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 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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Posted: September 4, 2018

SSA Swindling? – Part II – Dismissal With Leave to Replead for Failure to Allege Injury in Fact

This week, we follow last week’s dismissal of 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, where one can find a full account of the alleged collusion in the Amended Complaint. In this post, we focus on the Defendants’ December 12, 2017, Joint Memorandum of Law in Support of the Motion to Dismiss, and Judge Ramos’ August 24, 2018, Opinion and Order granting the Motion to Dismiss.

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. After the Plaintiffs filed their complaint, certain defendants settled the case. This included Bank of America and Deutsche Bank, who settled for a combined $65.5 million in August of 2017.

Defendants’ Motion to Dismiss

The Defendants moved to dismiss the case in late 2017, arguing that the Plaintiffs lacked antitrust standing, and otherwise failed to state a claim because the Plaintiffs, relying mostly on the 150 communications, were unable to point to a transaction with an artificially set price of which Defendants were a part. Defendants asserted that Plaintiffs’ claim that they were injured because they transacted during a period when the entire SSA market was “rigged” were both implausible and unsubstantiated.

According to Defendants, Plaintiffs were not efficient enforcers because their claims were too remote and indirect, more efficient enforcers exist, and damages done to them were too speculative. Plaintiffs’ argument that Defendants participated in a decade-long global conspiracy to manipulate the entire SSA bonds market was implausible. Plaintiffs were unable to allege that the Defendants participated in the conspiracy with any evidence besides the correspondence among a handful of individuals dealing with a handful of deals. The allegation that they set artificial prices for a few particular deals, even if proven true, could not substantiate the claim that the entire market was rigged or that the Defendants participated in any misconduct in connection with Plaintiffs’ deals. Further, Plaintiffs did not allege a conspiracy because they failed to allege an industry-wide mechanism or benchmark that affected prices, or that every major bond dealer was involved in the alleged conspiracy. Additionally, Plaintiffs failed to allege that Defendants were participating in the conspiracy throughout the alleged class period.

Additionally, Defendants asserted that Plaintiffs abandoned attempts at providing sufficient allegations of SSA rigging using economic analysis, and that the economic literature provided by Plaintiffs was totally irrelevant. As a consequence, Plaintiffs did not plausibly allege an injury, and their complaint should be dismissed.

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, with leave to replead until October 23, 2018. Judge Ramos based his decision primarily on the fact that, as Plaintiffs had not 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.

Judge Ramos did note that Plaintiffs could however satisfy the pleading standard with statistical analyses which would show a comparison of bid-ask spreads paid by class members to spreads made on comparable instruments after the period of collusion ended. However, as Plaintiffs Amended Complaint lacked any allegations providing this statistical analyses Judge Ramos dismissed the Amended Complaint. Judge Ramos however made a finding that it was not yet futile for Plaintiffs to replead, and granted Plaintiffs the right to do so.

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: August 27, 2018

Stock Loan Lowdown: Fourth Time’s (still not quite) the Final . . . and Time Will Tell if it’s the Charm

Hello again, fair followers. Presented today for your pleasurable perusal is this pithy pandect of the penultimate paper in the Prime Broker Defendant’s Motion to Dismiss procedure. If perhaps you are pondering the precise past of Defendant’s process in pushing back, I present the proximate program over which I propose you pore:

Stock Loan Lowdown
Stock Loan Lowdown, Part Two: To Dismiss or Not to Dismiss?
Stock Loan Lowdown: Third Time Through the Order

And now to the meat of the matter: does the Defendant’s robust reply result in any real issues to plague the Plaintiffs?

Play It Again, Sam – Plaintiffs Fail To Allege A Plausible Antitrust Conspiracy

The bulk of Defendant’s reply brief is focused on the plausibility of the conspiracy laid out by the Plaintiffs. Nothing in Plaintiff’s opposition, they argue, successfully counters the key defects in the conspiracy: the marketplace lacked clearing brokers necessary to support anonymous trading; the industry was not suited to such trading because loaned securities could be recalled at any time; and the presence of agent-lenders at EquiLend board meetings—individuals whose interests would not have supported such a conspiracy.

First, Defendants point out, there is no clearing mandate for stock loans—no OCC bylaws requiring lenders and borrowers to rely on OCC clearing members to clear their trades—and as of yet none of the OCC members have entered the business of clearing stock loans for third parties. Without clearing arrangements, Defendants argue, such trades cannot be sustained. Moreover, Plaintiff’s argument that clearing would be possible if any of the OCC members did so enter the business is insufficient, according to Defendants, where plaintiffs fail to explain why Defendants (and other OCC members) would have chosen to do so, absent a regulatory mandate.

Second, Defendants argue that Plaintiffs have offered no explanation for the Defendant’s apparent ability to perpetrate a conspiracy in full view of the other members of Equilend’s other board members—namely, the large agent-lenders, such as BlackRock, Northern Trust, and State Street, all of whom represent many of the conspiracy’s alleged victims. The Plaintiffs argued, in their opposition, that the agent lenders may have had “their own incentives to preserve the status quo.” Defendants point out that such justifications are not only unpled, but directly contradicted by statements in the Plaintiff’s complaint. In support of this contention, Defendants point to statements such as “numerous agent lenders supported AQS,” and insist that, if agent lenders were in fact part of the alleged conspiracy, Plaintiffs should have pled as much.

Third, with respect to Plaintiff’s arguments concerning the recall of stocks—namely, that such issues could be overcome by the use of variances in risk premiums—Defendants simply point to their lack of citation or explanation for such a process. They further argue that the industry support Plaintiffs claim that the AQS project had amounts to little: those investors and supporters “would not have been the first to anticipate incorrectly market or regulatory evolution on central clearing.”

Defendants next shift to Plaintiff’s claims of direct evidence, and find that they “fall[] flat.” To be direct, Defendants note, such evidence must be both explicit and requiring no inference to establish the proposition asserted. The conversations Plaintiffs offer are, at best, inferences based on circumstantial evidence, and a far cry from an admission of an explicit agreement to boycott. What’s more, all direct evidence cited by the Plaintiffs pertains to the joint venture—not to the alleged agreement among Defendants as to what they would do outside of that venture.

Defendants next attack Plaintiff’s apparent reliance on group pleading. While the courts may allow pleadings that do not make defendant-by-defendant allegations, the “dispositive issue” is whether it is adequately pled that they “in their individual capacities, consciously committed themselves to [a] common scheme designed to achieve an unlawful objective” (a proposition for which defendants cite the SDNY IRS case). Plaintiffs, according to this reply, do not even attempt to satisfy that standard.

Next up are allegations of parallel conduct—as one might expect, Defendants again found these to be inadequate. First, they argue, the conduct described by Plaintiffs was more divergent than parallel: for example, multiple Defendants joined, used, or invested in AQS, which clearly diverges from a boycott. By the same token, it can hardly be said that Defendants all boycotted all three platforms. Moreover, any parallel behavior that can be said to exist is, as per Defendants, “mere inaction.” For example, Defendants point to the fact that there are no allegations that that the Defendants had anything to do with OCC clearing rules—so how could they have “imposed unnecessary conditions on their clearing connections?”.

Defendants next turn to the Plaintiffs’ proffered “plus factors,” arguing that the purported high-level of inter-Defendant communications cannot possibly create an inference of conspiracy in an industry in which inter-broker communications are commonplace. The communications cited by Plaintiffs are “routine,” defendants insist, and cannot on their own plausibly allege a high level of communications. Defendants also pooh-pooh Plaintiff’s claim of a “common motive to preserve their supracompetitive profits”: all industry participants seek high profits, and allegations of a profit motive utterly fail to supply a plus factor.

Hit It Again, Harry* – Plaintiffs Fail To Salvage Their Claim Based On The EquiLend Conspiracy

Defendants in this section latch on to Plaintiff’s contention that the Complaint primarily concerns an agreement among the Defendants as to their actions outside the joint venture—not the actions taken within EquiLend. To the contrary, Defendants argue: the antitrust claim described by Plaintiffs in fact rests largely, if not primarily, on allegations regarding EquiLend that are, in fact, entirely consistent with lawful joint-venture conduct.

First, Defendants argue that the allegations concerning participation in EquiLend are subject to the rule of reason. Because Plaintiffs concede that EquiLend’s platform offered some operational efficiencies, and do not attempt to argue that EquiLend was “an illegitimate shell,” the conduct described—such as EquiLend’s creation and pricing of DataLend, and purchases of both AQS and SL-x’s intellectual property—it should be subject to the rule of reason as the internal decisions of a legitimate joint venture. To counter Plaintiff’s insistence that the allegations involving EquiLend must properly be considered as a whole, Defendants point out that, in order to examine a claim as a whole, one must first analyze its individual allegations.

Having established to their satisfaction that Plaintiffs cannot avoid the application of the rule of reason, Defendants then shift to arguing why Plaintiffs fail to allege a rule-of-reason claim. Under that analysis, Plaintiffs would be required to show that the alleged agreement produced an adverse, anti-competitive effect within the relevant market. Defendants first attack whether the Plaintiffs have adequately alleged that the stock loan market is a relevant antitrust market, insisting that, while the individual Defendants may compete in the stock loan market, Plaintiffs have not alleged that the joint venture, EquiLend competes with them there, or, in fact, that it has any presence in any market. Without any participation in a market, EquiLend cannot, and does not, have the ability to adversely affect competition. Defendants further invite the court to decline Plaintiff’s invitation to truncate the rule of reason analysis, insisting that the alleged conduct was not, as Plaintiffs claim, “obviously anti-competitive.” As an example here, Defendants cite EquiLend’s creation and pricing of DataLend: how can the creation of a new service, with superior data and lower prices, created specifically to compete with a market incumbent, possibly be an example of anticompetitive behavior, they ask?

Pay It Forward, Paul – Plaintiffs Injuries Are Too Speculative To Confer Antitrust Standing

Defendants continue to argue that Plaintiffs injuries, based on “vague allegations” that SL-x and Data Explorers would have increased efficiency, price competition, and transparency, simply do not identify damages that the borrowers and lenders in any sufficient detail. Moreover, while the Complaint argues that the imposition of an electronic, all-to-all trading platform, like that of AQS, would have resulted in better prices, that contention simply does not apply to Data Explorers – a pricing service – and SL-x, a platform non-operational in the US.

Furthermore, Defendants argue, AQS could not have succeeded without clearing brokers to provide access to central clearing. While more than sixty brokerage firms have stock lending clearing privileges, Plaintiffs do not dispute that none of those firms have entered the business of clearing loans for other entities. Their presence, Defendants argue, is a precondition to the success of AQS—and thus to any improvements in pricing—and their absence cannot be attributed to the alleged scheme.

Time’s Up, Tony – Plaintiffs Have No Answer To The Statute Of Limitations

Finally, Defendants insist that Plaintiffs claims are time-bared insofar as it seeks damages for conduct that allegedly first caused injury before August 16, 2013. Plaintiffs arguments to the contrary fail first, because they misstate the law of accrual, and, second, because they do not successfully defend the sufficiency of their fraudulent concealment claim.

Plaintiff’s opposition asserted that the limitations period runs not from when Defendants acted, but from when the injury occurred. Defendants point out that, to the contrary, a Section 1 claim accrues when “the defendant commits an act that injures the plaintiff.” Much of the supposedly wrongful conduct—including the boycott of DataExplorers, and many of the SL-x allegations—occurred outside of the four-year limitations period, and, according to the allegations, caused contemporaneous injury. Because the conduct and initial injury occurred more than four years prior to the original complaint, the statute of limitations bars any recovery of damages caused by that conduct.

Plaintiffs argued that, notwithstanding the early date of Defendants actions, their claims were timely because the stratified the pleading standard for tolling. Defendants argue that, to the contrary, Plaintiffs allegations fall short on all three elements: concealment, ignorance, and diligence. First, the alleged conspiracy was not self-concealing, as the EquiLend platform and its ownership was public knowledge, and Plaintiffs did not adequately allege affirmative acts of concealment by defendants; to the extent that they cite any acts, they fail to identify which occurred prior to August 2013. Against claims of ignorance, Defendants point again to the 2009 Global Custodian article quoted in Plaintiff’s own complaint, stating that it must have, at least, placed plaintiffs on inquiry notice. And on diligence, Defendants claim that Plaintiff’s reading of the Rule 9(b) requirement to say that “a plaintiff’s diligence is often satisfied by allegations of a defendants concealment” is inadequate, as it functionally reads the diligence requirement out of existence. Moreover, Plaintiffs fail to explain what happened during the limitations period to prompt the investigation by counsel that resulted in the lengthy complaint—and without that, it is impossible, as per Defendants, to ascertain whether Plaintiffs could or should have discovered their claim within the period.


And with that, I will close this post; we’ll update this series again when the motion to dismiss decision comes down, so stay tuned for developments.

*No, you’re not missing a reference. Call it creative license.

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: August 20, 2018

LIBOR–The Over-the-Counter Defendants’ Motion to Dismiss

In this post, we cover recently filed briefing in In Re: Libor-Based Financial Instruments Antitrust Litigation, 11-MD-02262 (“In re Libor“), the multi-district litigation in the Southern District of New York comprised of actions filed across the United States since 2011 relating to manipulation of LIBOR (the London Interbank Offered Rate) for the U.S. dollar.

Some may find it hard to believe that there can still be pre-trial dispositive motions being litigated in cases that have been around for seven years; yet, on July 13, 2018, LIBOR Defendants Bank of America, N.A. and JP Morgan Chase Bank, N.A. (together, the “OTC Defendants”) moved for partial judgment on the pleadings under Federal Rule of Civil Procedure 12(c) to dismiss the OTC Plaintiff Class’ antitrust claims based on transactions with, or on which interest is paid by, subsidiaries or affiliates of a U.S. Dollar LIBOR panel bank. The OTC Plaintiff Class (“OTC Plaintiffs”) filed an opposition to the OTC Defendants’ motion on August 9. We will summarize the arguments made by both parties in their respective motions.

If you are generally unfamiliar with LIBOR, it may be worth reading our June 6, 2018, post, which provided a general overview of the factual allegations in In re Libor, first, before reading on here. It is important to remember that the LIBOR interest rate was calculated using daily submissions from banks that made up a panel composed by the British Bankers Association. The OTC Plaintiffs generally consist of those who bought an interest rate swap or bond/floating rate note tied to the LIBOR rate directly from a panel-member bank (or one of its affiliates) (although the actual class definition is more complicated than that).

Requirements for Antitrust Standing Generally

As stated in a previous decision in In re Libor, in order to have standing to assert antitrust claims, it is required that a plaintiff allege “that it (1) has experienced antitrust injury and (2) is an efficient enforcer of the antitrust laws . . . .” In re Libor (“LIBOR VI”), 2016 WL 7378980 at *1 (S.D.N.Y. Dec. 20, 2016). There are four factors that guide whether a plaintiff will be an efficient enforcer of antitrust laws: “(1) the directness or indirectness of the asserted injury, which requires evaluation of the chain of causation linking appellants’ asserted injury and the Banks’ alleged price-fixing; (2) the existence of more direct victims of the alleged conspiracy; (3) the extent to which appellants’ 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.” Gelboim v. Bank of Am. Corp., 823 F.3d 759, 778 (2nd Cir. 2016) (quoting Associated Gen. Contractors of Calif., Inc. v. Calif. State Council of Carpenters, 459 U.S. 519, 540 – 545 (1983)). The efficient enforcer test is meant to guide “whether the putative plaintiff is a proper party to perform the office of a private attorney general and thereby vindicate the public interest in antitrust enforcement.” Id.

The OTC Defendants’ Argument

The OTC Defendants contend that the OTC Plaintiffs do not have standing to assert antitrust claims for the following types of transactions: 1) where the plaintiff’s only counter-parties were panel members’ affiliates or subsidiaries, but not any actual panel member; 2) transactions where the issuer was not the panel member, but rather an affiliate or subsidiary of the panel member, and the panel member’s only role was as that of a seller; and 3) where the panel member was an issuer, but the seller was an affiliate or another panel member’s affiliate.

The OTC Defendants argue that the decision to incorporate the LIBOR rate the first type of transaction would be made independent of the panel member and is therefore an “independent decision” that severs the causal chain required by the efficient enforcer test’s causation factor. The OTC Defendants cite to the Court’s decision in LIBOR VI; in that case, the Court ruled that a class of bondholder plaintiffs could not be an efficient enforcer where the plaintiffs’ counter-party was not a panel bank, and dismissed plaintiffs’ antitrust claims accordingly.

The OTC Defendants also point to the Court’s holdings from LIBOR VI that plaintiffs have not pleaded facts to show that the panel members participated in the suppression of LIBOR, and that panel member banks are the proper defendant for persistent suppression claims. Although they admit that those holdings pertained to the question of who the appropriate defendants are, not whether plaintiffs are efficient enforcers of antitrust law, the OTC Defendants submit that the reasoning should nevertheless apply here. Finally, the OTC Defendants contend that the OTC Defendants have not asserted any allegations to suggest that the panel member’s affiliates and subsidiaries were not independent.

The OTC Plaintiffs’ argument that the OTC Plaintiffs have no standing to assert antitrust claims for the second type of transactions uses similar reasoning as to that of the first type of transactions. According to the OTC Defendants, the OTC Plaintiffs have not alleged facts to suggest that where the panel member was a mere seller, that it would have been the one to decide to incorporate LIBOR rates into the transaction. Since the decision to incorporate LIBOR is independent of the panel member, and the causal chain required by the efficient enforcer test’s causation factor is severed, the OTC Plaintiffs do not have antitrust standing for those transactions.

For their argument that there is no standing for antitrust claims where the panel member was an issuer, but the seller was an affiliate or another panel member’s affiliate, the OTC Defendants rely on Illinois Brick Co. v. Illinois, 431 U.S. 720, 736 (1977). In that case, the Supreme Court ruled that, with certain exceptions (which the OTC Defendants argue are inapplicable), “only direct purchasers have standing to bring civil antitrust claims.” In other words, to have standing to bring an antitrust claim under the Clayton Act, one must purchase the price-fixed product directly from the alleged co-conspirator.

Although OTC Defendants concede that there is an exception under this rule for when the defendant owns or controls the entity that sold the goods, they argue that the exception only applies where there is such functional unity between the defendant and the seller-entity that the defendant controls the seller-entity and sets the prices of the product in question. The OTC Defendants point out that the OTC Plaintiffs have not alleged that the panel members decided to incorporate LIBOR in these type of transactions. The Illinois Brick rule therefore prohibits standing to assert antitrust claims where the panel member was only an issuer.

The OTC Plaintiffs’ Argument

The OTC Plaintiffs argue in response by first contesting that panel members were not involved and did not benefit from LIBOR-based transactions involving their subsidiaries and affiliates such that there is no causal link between the panel members and transactions involving their affiliates and subsidiaries. They contend that although the Court previously found that defendants had no control over, input in, and profit from the Bondholder’s LIBOR-based transactions, the OTC Defendants in fact did control, have input in, and profit from the OTC Plaintiffs’ transactions. They point to published reports from Bank of America and JP Morgan Chase & Co. showing that the OTC Defendants’ subsidiaries and/or affiliates served to manage interest rate risk across the entire corporate structure. The OTC Plaintiffs also note that the equivalent of the treasury department set “transfer pricing” across different departments and ensured that the customer-facing segments of the main bank did not buy or sell instruments above the panel member’s LIBOR submission. Finally, they note that in LIBOR VI, the only case that the OTC Defendants relied on besides Illinois Brick, the Court specifically stated that the “antitrust laws do not require a plaintiff to have purchased directly from a defendant to have antitrust standing. 2016 WL 7378980 at *16.

The OTC Plaintiffs then note that the OTC Defendants ignore the other three factors in the efficient enforcer test. Since there is no difference in motivation of enforcement of antitrust laws between those who transact only with a panel member and those who transact with a subsidiary, the theory of damages is no more speculative when it comes to transactions with subsidiaries and affiliates and the court has already said that there is no danger of duplicative recovery when damages are tied to particular transactions.

Every factor in the efficient enforcer test, according to the OTC Plaintiffs, goes in their favor.

The OTC Plaintiffs also cite Arandell Corp. v. Centerpoint Energy Servs., 2018 WL 3716026 (9th Cir. Aug. 6, 2018), to support the assertion that parents and wholly-owned subsidiaries are treated as a single enterprise when they engage in coordinated activity for an illegal, anti-competitive purpose. In Arandell, the Court held that a subsidiary-gas seller could be liable for advancing anti-competitive conduct and named as a defendant selling gas at prices fixed by its parent and the parent and subsidiary shared profits with each other. According to the OTC Plaintiffs, since the panel members fixed the LIBOR rates, they and their respective affiliates and subsidiaries who sold and issued the transactions should be treated as a single enterprise.

The OTC Plaintiffs also push back against the OTC Defendants’ argument that there should not be antitrust standing where the panel members were mere sellers. The case law that the OTC Defendants cited to support that argument concerned the liability of agents and brokers for state-law breach of contract and unjust enrichment. Since the common law requirement of a contractual or quasi-contractual relationship is not relevant to the question of who is the proper plaintiff to enforce antitrust laws, according to the OTC Plaintiffs, those cases are inapplicable.

The OTC Plaintiffs also contend that the direct purchaser rule under Illinois Brick is inapplicable, since that rule applies to fixed-priced goods, so as to prevent duplicative recovery by upstream and downstream purchases of the same good. Since class members do not ever receive the same suppressed interest payment, the rule does not apply to financial benchmark-fixing cases. Moreover the “practical considerations of double recovery, complex apportionment, and over-deterrence are not present here as they are in Illinois Brick.

Finally, the OTC Plaintiffs argued that their antitrust claims should not be dismissed while material factual disputes are pending. The motion raises issues as to the banks’ internal structure, the issuance of LIBOR swaps and bonds, and the sharing of revenues. Discovery thus far has been limited, according to the OTC Plaintiffs. They argue that they should be allowed to take further discovery on the aforementioned topics before their claims are dismissed.

Remainder of Briefing Schedule

Under the current briefing schedule, the OTC Defendants’ replies are due August 24, 2018. Stay tuned to this blog, as we will be sure to inform you as to any new development from the OTC Defendants’ reply.

This post was written by John F. Whelan.

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