactions entered between 7:30 A.M and 4:30 P.M. Singapore time. (Id. ¶ 164.) Affiliates of Bank of America, Barclays, Citibank, Commerzbank, Credit Agricole, Credit Suisse, DBS, Deutsche Bank, HSBC, JPMorgan Chase, Royal Bank of Scotlabnd, Standard Chartered Bank, Bank of Toyko-Mitsubishi UFJ, UBS, and United Overseas Bank are alleged to have been members of the SOR panel during the relevant time period and are defendants in this action.

SIBOR and SOR rates are used as “benchmark” in that they are incorporated by reference in various derivative transactions, including at least interest rate swaps, forward rate agreements, foreign exchange forwards, and foreign exchange swaps, in order to set the applicable interest rate for each transaction. Plaintiffs allege that between 2007 and 2011, Defendants conspired to each submit rate quotes to ABS that were artificially manipulated to be higher or lower than the true cost of borrowing; this was done, according to Plaintiffs, in response to requests from traders of derivates based on SIBOR or SOR (including U.S.-based traders) who were affiliated with the panel-member Defendants, so that those traders’ “long” or “short” positions would be benefited. Plaintiffs allege that each panel member honored request from other members to artificially manipulate the submitted rate quotes in order to serve a “collective financial benefit.”

This post was written by John F. Whelan.

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 John F. Whelan at or call John Lundin or John Whelan at (212) 344-5400.

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Posted: November 16, 2018

Eastman Kodak Takes Aluminum Market Manipulation Claims to the UK

Law 360 reports that Eastman Kodak has filed claims against Goldman Sachs, JP Morgan Chase, Glencore, and other entities, accusing them of violating UK and EU competition law by manipulating or distorting the aluminum market by conspiring with aluminium warehousers affiliated with the London Metal Exchange to withhold or delay supplies. A similar lawsuit in the United States was dismissed on the grounds that Eastman Kodak and other direct purchasers lacked antitrust standing, and that decision is on appeal to the Second Circuit.

Posted: November 6, 2018

SEF Scuttling? Alleged Manipulation of the Interest Rate Swap Market – Part II – Buy-Side Funds Claims Survive Motion to Dismiss Shelling, but Not Unscathed.

This week we cover the July 28, 2017, decision on the Motion to Dismiss the Second Amended Complaint in Interest Rate Swaps Antitrust Litigation, No. 1:16-md-02704 (SDNY) (“IRS Antitrust Litigation”), an action previously introduced in our August 6, 2018, post, where one can find a full account of the alleged collusion. The Court granted Defendants’ motion for the time period of 2007-2012, but predominately denied it for the period of 2013-2016.

In brief, Plaintiffs, buy-side funds such as pension and retirement funds, along with several all-to-all trading Swap Execution Facilities (“SEFs”) including Tera and Javelin, alleged that Defendants have used their heavy hand to prevent the development of truly all-to-all platforms for trading of interest rate swaps (“IRS”), along with central clearing of IRS transactions. Defendants’ aim was to maintain a two-tiered system of trading, where the broker-dealer banks traded with one another on all-to-all inter-dealer bank (“IDB”) platforms, but their buy-side clients were still forced to purchase through the broker-dealers, with more limited pricing information than they could have obtained through an all-to-all platform. Plaintiffs allege that the Dealer Defendants accomplished this by blackballing several companies attempting to offer all-to-all trading platforms, including Javelin and Tera. Defendants’ aim was to limit buy-side firms to purchasing IRS from the major sell-side dealers, through request for quote (“RFQ”) protocols that mimicked many of the informational and pricing inefficiencies of over the phone requests for price quotations, and likewise widened bid/ask spreads for prices that the buy-side Plaintiffs would have to pay, causing those Plaintiffs’ damages. See In re Interest Rate Swaps Antitrust Litig., 261 F. Supp. 3d 430 (S.D.N.Y. 2017).

Generally speaking, the Plaintiffs’ claims for conduct prior to 2013 were dismissed, but their claims for conduct between 2013 and 2016 mostly survived Defendants’ motion. See id.

Plaintiffs’ Claim of a Sherman Act § 1 Conspiracy Among the Dealer Defendants was Dismissed for the Period of 2007-2012 Under Twombly

According to Judge Engelmayer, Plaintiffs’ claims for the period 2007-2012 plead parallel inaction which was not sufficient to survive under Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). Plaintiffs’ claim that Dealer Defendants threatened to deny liquidity to IDBs that allowed buy-side firms to make purchases and sales on their platforms, and insisted on clearing through dealer-controlled platforms. The Court found that Plaintiffs’ claims of parallel inaction on the part of the various dealer banks however were not enough to give rise to a claim under Twombly.

The dealer banks’ actions were consistent with self-interested behavior, rather than an active conspiracy. The Dealer Defendants had no reason to change a system where they were reaping profits, and promote a system which would foster their own disintermediation. Of particular importance to the court’s determination was the fact that the central clearing infrastructure necessary to facilitate all-to-all trading was not present at this time, and as such, bilateral trade specific inquiries, into, inter alia, creditworthiness, were still needed prior to finalizing IRS deals. This made all-to-all trading all but impossible. Rather, central clearing, was only forced into existence later in 2013, when it was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The introduction of central clearing obviated the need for deal specific inquiries into creditworthiness. See IRS Antitrust Litigation, 261 F. Supp. 3d at 463-65.

Similarly, Plaintiffs’ claims were too speculative because the foundational clearing infrastructure needed was not present. The “alternative history of IRS trading for the first five years of the class period (2008-2012) require[d] too many leaps of imagination and guesswork for a claim of class injury to be viable.” Id. at 493.

Moreover, while Plaintiffs did allege that as part of “Project Fusion” most of the Dealer Defendants acquired a controlling stake in Tradeweb and forced it to remain a RFQ platform, rather than an all-to-all platform, Plaintiffs’ allegations as to the “Project Fusion” conspiracy likewise failed. This was because Plaintiffs plead conclusory allegations and inferences, did not plead the existence of a per se unlawful agreement, as the mere joint investment into a legitimate business does not fit into any category of agreement that is recognized as per se illegal, and did not plead facts sufficient to support an unlawful restraint of trade under a rule of reason analysis, as there were no allegations of an applicable market for Tradeweb’s product, or that Tradeweb had any power in any market, or even what the anti-competitive harms were from Tradeweb’s conduct. Id. at 465-69. For these reasons, Plaintiffs’ Sherman Act § 1 claims for this 2007-2012 time period were dismissed. Id. at 472. Such pre-2012 claims also were time-barred, as the court rejected arguments of tolling due to fraudulent concealment of Dealer Defendants majority interest in Tradeweb. Id. at 487-90.

Likewise the Buy-Side Class Plaintiffs’ state law claims for unjust enrichment for this time period were dismissed. Id. at 500-501. Further, Javelin and Tera’s claims under New York State Donnelly Act were also dismissed for this time period. Id. at 498-99.

Defendants’ Motion to Dismiss Plaintiffs’ Sherman Act § 1 Conspiracy Claim was Denied for the Period of 2013-2016 as Plaintiffs Plead a Per Se Unlawful § 1 Conspiracy; Namely a Group Boycott

According to Judge Engelmayer, Plaintiffs’ claims for the period of 2013-2016 in contrast did plead a per se unlawful Section 1 conspiracy, as Plaintiffs plead a group boycott of new all-to-all platforms by the Dealer Defendants. As alleged, this could be inferred from, among other things, the Dealer Defendants’ parallel refusals to trade on the Javeline, Tera, and TrueEx platforms, their common excuses and vocabulary for why they would not trade on these platforms, their similar bait and switch tactics to attempt to buy-out and undermine these platforms, their withholding of consent to IDB’s to use these platforms, their threats, pressure, and penalties, applied to buy-side customers who used these platforms, and their withholding, and threats of withholding, of clearing services to these platforms and the buy-side firms who used them. Id. at 472-75.

While it was true that Defendants had a natural explanation under Twombly for not supporting and supplying liquidity to these all-to-all platforms, namely their concerns about their own disintermediation, the alleged common behavior during this period was not purely explainable by self-interest. Rather, the Dealer Defendants actions as alleged, while not irrational, were so symmetrical, and so similar, so as to support the conclusion that they were acting in unison in a fashion that goes beyond simple self-interest, which would have been satisfied by refusing to do business with these platforms. Id. at 475-76. Judge Engelmayer’s decision was also supported by certain “plus-factors,” namely, the presence of a motive to starve these platforms of sufficient liquidity to be viable, a high degree of communications among the Dealer Defendants, and certain suspicious behaviors by the Dealer Defendants, including the alleged statement by a smaller IDB that it could not do business with an all-to-all trading platform because the Dealers “would not allow it.” Id. at 475-77.

Viewed as a whole Plaintiffs’ allegations were sufficient to plead a per se group boycott conspiracy under Sherman Act § 1. See Id. In coming to this conclusion, Judge Engelmayer rejected arguments of impermissible group pleading, and lack of uniformity of action by the Dealer Defendants. Id. at 478-79. He likewise rejected arguments that certain “market realities,” as evidenced by certain secondary sources, made this argument implausible. These “market realities” included (1) that buy-side support for all-to-all trading was limited because most IRS are “bespoke,” specially tailored contracts in which there is insufficient liquidity for trading on all-to-all platforms; (2) that at least for one all-to-all platform, TrueEx, there was support from many IRS dealers and a high amount of trading volume; and (3) that several of the all-to-all trading platforms failed due to reasons outside of a group boycott. Judge Engelmayer noted that while these “market realities” could be probative as to the merits of Plaintiffs’ claims if explored more in discovery, he was constrained not to second-guess Plaintiffs’ well-pled § 1 claims at the pleading stage on the basis of a few secondary sources. Id. at 479-81.

That being said, the Court did go on to caution that Plaintiffs’ claims would be limited to proceeding on claims for “plain vanilla” IRS, as claims for bespoke IRS were too speculative. Bespoke IRS, with their idiosyncratic terms that must be negotiated prior to closing, have more intermittent liquidity, and lack general “commodity-like” uniformity that make them amenable to trading on an all-to-all trading platform. While class counsel argued that such all-to-all trading platforms would foster greater price transparency and competition for all IRS, including bespoke IRS, he all but conceded that the class was intended only to be limited to purchasers of “plain vanilla” IRS. See id. 494-95.

The court did however grant some of the individual motions to dismiss some of the Defendants for failure to allege facts sufficient to tie them to the conspiracy, including those of HSBC, ICAP, a London-based IDB, and Tradeweb, but the Court rejected similar arguments from BNPP and UBS. Id. at 482-87. Tera and Javelin’s claims under the Donnelly Act and for unjust enrichment were likewise dismissed against HSCB, ICAP and Tradeweb. Tera and Javelin’s claims for tortious interference were also dismissed in their entirety. See id. at 497-501.

Defendants’ Motion to Dismiss Plaintiffs’ Sherman Act § 1 Conspiracy Claim was Denied as Class Plaintiffs did Allege Facts that Support the Inference that they were Efficient Enforcers

Further, the court held that Plaintiffs did allege that they suffered a direct injury and were efficient enforcers. The prevention of all-to-all exchange trading on these platforms left buy-side Plaintiffs with no alternative but to continue to make trades at wider bid/ask spreads. “As alleged this scheme proximately and predictably harmed buy-side investors who were denied the superior prices of an allegedly tighter-priced trading platform.” Id. at 491 citing Blue Shield of Virginia v. McCready, 457 U.S. 465, 480-84 (1982). The court goes on to distinguish the Court’s opinion in In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4277510 (S.D.N.Y. Aug. 29, 2014) and In re Aluminum Warehousing Antitrust Litig., 833 F.3d 151, 161-163 (2d Cir. 2016), covered in more detail in our October 17, 2018 post, on the grounds that this action as alleged involves manipulation of a single market, rather than multiple markets.

While Defendants claimed that Javelin and Tera, the all-to-all trading platforms, were more efficient enforcers, the Court noted that “[i]nferiority to other potential plaintiffs can be relevant, but is not dispositive.” Id. at 493 citing In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 689 (2d Cir. 2009). Moreover, effective enforcement of the antitrust laws would be enhanced by collaboration between the buy-side Plaintiffs and Javelin and Tera, and that given that those SEF all-to-all trading platforms may not be able to fund discovery on their own, partnership with the class, and their resources, would help make sure that the antitrust claims were vigorously prosecuted. As such, the court rejected arguments that the class Plaintiffs were not efficient enforcers. The court also rejected that the potential for tension and negative correlation between the damages of buy-side Plaintiffs, and the SEFs, Tera and Javelin, are not fatal to the Plaintiffs’ claims. Id. at 495.

Defendants’ Motion to Dismiss Plaintiffs’ Sherman Act § 1 Conspiracy Claim was denied as that claim was not Barred by Dodd-Frank

Finally, Defendants’ argument that applying the analysis in Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007), Dodd-Frank precludes application of the antitrust laws, including Sherman Act § 1. The court rejected this, noting that Dodd-Frank, particularly 12 U.S.C. § 5303, includes an “antitrust savings clause” prohibiting the inference that Dodd-Frank precludes application of the antitrust laws. See IRS Antitrust Litigation, 261 F. Supp. 3d at 495-97. Judge Engelmayer, in part relying on the analysis in In re Credit Default Swaps Antitrust Litig., No. 13MD2476 DLC, 2014 WL 4379112, at *16-17 (S.D.N.Y. Sept. 4, 2014), further rejected Dealer Defendants’ reliance on 7 U.S.C. § 6s(j)(6); and 15 U.S.C. § 78o-10(j)(6), as an exception to the antitrust savings clause, as the Dealer Defendants’ SEF boycott, as alleged, would not be “necessary or appropriate” to achieve the purposes of Dodd-Frank, as required by those cited provisions, and, more importantly, because those provisions are not exceptions to the antitrust savings provisions, but are rather provisions that “impose additional duties on swap dealers.” IRS Antitrust Litigation, 261 F. Supp. 3d at 497-98 (emphasis in original).

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: October 31, 2018

The VIX is Fixed?! A Complaint is Remixed

We closed out our first VIX-is-Fixed post with a promise to deliver real-time updates on the state of the VIX complaint. While we’ve failed a bit in that regard, we’ve added a timely discovery update to this post to make up for it – keep scrolling to find out just what tricks the Plaintiffs have up their sleeves.

For an overview of the main players in the VIX action and an overview of the index itself, I’d suggest you review our Preview of the Tricks post. If you’re up to speed already, then buckle up for a deep dive into the zeros, banging, and a small ocean’s worth of data. The Consolidated Amended Complaint alleges negligence and violations of the Securities Exchange Act, Commodity Exchange Act, and Sherman Act, but gives over the majority of its eighty-odd pages to detailed explanations of the factual review and research carried out by Plaintiff’s attorneys that breaks down the vulnerabilities present in the VIX.

Bang Bang Bid

Plaintiffs devote some time in outset of their complaint to break down the two processes that Defendants used to manipulate the settlement process. These include “banging the close” and abuse of the “two-zero bid rule,” both of which I’ll take a minute to discuss here.

While “banging the close,” would, in other markets, refer to a form of manipulation in which a trader bought or sold large numbers of futures contracts during the closing period (clever naming!), in order to benefit futures positions purchased earlier in the day. Given what we already know about the way the VIX settlement process works (recap: highly dependent on thinly traded and illiquid financial instruments – namely, out-of-the-money SPX Options – and a short window trading window closing at 8:20 AM), the term isn’t quite on point for this particular form of manipulation, if only for the timing. “Banging the once-monthly, early-morning opening auction” didn’t have quite the same ring to it, I suppose. The complaint takes care to point out that a longer settlement window that occurred during normal market hours, or a more frequent measurement, would have made the manipulation more difficult—and that the CBOE declined to take such preventative steps. As a result, Plaintiffs claim, by placing higher mid premiums on puts at particular strike prices, the John Doe Defendants were able to “bang up” the level of the bid premium of that strike, and thus increase the settlement value for corresponding VIX Options and Futures. The process worked in reverse, too—Defendants could “bang down” the mid premium by placing lower ask premiums on puts at particular strike prices, and so decrease settlement values for the corresponding bids.

The second method of manipulation has to do with the process of the SOQ calculation. The calculation starts in the center of the pricing circle, and works its way outwards through increasingly out-of-the-money strike prices. The “two-zero bid rule” is so named because the calculation is supposed to stop at the point in which two zeros are found in a row—an indication, first, that the SPX Option is so far out of the money that pricing is no longer reliable for the settlement calculation, and, second, that traders are not particularly creative when it comes to assigning monikers. To circumvent the two-zero bid rule, Plaintiffs posit that the John Doe Defendants were spreading bids out across strike prices to ensure that there were never more than two consecutive zero bids ahead of the strike prices that Defendants wanted the SOQ process to take into account. By preventing two zero bids in a row from appearing naturally, Defendants forced the calculation to consider out-of-the-money strike prices appearing much deeper in the range than they otherwise would, thus skewing the settlement values for the expiring VIX Options and VIX Futures.

The formula used by the CBOE to calculate the VIX weighs the difference between strike prices on either side of a given strike price—a number that will nearly always be larger for more out of the money options—and that weighing factor will increase when the given strike price is smaller. That means that out-of-the-money put options (as opposed to call options) will have a greater impact on the ultimate VIX settlement price. This is the case because the strike prices for out-of-the-money put options will always be less than the prevailing at-the-money strike; out-of-the-money call options, in contrast, are always greater than the prevailing at-the-money strike price. While the complaint offers a much more in-depth look at the VIX calculation, let it suffice to say that these two factors lead to the result that put options that are the most out of the money have a disproportionate impact on the ultimate VIX settlement price. By circumventing the two-zero bid rule, defendants push the formula to consider bids deeper and deeper out of the money, thus amplifying the impact of their manipulations.

In God We Trust; All Others Must Provide Data

In addition to the academic analysis performed by Professor Griffin and Mr. Shams—whose results we discussed in our first installment—Plaintiffs also undertook their own extensive economic analysis to further demonstrate their the VIX process had been routinely exploited. By tracking trends in trading volume over time—and putting together into neat and colorful graphs for the more visual learners out there—Plaintiffs very effectively make their case for intentional manipulation.

First, Plaintiffs note that the data shows a “uniquely disproportionate” number of puts placed, rather than calls, during the settlement period. When considered across the whole of expiry and non-expiry days, the ratio of puts to calls placed was similar (ranging from 1.74 to 1.82). During the settlement window, however, that ratio ballooned to 5.93—a 224% difference. It is more than a coincidence, Plaintiffs insist, “that market actors just so happened to be preferring the type of order that would maximize a manipulative effect during exactly the time when such manipulative effect was possible.”

Second, Plaintiffs track increases in trading volumes on settlement days, particularly for the SPX Options that would have a more significant impact on the SOQ process. Notably, prior to February 13, 2018, 92% of settlement days saw higher trading volume than the Tuesday that preceded them. This pattern of higher trading volume held true for SPX put options that were out of the money—an unusual thing to see, because, in a manipulation-free market, one would expect to see lower trading volumes simply because, as the option is less and less likely to be exercised, there will be less and reason to pay for that option. What Plaintiff’s data shows, however, is that the more out of the money an SPX put option was, the more it was being traded. Weird. What’s more, this abnormality was particularly present for options that had a wider gap between strike prices—as discussed above, these are the trades that would have the biggest impact on the VIX SOQ settlement process. And, again, this is a pattern true only for trades within the settlement window. Weirder? Finally, the data also shows that, at exactly 30 days to maturity, out-of-the-money options (and only out of the money options) saw a spike in trading volume. As a reminder: SPX Options were only included in the VIX SOQ calculation if they were 30 days to maturity, and out of the money. Therefore, the increased trading volume on settlement days is being driven by trading only in those instruments that could have an impact on the SOQ process. Weirdest!

Third, Plaintiffs argue that the data shows “routine” exploitation of the two-zero bid rule. Such exploitation must be occurring, they posit, because the total number of actively quoted SPX Options (that is, options with a non-zero ask quote) did not change very much between 8:30 AM and 8:40 AM on settlement days. What did change, and to a statistically significant degree, was the number of those SPX Options in that time that were VIX-eligible: two zero bids in a row, the circumstance or “gap” that would render subsequent bids ineligible, occurred far less frequently during settlement windows than it did during other time periods.

Plaintiffs next compared the VIX benchmark to the VIX itself. While careful to stress that the question is not whether the VIX moved, but whether it move differently when a settlement was involved, Plaintiffs make several arguments that the data does show the VIX acting differently around the settlement window. For example, they point to the fact that there was a much larger gap between the start and end of the day for settlement Wednesdays, and that, on settlement Wednesdays, there is a much larger gap between the VIX at the start of the day as compared to fifteen minutes later. All of the differences identified, Plaintiffs note, were statistically significant.

Finally, Plaintiffs point to one final, telling oddity in the data. All of these patterns suggesting market manipulation were consistent across the time frame studied, up until February 2018. After this date, many of the volume anomalies surrounding settlement Wednesdays abated. Why the change, one might ask? Well, Plaintiffs have a pretty good answer to that question: on February 13, 2018, it was for the first time publicly reported that FINRA was investigating the manipulation of VIX pricing. What better motivation to desist manipulations than the menace of unmasking?

They don’t know that we know that they know . . .

The next section of Plaintiff’s complaint aimed to show that the CBOE knew or was reckless in its disregard of the fact that the VIX settlement process was being manipulated. Unlike all other participants, the CBOE had a front-row seat to all of the settlements, and access to all of the data needed to determine the identity of the manipulators responsible for the rigging.

Rather than disclosing the manipulations that they could easily have observed, the CBOE instead, according to Plaintiffs, made misleading statements about the integrity of the VIX Options and VIX Futures. It further failed to take advantage of the many viable alternatives to its flawed settlement processes—such as calculating prices by using the average of prices across a three-hour window during normal market trading time, as other volatility-related products typically do.

Plaintiffs further point out that it is explicit in the CBOE’s own rules and those that they were subject to obligated them to police for and prevent manipulation. As a “board of trade,” for example, the CEA requires that the CBOE “have the capacity and responsibility to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures.” Similarly, the CBOE rules hold that traders may not “engage or attempt to engage in any fraudulent act or engage in any scheme to defraud, deceive, or trick, in connection with or related to any trade or other activity related to the Exchange.”

Plaintiffs also point to the CBOE’s glaring motivation to maintain the VIX as a “premier” product. The CBOE has an exclusive licensing agreement with Standard & Poors, which permits only CBOE to list SPX Options. This gives the CBOE a lock on the SPX and VIX markets, and those proprietary products generate far higher revenue for the CBOE than any of their multiply-listed options. Plaintiffs go further, describing the three products—SPX Options, VIX Options, and VIX Futures—as “cash cows” for the CBOE, consistently representing about half of that entity’s total revenues. At risk of mixing metaphors, it would be detrimental to the CBOE, or so Plaintiffs argue, for the company to bite the cow that feeds it.

The complaint further reviews the CBOE’s actions with respect to the VIX, and to products with similar settlement process. These show that the CBOE is, contrary to appearances, able to identify manipulative acts, and to address them—albeit only publicly years after the manipulation originally occurred.

Yup, that hurt.

What is a complaint without some damages? Plaintiffs make the general assertion that, based on assurances by the CBOE as to the accuracy and fairness of the settlement process, investors—plaintiffs and members of the class—were harmed because they “poured billions of dollars” into transactions in products that were “not the result of regular forces of supply and demand.” Instead, Plaintiffs and class members were “tricked” into trading SPX Options, VIX Options, and VIX Futures at prices that were made inaccurate as a result of misconduct on the part of the CBOE and the Doe Defendants. That manipulation mean that Plaintiffs and class members were forced to pay more, or accept less, for those products than they would otherwise have done, had the market been a truly free on.

The complaint goes on to explain in detail the different ways that such harm occurred, depending on what options and futures the various plaintiffs and class members held, and what they did with them. They argue reliance on the fairness of the VIX SOQ process: such transactions would not have occurred had they known of the manipulation. In the alternative, Plaintiffs also put argue for a presumption of reliance under Affiliated Ute, because their claims are partially predicated upon material omissions of fact by the Defendants, and, in the alternative, a presumption of reliance pursuant to the fraud-on-the-market doctrine.

No Time Like the Present

The final section of Plaintiff’s brief argues that Defendants, being the overachievers that they were, took their inherently self-concealing manipulation, and worked to affirmatively conceal it. Any applicable statute of limitations has been tolled, Plaintiffs argue, because Plaintiffs and class members did not—and could not have, due to Defendant’s hidden misconduct—discover that Defendants were manipulating the VIX or VIX-linked instruments.

The very nature of the SOQ process, with its anonymized trading, made it impossible for Plaintiffs to discover the facts comprising their claim until very recently. Moreover, Plaintiffs claim that Defendants not only knew of the practices detailed in their brief, but “knowingly, actively, and affirmatively concealed th[ose] facts,” and “actively misled Plaintiffs as to the true nature of VIX Options and VIX Futures, as well as the SOQ Process,” through public statements—such as those denouncing the whistleblower letter sent to the SEC and CFTC.

In making these arguments, Plaintiffs invoke the discovery rule, the doctrine of equitable tolling, and fraudulent concealment, and further claim that Defendants are estopped from relying on any statute of limitations defense in this action.

A Formal Request to Spill the Tea

Plaintiffs are in the unusual position, of course, of having no insight into exactly which trades were affected by this manipulation, because they cannot identify the traders responsible for this manipulation. To address this issue, Plaintiffs have filed a request for advanced discovery of the non-anonymized trading date currently in the possession of the CBOE. While Judge Shah previously expressed a “preference to ‘test’ plaintiffs’ claims before allowing discovery,” as Plaintiffs acknowledged in their discovery motion, they argue that their comprehensive complaint clearly demonstrates that no such testing is needed:

The specificity and robustness of plaintiffs’ complaint allegations show that the court need not wait for completion of the motion to dismiss process to know this is not a blind fishing expedition. […] Granting this motion is also appropriate because plaintiffs’ proposed discovery requests are narrowly targeted to their need to identify the Doe defendants.

This request is being made now largely out of fear that the statute of limitations will run before the motion to dismiss process is complete and formal discovery begins (likely not before summer 2019, assuming the claims survive the motion to dismiss). The Doe Defendants, once identified and named, will surely contend that the two-year statute of limitations clock began to run when the Griffin & Shams paper was published in May of 2017.

While Judge Shah considers this request, the Defendants—the identified ones, at least—will be hard at work on their motion to dismiss this complaint. Considering the level of detail Plaintiffs’ analysis provided, it may be an uphill battle, but the SSD Manipulation Monitors look forward to their efforts, and to summarizing the same for you. For that update—barring any adjustments to the currently-posted briefing schedule—watch this space sometime after the 19th of November.

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: October 26, 2018

Mexican Government Bond Defendants’ Motion to Dismiss Part Two

In this post, we follow up on our October 2, 2018, post, which covered arguments made by the Defendants in In re Mexican Government Bonds Antitrust Litigation, 18-cv-02830 (In re MGB) to dismiss Plaintiffs’ Consolidated Amended Class Action Complaint (the “Complaint”) concerning whether Plaintiffs made plausible allegations of an antitrust conspiracy and made adequate allegations for individual defendants. We now summarize the remaining arguments made in Defendants’ motion, which concern whether plaintiffs have established antitrust standing, have failed to state a claim for unjust enrichment, and whether Plaintiffs’ claims are time-barred and barred by the Foreign Trade and Antitrust Improvements Act.

As before, we commend your attention to our July 30, 2018, post, which summarizes the factual allegations in the Complaint.

Failure to Allege Antitrust Standing

In order to have standing to assert antitrust claims, it is required that a plaintiff allege that it has experienced an “antitrust injury” and that it be an efficient enforcer of antitrust laws. Defendants assert that Plaintiffs’ antitrust standing is insufficient on both grounds.

Antitrust Injury: For purposes of antitrust standing, an “antitrust injury” must be 1) an injury-in-fact; 2) that has been caused by the violation; and 3) that is the type of injury contemplated by the statute. Defendants argue that Plaintiffs have failed to adequately plead that each of their various theories as to Defendants’ collusion actually resulted in injury to Plaintiffs.

Auction Rigging Conspiracy: Plaintiffs allege that Defendants rigged the weekly auctions of Mexican Government Bonds (MGBs) conducted by the Mexican Government by sharing information with each other and coordinating bids to fix prices. Defendants argue that Plaintiffs have failed to show how the allegedly suppressed auction prices raised prices Plaintiffs paid on the secondary market such that injury was caused to them.

Post Auction Inflation: Plaintiffs alleged that prices were inflated by Defendants during the post-auction period of the day of the MGB auction by the Mexican Government, but according to Defendants, Plaintiffs do not allege that prices were inflated “on Non-Auction Days, when Defendants do not have new inventory of MGBs to sell.” Defendants argue that since Plaintiffs do not plead that they bought the MGBs on the day they were auctioned, or, to the extent they bought MGBs on auction days, that they bought tenors that were actually auctioned that day, Plaintiffs have failed to show how this alleged inflation caused injury to Plaintiffs.

Spread-Widening Conspiracy: Plaintiffs allege that after the MGBs were initially offered on the secondary market, Defendants agreed to artificially widen the “bid-ask spread,” the difference between the bid price that a Defendant would agree to buy a particular type of MGB from a consumer and what a Defendants would agree to sell that same type of MGB for, as listed in the “two-way quote.” Plaintiffs further allege that because of this, they were “overcharged each time they purchased MGBs from Defendants and underpaid each time they sold MGBs to Defendants.” Defendants argue that this is a conclusory assertion of injury, since the charts included in the Complaint only show “median” bid-ask spreads from 2006 through 2017, and do not therefore show that the bid-ask spread was widened for all transactions over the course of 11 years, or at least identify a single, particular transaction that was.

Bondes D: There are four types of MGBs, each of which differ from each other in how interest is paid to the holder. According to Defendants, Plaintiffs do not actually allege that they themselves bought one particular type of MGB, Bondes D. Therefore, Defendants argue, Plaintiffs could not have suffered any injury as to those bonds.

Efficient Enforcer. There are four factors which guide whether a plaintiff will be an efficient enforcer of antitrust laws: i) the directness of the plaintiff’s injury, (ii) the existence of more direct victims of the anticompetitive conduct, (iii) the extent to which the plaintiff’s alleged damages are “highly speculative,” and (iv) the potential for duplicative recovery or complex questions regarding apportionment of damages.

According to Defendants, Plaintiffs seek to certify a class which would include all persons who have entered into a trade for MGBs. This would include what Defendants call “umbrella” claims, meaning claims arising out of trades with non-Defendants. Defendants attack Plaintiffs’ ability to be an efficient enforcer of umbrella claims on several grounds.

Defendants assert that causation of injury by Defendants for umbrella claims is too attenuated for Plaintiffs to be efficient enforcers of such claims. Plaintiffs and non-defendants are independent actors; in such transactions, Plaintiffs were not required to transact at a given bid/ask price or even required to interact with non-defendants at all. The chain of causation between Defendants’ alleged suppression of bid/ask prices and prices of non-defendant transactions are thus severed. Defendants rely on a string of cases which they contend hold that such attenuation prohibits plaintiffs from asserting antitrust standing for umbrella claims.

Defendants also argue that Plaintiffs cannot be efficient enforcers of umbrella claims because parties that traded directly with a Defendant are “more direct victims” of the alleged conspiracy. They additionally claim that it would be “exceptionally complex” to isolate impact of Defendants’ conduct on umbrella claims, as one can only speculate as to what the umbrella claims would be, absent manipulation.

Finally, Defendants assert that allowing Plaintiffs antitrust standing for umbrella claims would impose liability on Defendants disproportionate to their gains, since Defendants would be liable to any non-party who traded with Plaintiffs, going beyond the scope of the Sherman Act’s intent.

Foreign Trade and Antitrust Improvements Act

The Foreign Trade and Antitrust Improvements Act (“FTAI”) excludes conduct involving trade or commerce with foreign nations from Sherman Act claims. The FTAI does not apply to i) import activity involving foreign commerce or ii) to conduct that has a “direct, substantial, reasonably foreseeable effect” on domestic or import commerce and gives rise to a claim under the Sherman Act (known as the ii. “Domestic Effects Exception”). The Domestic Effects Exception requires that there be a “reasonably proximate causal nexus” between overseas conduct and alleged domestic effects.

Defendants argue that neither exception can apply to Plaintiffs’ allegations that Defendants rigged the auctions in Mexican run by Mexican authorities at which the MGB were originally sold to Defendants. Those transactions only took place between Mexican market-maker entities and the Mexican government, making the auctions wholly foreign transactions to which the import exception cannot apply. Defendants also note that Plaintiffs have not even plead that the Domestic Effects Exception applies, but argue that even if they had, such alleged manipulation of the Mexican auctions would only have limited, indirect, effects on transactions in U.S., not “substantial” and “reasonably foreseeable” effects required for the exception to apply.

Unjust Enrichment

Defendants argue that Plaintiffs’ unjust enrichment claims should be dismissed for several reasons: First, Plaintiffs’ only basis that Defendants were “unjustly” enriched are based upon the conspiracy allegations, which are defective in and of themselves for being conclusory (as further explained in our previous post). Second, the unjust enrichment claims are duplicative of Plaintiffs’ other claims. Third, the claims are based upon transactions between the parties which are governed by contracts, and unjust enrichment is only available where there is no actual agreement between the parties. Finally, unjust enrichments claims do not apply to any transactions with which the Plaintiffs did not deal directly with the Defendants.

Statute of Limitations

Sherman Act claims are subject to a four-year statute of limitations, which runs from when the cause of action accrues, not from a plaintiff’s discovery of the action. The cause of action would thus run, according to Defendants, when the MGB transaction between the parties occur and plaintiff pays an anticompetitive price. Since Plaintiffs filed their complaint on March 30, 2018, that would claims based on transactions before March 30, 2014 would be time-barred. The statute of limitations can be tolled if Defendants fraudulently concealed facts underlying Plaintiffs’ claims, which Plaintiffs allege that the Defendants in fact did. However, fraudulent concealment can only be a basis for tolling the statute of limitations if it is done by affirmative acts of concealment or if it was done as part of a “self-concealing” conspiracy.

Defendants argue that Plaintiffs have failed to adequately plead fraudulent concealment so as to allow their claims to be tolled. All that Plaintiffs allege, according to Defendants, are that Defendants “(1) secretly disseminat[ed] confidential bidding schedules to each other and agree[d] on bids in MGB auctions; (2) implicitly represent[ed] that each Defendant was bidding competitively in the auction for MGB such that the final price represented a competitive auction; and (3) charg[ed] inflated spreads to customers without disclosing that the charges reflected an agreed price set by Defendants rather than a competitive price.”

Plaintiffs’ allegations of fraudulent concealment fail, according to Defendants, because they are not plead with particularity, as required by Rule 9(b), and, separately, they do no allege any acts of concealment separate from those that form the basis of their claim. Defendants not only contend that Plaintiffs have failed to show that the nature of the conspiracy is “self-concealing,” but also assert that Plaintiffs’ own allegations that Defendants’ alleged collusion caused “dramatic” price changes on auction days that were absent on non-auction days show that the existence of the alleged conspiracy was apparent from publicly available information. Defendants also note that Plaintiffs rely on public reports from as early as October 2013. Defendants assert that these public reports should have been sufficient to put Plaintiffs on notice so as to cause the statute of limitations to run. Otherwise, Plaintiffs would have “it “both ways,” asserting on one hand that there are public reports which evince Defendants’ conspiracy, but on the other asserting that Defendants’ conspiracy is self-concealing such that the statute of limitations should be tolled.

Remainder of Briefing Schedule

Under the current briefing schedule, Plaintiffs opposition is due on or by November 16, 2018. Stay tuned to this blog, as we will be sure to inform you as to any new developments from Plaintiffs’ opposition.

This post was written by John F. Whelan.

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 John F. Whelan at or call John Lundin or John Whelan at (212) 344-5400.

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Posted: October 17, 2018

Alleged Aluminum Allocation Fixing – Part II – Failure to Allege that the Injury was “Inextricably Intertwined”

This week we cover the Motion to Dismiss and affirming Appellate decisions decided in 2014 and 2016 in In re: Aluminum Warehousing Antitrust Litigation, 1:13-md-02481-KBF (SDNY), an action previously introduced in our September 24, 2018, post, where one can find a full account of the alleged collusion.

Brief Overview of the Alleged Collusion

Plaintiffs allege a conspiracy by the London Metal Exchange (“LME”), Glencore, Goldman Sachs and JP Morgan Chase & Co., among others, to restrain aluminum output and increase storage costs, both leading to an increase in price for, and injury to, Plaintiffs.

Claims Against the London Metal Exchange are Dismissed on Sovereign Immunity Grounds

In the summer of 2014, JudgeForrest of the Southern District granted defendant LME’s motion to dismiss brought under the Foreign Sovereign Immunities Act (“FSIA”) on the basis that LME was an organ of the United Kingdom (“UK”) Government, and was not engaged in commercial activity so as to fall into the commercial activity exception to the FSIA. See In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4211353 (S.D.N.Y. Aug. 25, 2014). Judge Forrest found that LME was essentially a regulatory arm of the UK Government and was acting in an inherently regulatory capacity. LME’s load out rules and arrangements with reference to warehouses were both implemented to serve a regulatory purpose, and were not negotiated at arms-length but were mandatory and compulsory, establishing LME’s regulatory role. As such LME was a state organ and LME’s activity did not fall within the commercial activity exception to the FSIA. See id. at *11-15.

Plaintiffs’ Failed to Plead Allegations Sufficient to Support Antitrust Standing

At about the same time Judg eForrest issued a separate opinion dismissing the Plaintiffs’ claims, on a number of grounds. See In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4277510 (S.D.N.Y. Aug. 29, 2014).
Among these included a lack of antitrust standing. Plaintiffs did not allege that they were competitors or consumers of the Defendants. Rather they alleged that Defendants’ independent actions had an effect which increased the Midwest Premium, thereby impacting the sales price in Plaintiffs’ independent trades. Because Plaintiffs’ did not allege that they were consumers or competitors of Defendants, they were forced to plead facts sufficient to show that their injury was “inextricably intertwined” as required under Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), Crimpers Promotions Inc. v. Home Box Office, Inc., 724 F.2d 290 (2d Cir.1983) and Province v. Cleveland Press Publ’g Co., 787 F.2d 1047, 1052 (6th Cir.1986). Because Plaintiffs failed to allege that they were “manipulated or utilized by [d]efendant[s] as a fulcrum, conduit or market force to injure competitors or participants,” that is to say they were manipulated “as a means to carry out the restraint of trade in the product market” within the language of Province, so as to support a claim that their injury was “inextricably intertwined” with that of consumers or competitors, the case was dismissed for lack of antitrust standing.

On appeal, the Second Circuit affirmed Judge Forrest’s reading under McCready, Crimpers and Province noting that because Defendants were not used as a “fulcrum, conduit or market force,” and they thus could not assert a claim under the “inextricably intertwined standard.” See In re Aluminum Warehousing Antitrust Litig., 833 F.3d 151, 161-163 (2d Cir. 2016).

Plaintiffs’ Failed to Plead Allegations Sufficient to Support Conspiracy

Additionally, in In re Aluminum, 2014 WL 4277510 at *24-34, per Judge Forrest, Plaintiffs failed to plausibly allege facts supporting either an agreement among the warehouse defendants to restrain load-outs of aluminum, or an agreement between the trader defendants and warehouse defendants to effectuate that conspiratorial scheme. They drew this conclusion, based on the fact that, given the allegations as pled, the story was consistent with the defendants acting in accordance with the market forces of supply and demand, rather than a conspiracy. Defendants were holding a cheap good now, as it was anticipated to become more expensive later, which is consistent with lawful competitive behavior. The court also noted that Defendants, who made money by trading warrants and selling storage space, were not competitors and did not directly gain from an increase in the Midwest premium, and as such lacked financial motive to act. The plaintiffs did not even allege a plausible market in which defendants restrained trade. As such, there was no conspiracy under either a per se or a rule of reason analysis.

Additionally, the Plaintiffs failed to plausibly allege the details of any conspiracy. The generalized allegations of defendants being on LME committees especially without allegations of how decision-making changed when the trader defendants acquired the warehouses, was wholly insufficient. The same can be said of the mere affiliation between individuals employed by Goldman Sachs and the warehouse defendants, in the absence of more particularized allegations. In light of this all, especially given that defendants’ conduct was self-interested, defendants alleged cancelling of warrants in parallel and delaying load-outs in parallel were not sufficient to satisfy the requirement that Plaintiffs plead parallel conduct to justify an inference of a conspiracy.

Plaintiffs’ Failed to Plead Allegations Sufficient to Support Monopolization Claims

Further, per Judge Forrest, Plaintiffs failed to allege facts sufficient to support their monopolization claims because they failed to fully define a relevant market, or assert that any of the defendants had the power to unilaterally effect the Midwest premium. The attempts to rely on the acts of multiple different actors was improper as the law does not recognize a “shared monopoly.” Metro’s control of a large percentage of the warehouses was not sufficient on its own to satisfy the test as they did not unilaterally control the warrants and futures contracts that determined the ingress and egress of aluminum to and from warehouses. Id. at*34-37.

Plaintiffs’ Failed to Plead Allegations Sufficient to Support State Law and Unjust Enrichment Claims

Finally, per Judge Forrest, the Plaintiffs various state law claims rely on the same antitrust, conspiracy, monopolization and unfair conduct allegations, and otherwise were not pled with particularity to allow the court to determine how the conduct violated each individual state statute. Id. at *37-38; In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4743425 (S.D.N.Y. Sept. 15, 2014). On appeal this was affirmed on the same grounds. See In re Aluminum Warehousing Antitrust Litig., 833 F.3d at 163.

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: October 10, 2018

Stock Loan Lowdown: Class NOT Dismissed

Counsel for Iowa Public must have gone home happy on September 27th, as the long-awaited motion to dismiss decision could hardly have played out more favorably for them. With the caveat that “it remains to be seen whether Plaintiffs’ factual allegations will be born out in discovery,” Judge Failla rejected each of Defendants five bases for dismissal and denied their 12(b)(6) motion.

For an overview of the briefing on this motion, I invite you to explore past posts in this series by following the links below:
Stock Loan Lowdown
Stock Loan Lowdown, Part Two: To Dismiss or Not to Dismiss?
Stock Loan Lowdown: Third Time Through the Order
Stock Loan Lowdown: Fourth Time’s (still not quite) Final
Judge Failla’s 93-page decision began with an overview of the stock loan market and its key players, including a detailed explanation of the role and functions of each of the three new market entrants central to the dispute: QuadriServ, AQS, and Data Explorers. One small bright point for defendants may be Judge Failla’s footnoted comment, in which she “pause[d] to observe that the briefing on all sides was excellent.”

The decision first addressed Defendants’ main argument—that Plaintiffs failed to plead a plausible antitrust conspiracy—before moving on to cover whether or not the alleged concerted action was an unreasonable restraint on trade, the Plaintiffs’ antitrust standing, the timeliness of Plaintiffs’ claims, Plaintiffs’ claim for unjust enrichment, and, finally, EquiLend’s supplemental motion to dismiss.

A High Hurdle, Unscaled

Facial Plausibility
First observing that a well-pleaded complaint may proceed even if “actual proof of those facts is improbable,” the court here found that Plaintiffs did allege facts sufficient to support the inference that a conspiracy actually existed. On the question of facial plausibility, the court agreed with Plaintiffs that the timely of the alleged conspiracy was plausible; it may have stretched over nine years, but, as the court observed, it merely continued until it achieved its alleged objectives. The Court further adopted Plaintiffs’ assertion that a small subset of prime brokers could bring about an actionable conspiracy, on the strength of the observation that the six named Prime Broker Defendants controlled between 76% and 80% of market share, and would have the power to carry out an effective group boycott. With respect to Defendants’ objections to the plausibility of the planning of the conspiracy at EquiLend board meetings, the court found that the debate turned on “a battle of competing inferences” about who has the agent lenders’—the other EquiLend board members—greatest loyalty, and that, on a motion to dismiss, such all reasonable inferences has to be drawn in Plaintiff’s favor.

Defendants also attached the plausibility of the allegations on the grounds that the OCC prevented lenders and borrowers from transacting directly on its platform. The Court found that the Defendant misconstrued the Amended Complaint on this point: the allegation was not of a conspiracy to prevent borrowers and lenders from transacting directly without a broker intermediary, and thus whether not not such transactions were permissible was of no moment. Specially, the court found that, when inferences were drawn in Plaintiffs’ favor, “the necessary infrastructure existed for services such as those promised by AQS and SL-x, and it was Defendants’ conduct, not structural impediments, that caused these companies to fail. Defendants’ final argument on facial plausibility concerned the demand for and feasibility of anonymous exchange trading; to these points, the Court agrees with plaintiff’s submissions that such assertions are “fact-laden arguments that cannot be credited on a motion to dismiss.”

Group Pleading
The motion to dismiss argued that Plaintiffs’ allegations relied on impermissible generalizations about the Defendants as a group. To this, the court observed that the Amended Complaint did specifically allege that each Defendant agreed to participate in the conspiracy. With this base established, it was held that referring to the “Prime Broker Defendants” by that generalized moniker when discussing their collective actions in furtherance of the conspiracy did not constitute impermissible group pleading. The Court also noted that the Amended Complaint identified specific employees by name, thus providing each Defendant with sufficient notice of the claims against them.

Direct Evidence & Parallel Conduct
At the pleading stage, Plaintiffs had two methods by which they could allege enough facts to support the inference of the existence of a conspiracy: direct evidence, and circumstantial facts supporting the inference of a conspiracy. Of the four allegations identified by Plaintiffs as direct evidence, the Court found two to qualify as direct evidence: first, a statement by John Shellard of J.P. Morgan that there was a “general agreement among [the] directors [of EquiLend]” that “industry advances should be achieved from within EquiLend,” and, second, a statement by Thomas Wipf of Morgan Stanley that Morgan Stanley and Goldman Sachs agreed that they needed to “get a hold of this thing,” in reference to AQS. Both are statements that, according to the court, “expressly describe agreements among the defendants,” and are thus direct evidence of concerted action. On the other hand, the Court agreed with Defendants that statements referring to EquiLend as “the mafia run by five crime families,” and instructions not to “break rank,” required “far too many layers of inference” to qualify them “as direct evidence of anything much, except perhaps of [the speaker’s] affinity for colorful speech.”

Circumstantial evidence of a conspiracy may be pled through examples of parallel conduct that would probably not result absent advance understanding among the parties. In this case, Plaintiffs argued, and the Court agreed, that the Amended Complaint adequately pled several instances of parallel conduct by Defendants. For example, the communication of identical positions to AQS by Credit Suisse, J.P. Morgan, Morgan Stanley, and UBS that they would each support AQS only if it because a broker-only platform could not be explained by Defendants’ shared commitment to OCC by-laws: while the OCC did require end-users to clear their trades through clearing brokers, that is not the same as a requirement that the platform be restricted to brokers only. While the Court agrees with Defendants that the Amended complaint does contain some allegations of divergency conduct, those instances do not negate the allegations of other, parallel, conduct. With respect to allegations of inaction, the Court noted that it “appreciates the challenges” of drawing such inferences, but, nevertheless, on a motion to dismiss all reasonable inferences—including those arising from allegations of inaction—must be drawn in favor of Plaintiffs.

Plus Factors
To sufficiently plead circumstantial evidence of a conspiracy, allegations that a defendant engaged in parallel conduct must generally be accompanied by certain “plus factors” supporting the inference that the parallel conduct flowed from a preceding agreement. One such plus factor is “interfirm communications,” which need not necessarily be conspiratorial. The Court found that the Amended Complaint pled multiple instances of interfirm meetings at conference, private dinners, and EquiLend board meetings, and that such allegations were sufficient to support an inference of opportunity to conspire. The Court also identified a common motive to conspire in Plaintiff’s allegations that changes to the stock loan market processes would reveal the excess fees being charged under the cover of price opacity. Similarly, the Court found Plaintiff’s allegations that support for the emerging platforms would have been, absent a conspiracy, in Defendants’ self interest to be a reasonable inference. The Court did agree with Defendants that allegations of collusion in other markets was irrelevant for the purpose of evaluating the sufficiency of this complain.

Bank of America, J.P. Morgan, UBS, and Credit Suisse
Defendants sought dismissal of the claim against Bank of American on the grounds that its early support of, and investment in, AQS renders its membership in the conspiracy implausible. While recognizing that Defendants have hit on a weakness in the Amended Complaint, the Court still finds that Bank of America’s presence of EquiLend’s board, together with allegations of parallel conduct supported by plus factors, is sufficient to sustain the allegations against it at stage of the litigation.

With respect to J.P. Morgan, UBS, and Credit Suisse, the Court similarly upholds the claims, noting that the Amended Complaint does allege participation of these defendants in conspiratorial meetings, and, further, that “not every member of a conspiracy needs to issue the same threats for the conspiracy to exist.”

Unreasonable Restraint is a Reasonable Allegation

In parsing Defendants’ attack on the sufficiency of Plaintiffs pleadings on the second element of a Sherman Act claim—whether or not the alleged action was a unreasonable restrain on trade—the Court was bound to apply one of two rules: that the conduct was per se illegal, or that the conduct violated the “rule of reason.”

While observing that only “manifestly anticompetitive” conduct is “appropriately designated as per se illegal,” the Court ultimately found that the allegations in the Amended Complaint reached such a level. The dispute here primarily concerned conduct in the context of a joint venture—EquiLend—which Defendants argued should be evaluated under a rule of reason standard, rather than the per se standard. Plaintiffs alleged that EquiLend’s joint venture status was “a smokescreen behind which the Prime Broker Defendants could operate,” and that the conduct was undertaken by and on behalf of each of the Prime Broker Defendants, and not in furtherance of any legitimate joint venture. The Court finds that “mere consistency” with an alternate inference of the conduct posited by Defendants was not sufficient at this stage of the litigation, and thus the alleged conduct was “not immunized from the per se rule by virtue of EquiLend’s presence in the fact pattern.”

Having found that the pleadings alleged conduct that qualified as a per se unlawful restraint of trade, the Court noted that a rule of reason analysis was thus unnecessary, but undertook such review for the purpose of completeness. Anticompetitive conduct, as defined by the Second Circuit, is “conduct without a legitimate business purpose that make[s] sense only because it eliminates the competition.” Under this standard, the Court found that Plaintiffs’ arguments concerning EquiLend’s purchase of the intellectual property of both AQS and SL-x—namely, that it was purchased solely to “bury” the technology—were, for the purpose of a motion to dismiss, convincingly evidenced by Plaintiffs’ allegations of underuse of the products after purchase. Similarly, when asserting that EquiLend’s creation of DataLend was an instance of anti-competitive behavior, Plaintiffs argue that the purpose of the creation was to kill, not to compete with, DataExplorers, and that Defendants achieved that goal by providing a subpar, but aggressively underpriced, product designed to undermine DataExplorers. Again, the Court found that the possibility that Defendant’s conduct could conceivably be characterized as improving competition is insufficient to overcome the deference due to a reasonable inference that can be drawn in Plaintiffs’ favor.

Still Standing Strong

Defendants further contested Plaintiffs’ standing to challenge violations of antitrust law. Standing in these circumstances requires that an alleged injury be “of the type the antitrust laws were intended to prevent,” and that Plaintiffs be “efficient enforcers” of those laws. Plaintiffs alleged that the lack of a central market place creates bottlenecks, wasted resources, and caused volatile, opaque, and artificially inflated prices—all of which could have been avoided by the implementation of centralized electronic trading for stock loan transactions that Defendants blocked. With respect to DataExplorers and SL-x, Plaintiffs allege that their presence in the market would have increased efficiency, price competition, and transparency in the market. Defendants did not challenge the assertion that the alleged injury is of the type the antitrust laws intended to prevent, but did contest one element of “efficient enforcer” standing: the speculative nature of the injury. On this point, the court notes that Defendants’ arguments are “thought-provoking,” but ultimately holds that, because efficient enforce standing is a balancing test, a challenge to just one factor would not eliminate Plaintiffs standing. And in assessing speculativeness—and adding insult to injury—the Court further concluded that Plaintiffs’ allegations that the new market entrants were met with market demand and would have provided benefits to be plausible.

All in Good Time

The Court rejected Defendants’ challenge to the timeliness of Plaintiffs’ claims on the grounds of fraudulent concealment. To successfully plead fraudulent concealment, a plaintiff is required to allege (i) that the defendant concealed the existence of the cause of action; (ii) that the plaintiff remained in ignorance of the cause of action until some point within the limitations period; and (iii) that plaintiffs continuing ignorance was not attributable to lack of due diligence on plaintiff’s part.

The Court held that Plaintiffs successfully pled both inherent self-concealment and affirmative concealment by Defendants. With respect to self-concealment, the Court agreed that, because the alleged conspiracy depended on numerous participants and was designed to ensure, it depended on concealment for its success. The Court further observed that the Amended Complaint alleged that Defendants communicated threats directly to individual executives at hedge funds, and that the threats were to withhold bespoke services—such threats, the Court infers, were likely provided “quietly, in the context of personal relationships,” and thus do not undermine a finding that the conspiracy was inherently self-concealing.

The finding of a inherent self-concealing nature means that the Court did not need to consider the question of affirmative acts of concealment. The Court again chose to do so for completeness, and again found that some—though not all—of the behavior alleged in the Amended Complaint did support such a finding. For example, the Amended Complaint contained pleadings of secret meetings and communications, which the Court agreed with Defendants in finding that such allegations were too general and conclusory to support affirmative concealment. The allegations concerning the use of the phrase “Project Gateway,” on the other hand, did allow the Court to infer that the moniker may have been designed as a code name rather than as mere shorthand.

Ignorance & Diligence
Plaintiffs argued that they had no prior knowledge of the collusion, and that the facts upon which they based their complaint were only brought to light by counsel’s recent investigation, which revealed “critical, non-public facts.” While Defendants pointed to a 2009 industry publication refereeing to EquiLend as a “cartel,” the Court held that “a single instance of unverified media speculation” was not sufficient to put Plaintiffs on inquiry notice. Similarly, the investment made in support of the “victim platforms” showed that it was not obvious that a conspiracy was out to pull them down.
On diligence, the Court agreed that Plaintiffs allegations of regular monitoring of their investments, and of news reports concerning the financial industry and stock lending market, were sufficient: drawing all inferences in their favor, a reasonable person would not have thought to investigate beyond the activities that Plaintiff engaged in.

Unjust Enrichment

In what might be the shortest section of my blog posts to date: the Court here concluded, equally briefly, that, as “Plaintiffs state a viable anti-trust claim, their unjust enrichment claim stands as well.”

A Supplemental Dismissal

EquiLend filed a supplemental motion to dismiss to advance four points. First, EquiLend argued that it’s conduct was consistent with rational business strategy; as with similar arguments discussed herein, the Court found that, on a motion to dismiss, the fact that conduct may also be consistent with an innocuous explanation does not permit the Court to ignore inculpatory inferences that may reasonable be drawn from the same allegations. EquiLend’s second argument, that the use of its board meetings to plan the conspiracy is insufficient to support a claim against it, was similarly rejected. The Court noted that the Amended Complaint does not merely alleged that Defendants used EquiLend meetings, but that EquiLend engaged in conduct in furtherance of the conspiracy—such as purchasing SL-x’s intellectual property and launching DataLend. For the same reason, the Court rejects EquiLend’s third argument, that the allegations do not pass muster under a rule of reason analysis: the Amended Complaint pleads sufficient facts to support an inference that EquiLend was a member of the conspiracy, and thus allegations concerning the Prime Broker Defendants market power and anticompetitive conduct also implicate EquiLend. Finally, EquiLend argued that there was no specific jurisdiction over EquiLend Euope; the Court found that jurisdiction exists because the overt acts of its co-conspirators may be imputed to it.

And with that, we put most stock loan-related anticipation to sleep for the time being—at least until it’s time to review the Prime Broker Defendants’ answer. Or should we be on the lookout for an appeal brief? Whichever it is, watch this space.

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

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Posted: October 5, 2018

Bank of America Pays $30 Million Civil Penalty For Attempted Manipulation Of USD ISDAFIX Benchmark

Reuters and Yahoo News are reporting that the CFTC has ordered Bank of America N.A. to pay a fine of $30 million to settle charges that it “made false reports and attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), a leading global benchmark” between 2007 and 2012. The US Dollar ISDAFIX benchmark is referenced in a range of interest rate products.