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: 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.

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 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.

Posted: October 2, 2018

Mexican Government Bond Defendants Seek Dismissal–Part 1

In this post, we cover a recently filed motion 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”) for failure to state a claim. The motion to dismiss is available here. Certain of the defendants also have filed a motion to dismiss for lack of personal jurisdiction and improper venue, available here. This post, however, will only discuss the former motion.

Defendants’ motion to dismiss for failure to state a claim is made on several grounds, including failure to plead plausible allegations of an antitrust conspiracy, failure to plead allegations for individualized defendants, failure to establish antitrust standing, and failure to state a claim for unjust enrichment. Defendants also moved to dismiss Plaintiffs’ claims as being time-barred and barred by the Foreign Trade and Antitrust Improvements Act. This post will summarize Defendants’ arguments concerning whether Plaintiffs made plausible allegations of an antitrust conspiracy and adequately alleged allegations for individualized defendants. The remaining arguments will be summarized in a separate post.

Our July 30, 2018, post summarizes the factual allegations in the Complaint, and is worth reading first in order to fully understand defendants’ arguments.

Failure to Allege a Plausible Antitrust Conspiracy

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 fail to plead underlying evidentiary facts that allow for a plausible inference of such an unlawful agreement. In order to meet the requirement under cases such as Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) to plead facts which allow for the plausible inference of a conspiracy, Defendants assert that Plaintiff must either show direct evidence (a “smoking gun” such as a recorded phone call) or show parallel conduct among defendants and certain “plus factors” indicating that the parallel conduct was the result of an agreement, not just coincidence or market forces.

Defendants state in their motion that the news reports cited in the Complaint do not show direct evidence. Plaintiffs cite the reports for the proposition that an unidentified defendant has been granted leniency in Mexico’s cartel leniency program. Defendants dispute that the news reports stand for that proposition. They argue that all the reports say is that an institution has agreed to cooperate with authorities; the reports do not identify the scope of the Mexican authorities’ investigation, if the cooperator is a defendant, or what the cooperator actually did.

Neither, according to the Defendants, have the Plaintiffs alleged any particular instances of parallel conduct, such as, for example, unprecedented changes in pricing structure. Defendants also walk through why each of the pieces of evidence relied upon by Plaintiffs are inadequate as plus factors, even though Defendants assert that such an analysis should be unnecessary given that no parallel conduct has been alleged.

  • News Reports: all reports say is that there is an investigation by Mexican authorities, and that an entity is cooperating with that investigation; that an investigation is taking place is, in and of itself, insufficient to raise the inference of a conspiracy.
  • Inter-firm Communications: Plaintiffs detail in their Complaint that there was a “revolving door” of employees between Defendants, such that many Mexican Government Bond traders previously worked together in the same bank, before moving on to work for another market maker. Defendants contend that a “revolving door” is inadequate as a plus factor because Plaintiffs do not detail specific communications around the time of the Mexican Government’s auction.
  • Prior Cases in Other Markets: The Complaint also detailed admissions from the Defendants and findings from various regulatory authorities purporting to show that the same Defendant banks have colluded to fix prices in other markets. Defendants argue these ‘if it happened there, it could have happened here’ allegations do not substantiate a fraud claim.

Defendants also devote a significant part of their brief to attacking the sufficiency of the economic evidence represented by statistical charts appended to the Complaint. The statistical charts, Defendants argue, are insufficient to serve as “plus factors” for several reasons: 1) they show aggregated averages which lump together different auctions and maturity periods, obscuring trends and outliers and ignoring the effects of important events like the global financial crisis and the changes in Mexico’s credit rating; they do not differentiate between defendants and non-defendants, or identify the activities of individual defendants; 3) they do not show statistically significant results; 4) they use cherry-picked data, as each chart compares a different “before” and “after” period than the other, and features a different set of bonds. Moreover, what each chart purports to show could just as easily be explained by non-anti-competitive behavior. For example, one charts purports to show that “average trading prices for auctioned MGBs tended to rise following the announcement of auction results.” However, Defendants point to scholarship that suggests that this is not due to conspiratorial conduct, but rather due to the pricing information that an auction provides the market.

Spread-Widening Conspiracy. Plaintiffs also 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. Defendants similarly attack this allegation as conclusory, and lacking plausible evidentiary facts. Defendants point out that Plaintiffs do not even allege that the investigation by Mexican authorities pertains to the alleged spread-widening. These allegations are particularly implausible, Defendants argue, because the non-defendant suppliers of MGBs whom customers were free to buy from makes it unlikely that Defendants widened the spread on all transactions over an eleven year period.

Defendants also assert that the charts purporting to support Plaintiffs’ economic evidence of spread-widening suffer from the same defects that the charts relating to auction-rigging do. Particularly, the charts use median figures that obscure variation of bid-ask spreads for more than a decade, do not show individual defendants’ spreads, and do not claim to show statistically significant results.

Group Pleading

Defendants attack the allegation made against “Defendants” as failing to allege the conspiratorial conduct engaged in by each individual defendant; Plaintiffs “. . . fail to identify a single collusive act or communication by any individual Defendant.” Moreover, the charts purporting to support the economic evidence do not show the auction bids for each defendant, or each defendants’ bid-ask spread or fill rate. The news reports cited by defendants are similarly defective to support these generalized allegations; one report cited by Plaintiffs states that all participants in the market were under investigation, but since an investigation in and of itself cannot be an inference of a conspiracy, Plaintiffs’ allegations are insufficient.

Defendants also argue that the allegations against the Market Maker Defendants’ affiliates are also insufficient, as Plaintiffs merely plead that these entities directed and controlled the Market-Makers that bid at the auctions or that traded with Plaintiffs. Merely alleging direction and control, or corporate affiliation is conclusory and not enough to state a claim, according to Defendants.

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: September 24, 2018

Alleged Aluminum Allocation Fixing

This week we cover the allegations in the multi-district litigation In re: Aluminum Warehousing Antitrust Litigation, 1:13-md-02481-KBF (SDNY) (“In re Aluminum Antitrust Litigation”). We will leave a discussion of the subsequent motion to dismiss briefing and decision, and the appeals to a later date. In short, the Plaintiffs in In re Aluminum Antitrust Litigation allege that Defendants created a monopolistic restraint on the supply of primary aluminum, first by using a minimum per-warehouse distribution rule to monopolize market share, and then converting that minimum warehouse distribution rule into a maximum, creating delays in the distribution of Aluminum and an increase in price, despite the existence of a high market supply of primary aluminum.

Overview of the Aluminum Market

Aluminum, a very abundant metal, is used in a number of industrial products including airplanes and automobiles, packaging materials, construction materials, and consumer electronics. Primary aluminum refers to aluminum produced directly from mined ore. Large integrated producers create primary aluminum and sell to two broad categories of customers: manufacturers/processors/brokers in the physical market and traders/speculators in the resale market. After creation of primary aluminum, the supply is often warehoused.

According to Plaintiffs, demand for primary aluminum is relatively inelastic as aluminum is not readily replaceable with other metals in its various uses, regardless of price increases. Likewise, supply is also inelastic as the cost structures of smelters make it the case that they either produce at full capacity or not at all. The combination of these two market realities make it difficult for aluminum purchasers and manufacturers to fight back against price increases.

Nearly all industrial contracts for the physical delivery of primary aluminum express the price of aluminum using a formula with at least two standardized components: (1) the LME Settlement Price, the cash offered price at the end of the LME’s second morning trading session, and (2) a regional premium (e.g. the Midwest Premium, the Benchmark in the United States), which is meant to cover the cost of delivery to a customer, and which is compiled based on a reporting of the preponderance of physical transactions between buyers and sellers of spot aluminum on a given day for delivery to relevant geographic points. These components are published by private companies, including Platts and Metal Bulletin. From 2008 to 2012, the relationship between global production and demand was relatively stable, with the market tending toward surplus. Directly before the start of the Class Period, the supply of aluminum in the Midwest United States greatly increased, which should have caused the Midwest premium to decrease.

Overview of the Alleged Collusion

According to Plaintiffs, Plaintiffs, a number of first level and direct purchasers of aluminum for physical delivery within the United States, purchased primary aluminum at a price that included the London Metal Exchange (“LME”) Price, and the Midwest Premium or Midwest Transaction Price. Plaintiffs allege that Defendants, LME, Metro, Glencore, Pacorini, among others, and a number of financial institutions including Goldman Sachs and JP Morgan, worked together to unlawfully restrain trade by lengthening the amount of time it takes to load-out aluminum from warehouses, prolonging queues and restraining load-out rates in the market for warehouse services of aluminum in LME registered warehouses in the U.S. and Canada, thus causing an increase in the Midwest Premium, and consequently an increase in the price of primary aluminum.

Plaintiffs allege that in 2003, LME created a minimum rate of load-outs, 1,500 metric tons per day per warehouse location. This favored large warehouses like those held by Metro and Glencore/Pacorini. As a consequence, Metro at the time of the change of the minimum load-out rule announced that it would increase rents to at least three times the competitive rental rates. Simultaneously, regardless of actual capacity and commercial reasonableness, Metro and the other defendants entered into agreements and made the minimum rate of load-outs into a maximum. LME was aware of these limits and complicit in the agreement to use the minimum load-out rule as the maximum rate. Through a web of agreements Metro shared its profits with its co-conspirators, including Burgess-Allen and Glencore. One mechanism used was the illusory cancellation of LME warrants. The Defendants also worked together to shift aluminum among their warehouses in order to concentrate the stock at key warehouse locations.

According to Plaintiffs, LME made increased profits through increased rental revenues. The Goldman Defendants had full knowledge of Metro’s anti-competitive actions and helped facilitate them, especially through using their control of the LME’s rulemaking process to make sure that the minimum rule remained in effect, and lobbying with LME to the same end. The bank defendants made a profit from taking advantage of prevailing market contango, selling short positions on futures and taking advantage of the long positions of the industrial Plaintiffs taken as a hedge against increases in the LME primary aluminum price. The Goldman Defendants also profited through the increased value of aluminum owned by its J. Aron subsidiary. The Goldman, JPMorgan and other Defendants benefited as at the time LME was sold to a Hong-Kong Exchanges & Clearing, and they made a profit off the sale of their shares for a combined $468 million.


Plaintiffs sought damages, injunctions and declaratory relief under Section 1 and 2 of the Sherman Act, 15 U.S.C. § 1, the Michigan Antitrust Reform Act, MCL §§ 445.773, the Donnelly Act of New York General Business Law § 340, et seq., among other state antitrust and unfair trade practices statutes, and claims for unjust enrichment.

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: September 18, 2018

The VIX is Fixed?! A Preview of the Tricks

A new [academic] year, a new manipulation to monitor. Today’s subject is none other than the fixing of the VIX.

It’s time for a trip back in time. Not very far back, though – just to the 23rd of May, 2017, the date on which John Griffin and Amin Shams published Manipulation in the VIX?, a 37-page (or 57-with-references), extensively researched, paper on, manipulation of the Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX). VIX is a widely tracked index that gauges the 30-day implied volatility of the market, and, while Griffin and Shams couldn’t muster up a particularly exciting title for their own paper, the VIX itself is often referred to as the market’s “fear index” or “fear-gauge.”

As the litigation-minded among you might expect, this publication set off more than a few alarm bells – and had in house counsel calling their lawyers. Between March and July of 2018, more than twenty-eight VIX manipulation actions were filed; they now have been MDL’d to Judge Manish S. Shah of the Northern District of Illinois as In re: Chicago Board Options Exchange Volatility Index Manipulation Antitrust Litigation., No. 1:18-cv-04171, MDL No. 2842 (N.D. Ill.). The plaintiffs in these cases vary, but are largely investors and other trading firms, many of which are Chicago-based. Named defendants include the various CBOE entities, but several cases are also captioned as “[Plaintiff] v. Does” — without insight into the CBOE data bases, Plaintiffs aren’t yet able to identify the parties responsible for the alleged manipulation.

The consolidated master amended complaint (“CMAC”) is now due on September 19, 2018, while a joint status report proposing a briefing schedule for motions to dismiss is to be filed by October 5, 2018. The Manipulation Monitor will be following this one closely, so watch this space for details. But while we wait for the official MDL complaint, the time seems ripe—given that we have an academic paper and nearly thirty complaints already in existence—to set up our blogging on this line of cases with some background on the VIX itself, and exactly how the Doe defendants achieved “mischief managed” status.

The Building Bricks of the VIX

So, let’s start with the major players. The CBOE is the largest options exchange in the U.S., and offers options contracts on hundreds of stocks and exchange-traded funds, as well several popular stock indexes. Trading on the CBOE happens through a clearing mechanism provided by the Options Clearing Corporation (“OCC”), which brings together buyers and sellers and handles all subsequent transfers of securities or cash between option buyers and sellers at expiration. The CBOE Volatility Index—or “the VIX,” as we’ve been referring to it, whilst wondering if Drake named this one as well—is based on real-time prices of near-the-money options on the S&P 500 Index (“SPX”), and is designed to reflect the investors’ consensus view of the future (at least, the 30-day future) expected stock market volatility. The “fear index” received its nickname from its tendency to spike significantly when investors believe the market is behaving bearishly.

Allegations in the various complaints involve futures and options contracts linked to the VIX Index, which are traded on the CBOE Futures Exchange (“CFE”). While the first exchange-traded VIX futures contract was only introduced in 2004—and VIX options contracts in 2006—combined trading activity has grown to over 800,000 contracts per day, and 2017 saw record-setting trading volumes for both products. It is the unusual settlement procedures for these VIX contracts that, according to Griffin and Shams, render the market susceptible to manipulation.

When a futures or options contract expires, the settlement price—the reference price against which the contract is measured—is a critical variable. If the settlement price can be manipulated, then so too can the value of the derivatives at settlement. Usually, a settlement price would be based on the spot price of the underlying assets. In contrast, the settlement price for a VIX contract is determined by a monthly auction that yields a price quoted using the ticker symbol VRO. This auction is conducted using a Hybrid Opening System, or “HOSS,” in which traders submit bids and offers for SPX options listed by the CBOE; this yields an opening price for such options from which VRO is calculated. VRO in turn determines the final settlement value of VIX derivatives. This auction starts at 7:30am Chicago time, and ends an hour later, when trading on non-expiring VIX futures and options begin.

Verily Verily, VIX is but a Dream

According to Griffin & Shams, there are three features about the VIX that “might leave it open to manipulation: multiple connected markets with different price-order elasticities, cash settlement, and a finite window to manipulate.” The first factor has to do with the fact, explained above, that there are actually two different markets at play here. The “lower level” SPX options market—to which the “upper level” VIX derivatives market is tied—is fairly illiquid, with large bid-ask spreads, while the VIX derivates are large and liquid. This means that a comparatively small number of trades in the SPX options market can move the price of those options significantly; these price movements will have a corresponding, and disproportionately large, effect on the VIX. The second factor, cash settlement, ties into these price movements. Unlike an asset with a physical settlement—where an anomalous price at settlement would just result in an investor taking possession of a physical asset at an inflated price—if the VIX is artificially inflated at settlement, the would-be manipulator can cash out their position at the deviated price. The third factor is the short period of time concerned. The one-hour period of the auction means that a would-be manipulator need only intervene for a very discrete period of time. Manipulation for the low-energy types, if you will.

Manipulation in the VIX goes on to explain exactly how the theoretical VIX tricksters have carried out their scheme. Keeping in the theme of threes, the triad of steps required for such manipulation include: (1) opening long positions in the VIX derivatives prior to settlement; (2) submitting aggressive buy orders in the SPX options during the settlement auction, causing the auction-clearing of prices of SPX options to rise, and, with them, the VIX settlement prices; and, finally, (3) obtaining the higher price for the upper-level VIX futures or options when they settle.

Griffin and Shams point out that such trading will leave reviewable patterns in the data, and their paper, quite naturally, goes on to review just that. For starters, they highlight spikes in average daily trade values that are not related to any S&P 500 market-related event, but solely to the date of VIX settlement. These volume increases occur primarily on options with VIX sensitivity, and researchers found that “the relationship is highly statistically significant.” Because the pattern of trading spikes is not observable in other, nearly identical, OEX and SPY options, or even in ITM options excluded from VIX settlement calculations, they conclude that this “evidence consistent with attempted manipulative activity.”

Being the thorough academics that they are, Griffin and Shams also considered whether any alternative phenomena could be driving SPX option trading volume spikes at settlement. For example, they investigate whether the VIX settlement option provides an opportunity for those with “pent up demand”—stemming from the normally illiquid SPX market—to trade deep OTM options. This theory was scuppered by their observation that comparable OTM options actually traded at lower volumes at the time of settlement. The pair further considered two possible hedging explanations, but were able to show both that traders were not attempting to hedge positions in VIX derivatives through the underlying SPX options, nor were rolling their hedging positions into SPX options in a way that mimicked the VIX weighting formula.

Observing all of these patterns, Griffin and Shams concluded that the most likely explanation for the market behavior that they could see was, in short, manipulation.

What they could not do, however, was identify the manipulators. Electronic trading on the CFE and CBOE is conducted anonymously, and only the CBOE—and the manipulators themselves—know the identities of the parties entering the manipulative orders that the researchers have observed. Luckily for Plaintiffs, the CBOE and CFE are central repositories of a range of information related to the trades. The only now question is how many associates will it take to parse the results of the (eventual) discovery demands . . . .


Details on the specific legal allegations and potential damages to be discussed in our next installment, so watch this space for real-time* updates.

*Okay, maybe not quite real time. I’m not NBC’s Sprinting Intern . . .

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: September 10, 2018

The LIBOR Over-the-Counter Defendants Argue That Their Transactions Were Above the Board

In this post, we provide an update on our August 20, 2018, post that reported on the motion of LIBOR Defendants Bank of America, N.A. and JP Morgan Chase Bank, N.A. (together, the “OTC Defendants” or “Defendants”) for partial judgment on the pleadings, under Federal Rule of Civil Procedure 12(c) to dismiss the OTC Plaintiff Class’ antitrust claims, and the OTC Plaintiffs’ related opposition. In their motion, the OTC Defendants seek to eliminate antitrust claims for transactions where a member of the panel involved in setting the LIBOR interest rate was not both the issuer and direct seller by arguing that the OTC Plaintiffs cannot be “efficient enforcers” of antitrust claims in order to have standing to bring antitrust claims for such transactions.

On August 24, 2018, the OTC Defendants filed their reply memorandum of law. We will summarize the arguments made in the OTC Defendants’ reply.

Affiliated Counterparties

Concerning transactions where plaintiff’s only counterparties were the panel members’ affiliates or subsidiaries, the OTC Plaintiffs’ argued in their opposition that the OTC Defendants’ assertions that the panel members were not involved and did not benefit from LIBOR-based transactions were belied by reports showing that the purpose of the subsidiaries and/or affiliates was to serve the management of interest rate risk across an entire corporate structure. On reply, the Defendants argue that these reports cannot be considered on a motion for judgment on the pleadings, as they are extrinsic to the OTC Plaintiffs’ complaint, which, according to Defendants, does not even plead that the panel members were involved in their affiliates’ decisions to incorporate LIBOR. Defendants also make the point that it does not follow that since subsidiaries and affiliates were a part of a corporate structure that managed interest rate risk, that panel member banks influenced decisions of affiliates to incorporate LIBOR-interest rate into transactions.

The OTC Plaintiffs also argued in the opposition that the panel members and their related affiliates could be found to be a “single enterprise” for purposes of antitrust liability, since the panel members fixed LIBOR-interest rates and the affiliates and subsidiaries sold them. The OTC Defendants argue in response that the case cited by the OTC Plaintiffs in support of this argument, Arandell Corp. v. Centerpoint Energy Servs., 2018 WL 3716026 (9th Cir. Aug. 6, 2018), requires independent participation by each party in the enterprise, but OTC Plaintiffs have not shown that the decisions by affiliates to incorporate the LIBOR-interest rate were part of an actual conspiracy, or anything but independent decisions.

Efficient Enforcer

The OTC Defendants also addressed each of the factors in the “efficient enforcement” test in their reply. The OTC Defendants assert that even if all the other factors besides that of the chain of causation to the asserted injury weighed in the OTC Plaintiffs’ favor, it would not matter, since In re Libor (“LIBOR VI”), 2016 WL 7378980 (S.D.N.Y. Dec. 20, 2016), found the chain of causation factor to be dispositive. Defendants also push back against the assertion that the other factors balance out in the OTC Plaintiffs’ favor: the “more direct victims” factor carries little weight since it vitiates the chain of causation factor, and, in any event, does not favor Plaintiffs because transactions with panel members are “more direct” than transactions with panel members’ subsidiaries or affiliates. Defendants also asserted that the speculation of damages factor did not favor the OTC Plaintiffs.

Regarding the transactions where the panel banks were merely the sellers and the issuers were affiliates or subsidiaries of the panel members, the OTC Defendants again argue that the decision to incorporate the LIBOR-interest rate is an “independent decision” of the affiliate or subsidiary, and “breaks the chain” of causation such that the efficient enforcer test cannot be met.

In its opposition, the OTC Plaintiffs cited In re Libor (“LIBOR V”), 2015 WL 6696407 (S.D.N.Y. Nov. 3, 2015) for the proposition that the panel members could still be liable for subsidiary or affiliate-issued LIBOR-based bonds. Defendants retort that LIBOR V instead held that panel member Credit Suisse Group AG was a counterparty to the transaction at issue because its affiliate acted as its agent in the transactions. LIBOR V is inapplicable because the OTC Plaintiffs’ complaint does not contain any agency allegations and, as LIBOR V held, mere corporate ownership does not create a principal-agent relationship.

Panel Member – Issuers

Concerning transactions where the panel member was an issuer, but the seller was an affiliate or another panel member’s affiliate, the OTC Defendants contest the OTC Plaintiffs’ argument that the direct purchaser rule under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) (“Illinois Brick”), which requires that the price-fixed product be purchased directly from the alleged co-conspirator in order for the purchaser to have standing to bring antitrust claims, is inapplicable. The OTC Plaintiffs argued that the Illinois Brick rule applies to price-fixed goods, not securities. The OTC Defendants point out, however, that In re NASDAQ Mkt.-Makers Antitrust Litig., 169 F.R.D. 493 (S.D.N.Y. 1996), upon which the OTC Plaintiffs relied for that proposition, did not apply the direct purchaser rule because the brokers who owned the securities were not defendant-owned, and thus the “control” exception did not apply, not because the securities did not move up and downstream in the market such that duplicative recovery is a concern, as the OTC Plaintiffs suggested.

The OTC Defendants also push back against the OTC Plaintiffs’ assertions that the concerns about double-recovery and apportionment do not exist here as they do with the price-fixed goods in Illinois Brick. Defendants provide an example wherein a plaintiff buys a security at a reduced price because of the alleged suppression of the LIBOR-interest rate, and then sells the security at a reduced price, also because of the alleged suppression. “If the instrument is then resold during the alleged suppression period, the reduced price will be passed on to the subsequent purchaser, triggering the same double recovery/apportionment concern that animates Illinois Brick.”

Finally, the OTC Defendants insist that there are no “practical considerations” which warrant an exception to Illinois Brick, since this case involves direct purchasers, Illinois Brick is on point.


We will be sure to update this series again when the motion to dismiss is decided by the Court; stay tuned to this blog.

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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