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: January 2, 2019

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

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

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

Regulatory Immunity

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

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

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


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

Failure to Plead Elements of Rule 10b-5

    • Fraudulent Acts

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

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

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

    • Scienter

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

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

    • Reliance

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

    • Loss Causation

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

Failure to State a Claim Under the CEA

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

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

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

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

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

Plaintiff’s State-Law Negligence Claim Should be Dismissed

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

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

Aiding and Abetting under the CEA

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

Inadequate Allegations of Manipulation

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

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


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

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

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

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

Posted: December 19, 2018

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

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

Brief Overview of the Alleged Collusion

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

The Southern District Dismisses Without Prejudice and with Leave to Replead

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

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

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

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

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

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

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

This post was written by Lee J. Rubin.

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

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

Posted: December 4, 2018

26% Fee Award To Attorneys In ISDAfix Antitrust Litigation

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

Posted: November 30, 2018

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

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

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

Brief Overview of the Alleged Collusion

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

What is an Efficient Enforcer?

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

What is an Umbrella Purchaser?

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

Judge Caproni Punts the Question

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

Judge Woods Dismisses the Umbrella Purchaser Plaintiffs’ Claims

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

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

Judge Caproni Dismisses Umbrella Purchaser Claims Against Non-Fixing Defendants

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

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

This post was written by Lee J. Rubin.

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

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

Posted: November 28, 2018

JPMC, Citigroup Provisionally Settle EURIBOR Rigging Claims

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

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.

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

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.

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

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.

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