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: May 25, 2018

It Doesn’t Actually Take Forever. It Just Feels Like It.

On May 22, 2018, Judge Victor Marrero of the SDNY issued an order winding up In Re: Municipal Derivatives Antitrust Litigation, 1:08-cv-02516-VM-GWG). This multi-district litigation was a 2008 case; the cases that were combined in the multi-district litigation likely were from even earlier.

The reasons complex litigations such as these take so long are many and complicated. I leave it to others to debate the merits of those reasons. If you are going to engage in such litigation, know that it may not be a swift process.

If you have questions or comments about The Manipulation Monitor, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at or call him at (212) 344-5400.

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

Posted: May 17, 2018

Third Mexican Government Bond Manipulation Suit Filed; Plaintiff Moves to Consolidate

In the past two months, three antitrust class actions have been filed alleging the manipulation of the market for Mexican government bonds. Oklahoma Firefighters Pension & Retirement System v. Banco Santander, was filed on March 30, 2018, Manhattan and Bronx Surface Transit Operating Authority Pension Plan v. Banco Santander, was filed on May 3, 2018, and Boston Retirement System v. Banco Santander, was filed on May 14, 2018. On May 16, 2018, the plaintiff in Oklahoma Firefighters Pension & Retirement System v. Banco Santander moved to consolidate the three actions.

UPDATE: The day this was posted, two more suits were filed in the SDNY alleging manipulation of the market for Mexican government bonds: Southeastern Pennsylvania Transportation Authority v. Banco Santander and United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Banco Bilbao Vizcaya Argentaria.

UPDATE: On May 25, 2018, another Mexican government bond manipulation suit was filed: Government Employees’ Retirement System of the Virgin Islands v. Banco Santander

If you have questions or comments about The Manipulation Monitor, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at or call him at (212) 344-5400.

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

Posted: May 9, 2018

Stock Loan Lowdown

First up on the Manipulation Monitor’s catalog of current and compelling competition law litigation will be issues arising in the stock loan market. This post will examine allegations in two pending actions: Iowa Public Employees’ Retirement System et al v. Bank of America Corporation et al., concerning manipulation of the stock loan market, and QS Holdco Inc. v. Bank Of America Corporation et al., regarding the boycott of a platform related to stock loan lending.

Iowa Public Employees’ Retirement System et al v. Bank of America Corporation et al.

Filed in the Southern District of New York in August 2017, the primary allegations in this class action concern efforts by the “Prime Broker Defendants” to stymie the efficient growth and development of the stock loan market through a variety of collective actions dedicated to impeding entry into the market of alternative trading platforms. Causes of action include conspiracy to restrain trade in violation of the Sherman Act, as well as unjust enrichment under New York law. Click here to see the Complaint.

The Parties and the Alleged Class
The Prime Broker Defendants include Bank of America Corporation and their Merrill Lynch subsidiaries; Credit Suisse; Goldman Sachs; JP Morgan; Morgan Stanley; and UBS. Each of these Defendant entities, through their prime brokerage departments, are alleged to have served as intermediaries in transactions between borrowers and lenders of stock loans. The complaint alleges that the Prime Broker Defendants accounted for 76% of the market for prime brokerage services in 2017; looking specifically at the securities-lending related revenue—a division of prime brokerage services—a 2013 study finds that the Prime Broker Defendants accounted for eighty percent of that more limited portion of prime brokerage services.

Plaintiffs Iowa Public Employee’s Retirement System (“IPERS”), Orange Court Employee’s Retirement System (“OCERS”), and Sonoma County Employee’s Retirement Association (“SCERA”) each provide retirement benefits to public employees, and have lent significant volumes of stock to the Prime Broker Defendants and their stock borrower clients. While the named plaintiffs are lenders, the class action complaint defined the representatives of the class broadly enough to include those entities on the other side of the transaction—any entities which, because of Defendants’ alleged actions, paid inflated rates when they borrowed stock, or, in the alternative, received unduly low rates when they lent stock. Specifically, the class definition encompasses:

All persons and entities who, directly or through an agent, entered into stock loan transactions with Bank of America, Goldman Sachs, Morgan Stanley, Credit Suisse, JP Morgan, or UBS in the United States from January 7, 2009 through the present (the “Class Period”). Excluded from the Class are Defendants, their employees, subsidiaries, and co-conspirators, whether or not named in this complaint.

Overview of the Alleged Facts
The allegations in the complaint detail several specific ways the Prime Broker Defendants allegedly conspired to maintain the “over the counter” trading market that, they say, unduly benefits those acting as intermediaries. Before delving into those mechanisms, it is perhaps worthwhile to elaborate on the nature of the stock loan market itself.

Stock lending, briefly summarized, is the temporary transfer of stock from one investor to another investor. This practice is critical to providing liquidity in the market, and facilitates equities trading strategies such as hedging and short selling. However, and contrary to its moniker, stock lending involves an exchange of title: the lender transfers title of the stock or security to the borrower—with an irrevocable obligation to return equivalent securities at a later date—while the borrower, in return, transfers title of the collateral, typically cash or “safe” securities, to the lender in return. These trades are typically open—that is, for no specific term—but when the trade does conclude, the borrower returns the stock or securities along with a sum equivalent to the interest earned on the security. On receipt of their stock, and this fee, the lender returns the collateral. These trades are typically over-collateralized, with the collateral value resting between 102% to 105% of the market value of the security loaned.

Unlike, for example, equities trading, the stock loan market has remained almost exclusively “over the counter,” or “OTC.” That is, there exists no centralized, electronic platform for buyers and sellers to meet. Instead, a hedge fund seeking to borrow stock must reach out to a prime broker—using, allegedly, such outdated technology as the telephone—who will provide a price for those loans. The prime broker must then go out into the market to secure the desired stock, typically through negotiations with an agent lender, who represents numerous institutional investors. In exchange for these go-between services, the prime broker commands a percentage fee. Throughout this process neither the hedge fund nor the institutional investor has very much, if any, insight with respect to the price that the other party is willing to transact at, and thus limited visibility into the fees that the prime brokers are commanding. And it would appear that those fees are considerable: the complaint claims that prime brokers “vacuum up” as much as 60% of the revenue generated by stock loan transactions.

It is the continuation of this market dependence on prime brokers for stock loan transactions—and the relatedly volatile and opaque pricing by these middlemen—that Plaintiffs claim motivated the Prime Broker Defendants to engage in this alleged conspiracy.

The Alleged Conspiracy
Specifically, the Prime Broker Defendants created an entity known as “Equilend.” This platform went live in 2002, with the stated purpose of optimizing “efficiency in the securities finance industry by developing standardized and centralized global platform for trading and post-trade services.” Plaintiffs claim that Equilend was nothing less than “a forum for collusion.”

First, Plaintiffs claim that the Prime Broker Defendants used Equilend to stagnate development of the stock loan market, preventing the natural transition to a modern, “all-to-all” electronic platform through the acquisition and suppression of entities offering exactly that alternative: AQS/Quadriserve, and SL-x.

Quadriserv Inc. was a software company that, in the mid-2000s, developed and launched an electronic platform for stock lending. This new platform was called “AQS,” and its purpose was to allow borrowers and lenders to transact anonymously in the stock loan market. In 2009, Quadriserve/AQS announced a partnership with Options Clearing Corporation (“OCC”) to provide clearinghouse and central counterparty services for all transactions submitted through the AQS platform. This meant that parties could transact with minimal risk: a clearinghouse like OCC maintains sufficient capital to stand behind every trade it clears, and becomes, in essence, borrower to every lender and lender to every borrower. Quadriserv/AQS’s goal was to increase efficiency in the market place, and to increase profitability by decreasing spreads. This promise, according to Plaintiffs, was viewed as a threat by the Prime Broker Defendants, who subsequently took steps to minimize it. These steps included a request to Quadriserv/AQS to convert itself to a dealer-only platform; when that proposition was rejected by Quadriserv/AQS, the Prime Broker Defendants actively discouraged their customers from using the platform. This boycott allegedly started AQS of the liquidity it needed to function efficiently, and the platform struggled to stay afloat.

In late 2010, a similar stock lending platform emerged. Called SL-x, this new entity offered an electronic platform for stock loans, including real-time pricing information and central clearing. As Plaintiffs claim they did with Quadriserv/AQS, the Prime Broker Defendants again allegedly worked to block the development of SL-x by refusing to transact business on the platform, discouraged their clients from moving their stock lending transactions to SL-x, and, using their influence with two different clearinghouses, blocked SL-x’s access to central clearing. SL-x ultimately ran out of funding, and shut down their trading platform. The Prime Broker Defendants then purchased, through Equilend, the intellectual property rights of SL-x. Plaintiffs claim that this purchase was done without any intent to use the patents, and that defendants made the purchased solely to prevent other new entities from utilizing the technology.

Second, Plaintiffs argue that the Prime Broker Defendants have taken steps to limit market access to pricing data. This is demonstrated, Plaintiffs claim, through defendant’s interactions with an entity called “Data Explorers.” Formed in 2002, Data Explorers steadily gained access to wholesale pricing data throughout the early 2000s, and by 2011began marketing pricing data directly to agent lenders. Apparently out of fear that access to data would be cut off, Data Explorers did not immediately offer real wholesale pricing data—that is, letting a lender know how much the prime broker was charging hedge funds for borrowing the stock it had lent—but would instead offer performance data: essentially, whether the price it was receiving for lending a particular type of share was in line with market prices. To combat this increased transparency, the Prime Broker Defendants allegedly agreed among themselves to refuse to allow their pricing data to be released, and further set up a competing data business, called DataLend, as a division of Equilend. The Prime Broker Defendants then told the agent lenders who had signed up with Data Explorers that DataLend would provide comparable performance data at a much lower cost. DataLend could not compete, and their ultimate goal of providing wholesale pricing data—as opposed to just performance data—was not realized.

As a result of the Basel III measures, by 2016 the Prime Broker Defendants came under pressure to begin running their stock loan trades through a central clearing house. In response, the defendants began building their own paths to central clearing through the OCC and another clearing entity, Eurex. According to Plaintiffs, and to control the means of clearing, the Prime Broker Defendants launched “Project Gateway.” As a part of the Project Gateway efforts, Defendants acquired AQS, the Quadriserv platform described above; though apparently struggling, this was the only non-dealer-controlled product that offered centrally cleared all-to-all stock loan trading. After making this acquisition—again, through the Equilend entity—the Prime Broker Defendants essentially shut down the platform, not using it for transactions or centrally-cleared trades.

The combination of these steps taken by the Prime Broker have resulted, according to Plaintiffs, demonstrate collusion to eliminate competition, and, as a result, in one of the largest and most important markets remaining “antiquated, opaque, and inefficient.”

These allegations are not, of course, unchallenged: Defendants have moved to dismiss the complaint in its entirety. While a decision on this motion is not imminently expected, a summary of their counterarguments will be the subject of an upcoming post.

QS Holdco Inc. v. Bank Of America Corporation et al.

Coming on the heels of the Iowa Public case, in January of this year, QS Holdings—former owner of the Quadriserv/AQS platform discussed above—filed suit against essentially the same collection of Prime Broker Defendants, alleging similar patterns of collusion specifically targeted at the boycott of the Quadriserv/AQS platform. Click here to see the Complaint.

Recognizing the need for evolution in the stock loan market, Quadriserv launched its AQS platform in the early 2000s. The system was well received, the complaint claims, and was supported by key market participants such as the Federal Reserve Bank of New York and other financial regulators, stock lenders such as Barclays Global Investors, stock borrowers, including hedge fund Renaissance Technologies, venture capital funds, and Deutsche Bourse, one of the largest stock exchanges in the world. AQS also secured agreements with SunGard Data System’s Loannet, a universal accounting and settlement processing system for securities, and the OCC, to allow for central clearing.

Like Iowa Public, the QS Holdco complaint alleges that the Prime Broker Defendants viewed AQS as a threat to their profitable role as stock trading middlemen, and conspired to “boycott AQS and starve it of liquidity.” This agreement was reached through in-person meetings between senior personnel from the various banks, with Defendants Morgan Stanley and Goldman Sachs—the two largest prime brokers in the market—allegedly taking the lead. To ensure that their boycott was comprehensive, Morgan Stanley and Goldman Sachs are said to have recruited other Prime Broker Defendants to their cause, including defendants initially receptive to the new platform. As discussed above, the Prime Broker Defendants together formed EquiLend, and allegedly used EquiLend meetings, together with various private dinners, industry association meetings, and phone calls, to further such related discussions.

In addition to their collective refusal to participate on the AQS platform, thus depriving it of both trade flow and trade data, Plaintiffs claim that the Prime Broker Defendants further took steps to prevent other market participants from carrying out business on the AQS platform. These allegations include, for example, the charge that Prime Broker Defendants threatened hedge fund clients with loss of access to Defendant’s other services, such as assistance raising capital, if those clients chose to utilize AQS for their stock loan transactions. The complaint indicates that hedge funds D.E. Shaw, Millennium Management, and SAC Capital all faced such threats, while agent lenders like BNY Mellon (then Bank of New York) were forced to withdraw their initial support for the platform after threats from Goldman Sachs to withhold all of their stock loan business.

These combined actions resulted in millions of dollars in losses by Quadriserv, who ultimately sold their ownership interest in AQS to Plaintiff QS Holdco in July of 2015. In later 2015, further negotiations by the Prime Broker Defendants resulted in an explicit agreement to use EquiLend to purchase AQS: the same “Project Gateway” described in the Iowa Public complaint. This asset purchase was achieved in July 2016, and, having obtained the platform, Defendants promptly “shut down and shelved its innovative all-to-all technology” to avoid other entities using the same tools to challenge Defendant’s hegemony in the market.

The result of these allegations is a collection of antitrust claims under the Sherman Act, New York’s Donnelly Act, General Business Law, and Deceptive Practices Act, as well as common law claims for unjust enrichment and tortious interference with business relations. Motions to dismiss have not yet been filed, but we will provide case progress updates in the future.

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

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

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

Posted: May 2, 2018

Goldman Sachs Fined for Forex Practices

The Associated Press reports that Goldman Sachs agreed to pay a fine of over $110 million to settle allegations by the New York State Department of Financial Services and the Federal Reserve Board that its foreign exchange traders “participated in chat rooms, sometimes using code names, to discreetly share confidential customer information with other global bank traders to affect foreign exchange prices.”

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

Posted: May 2, 2018

Welcome to Schlam Stone and Dolan LLP’s Newest Blog, The Manipulation Monitor: A Guide to Financial Market Manipulation Antitrust Litigation

Welcome to Schlam Stone and Dolan LLP’s newest blog, The Manipulation Monitor: A Guide to Financial Market Manipulation Antitrust Litigation.

What Will We Be Writing About

In the Manipulation Monitor, we will discuss developments in antitrust and other competition law litigation relating to the financial services industry.

If you read our Commercial Division Blog (and you should), you know that it is very caselaw-focused. The goal of The Manipulation Monitor is different. We of course will write about the law relevant to antitrust and other competition law claims against financial institutions. But we also will write about the manipulation of the financial markets more generally: emerging legal theories of liability or defense; news regarding new investigations and new complaints; and key happenings in current litigation, such as motions made and decided and settlements. And we will post about topics of interest to current and potential parties to such actions such as litigation strategy and financing.

Recent Suits

Just in this decade, there likely have been well over a hundred—possibly hundreds—of lawsuits against players in the financial markets alleging that they manipulated those markets in various ways. In a way, this is inevitable. It is the nature of financial markets that banks interact with each other—that is the market working as it is supposed to—but when competitors interact in ways that often are opaque to outsiders, concerns about anticompetitive conduct arise. No doubt most interactions are entirely proper and necessary parts of the functioning of the financial markets. But experience—and criminal convictions, massive fines and settlements—show that not all the interactions have been innocent.
Here are some of the types of antitrust cases relating to the financial markets that are pending right now:

Benchmark Rate Manipulation

There have been a host of investigations, antitrust litigations and criminal cases accusing financial institutions of manipulating the market for benchmark rates such as LIBOR (the London Interbank Offered Rate), BBSW (the Australian bank bill swap rate), EURIBOR (the Euro Interbank Offered Rate), CDOR (the Canadian Dealer Offered Rate), SIBOR (the Singapore Interbank Offered Rate) and TIBOR (the Tokyo Interbank Offered Rate). In general, the claim in such cases is that instead of providing their current offered rate to help in benchmark rate setting, banks coordinated their responses to move the market in a way that benefited them.

The benchmark rate litigations have involved several complicating factors beyond the factual question of whether the banks colluded (this seems firmly established at this point, particularly with LIBOR) including personal jurisdiction over foreign actors, claims by indirect purchasers and measuring damages where, given the ubiquity particularly of LIBOR-linked financial products and business arrangements, a lower LIBOR rate might help a plaintiff in one area and hurt it in another.

Examples of benchmark rate manipulation suits are: In re: LIBOR-Based Financial Instruments Antitrust Litigation, No. 1:11-md-02262 (SDNY) (LIBOR manipulation); FrontPoint Asian Event Driven Fund, Ltd. et al v. Citibank, N.A. et al. , No. 1:16-cv-05263 (SDNY) (SIBOR manipulation); and Fire & Police Pension Association of Colorado v. Bank of Montreal et al., No. 1:18-cv-00342 (SDNY) (CDOR manipulation).

Commodities Manipulation

In recent years, there have been antitrust cases brought against financial institutions relating to manipulation of the markets for aluminum, platinum, palladium, silver and gold. These suits have not gone as well for plaintiffs as the benchmark rate manipulation cases, mostly because of questions about the connection between the manipulation alleged and the harm to plaintiffs. For example, in In re: Aluminum Warehousing Antitrust Litigation, No. 1:13-md-02481 (SDNY), the claims related to a conspiracy by banks that traded in the aluminum futures market to delay deliveries at warehouses that stored aluminum, driving up the price. But those claims were found to be insufficient to state an antitrust claim in the separate markets for aluminum or aluminum products. On the other hand, the allegations in the suits for manipulating the silver and gold markets are more like the claims in the benchmark rate manipulation cases: that certain banks colluded to set the spot rate for silver and gold in a way that benefited their market positions.

Examples of commodities manipulation suits are: In re: Aluminum Warehousing Antitrust Litigation, No. 1:13-md-02481 (SDNY); In re: Platinum and Palladium Antitrust Litigation, No. 1:14-cv-09391 (SDNY); and In re: London Silver Fixing, Ltd., Antitrust Litigation, No. 1:14-md-02573 (SDNY).

Foreign Exchange Market Manipulation

The claims in the foreign exchange market manipulation cases generally mirror those in the benchmark rate manipulation suits: plaintiffs allege that traders for the defendant banks communicated with each other informally to set forex spot rates in a way that was advantageous to the banks’ positions in the affected currencies. And like the benchmark rate manipulation suits, these actions involve questions of jurisdiction, the rights of indirect purchasers and damages.

An example of a forex manipulation suit is In re Foreign Exchange Benchmark Rates Antitrust Litigation, No. 1:13-cv-07789 (SDNY).

Government Bond Market Manipulation

Financial institutions recently have been alleged to have manipulated the markets for US treasury bills and securities, supranational, sub-sovereign, and agency bonds (bonds issued by bonds international entities such as provinces, states and regional development banks, or “SSA bonds”), and Mexican government bonds. Generally stated, these suits allege that traders at financial institutions colluded to manipulate auctions of US treasury bills and securities and Mexican government bonds, and the secondary market for SSA bonds, all in a way that advantaged the financial institutions over other market participants.

Examples of government bond manipulation suits are: In re: Treasury Securities Auction Antitrust Litigation, No. 1:15-md-02673 (SDNY); In re: SSA Bonds Antitrust Litigation, No. 1:16-cv-03711 (SDNY); and Oklahoma Firefighters Pension & Retirement System et al v. Banco Santander S.A. et al., No. 1:18-cv-02830 (SDNY) (Mexican government bonds).

High-Frequency Trading

The high-frequency trading antitrust actions are different from the suits discussed above. In the high-frequency trading suits, the plaintiffs claim that exchanges and related companies allowed financial institutions and other traders access to information that was not available to other investors so that they could engage in high-frequency trading that gave them an information advantage over regular investors that resulted in trading gains for the select few with access to this information and losses to other investors.

An example of a high-frequency trading suit is In Re: Barclays Liquidity Cross and High Frequency Trading Litigation, No. 1:14-md-02589 (SDNY).

Stock Loans

The stock loan suits relate to the market for lending stock to facilitate short selling. In short selling, the party that sells short often borrows the stock it is selling from an institutional investor such as an insurance company or a pension fund, which is paid to make the loan. In the middle of this transaction sit brokers—the financial institutions—that create an opaque market that sets the bid and ask prices for loaned stock. The plaintiffs in the stock loan suits alleged that the financial institutions limit competition in this market to increase the fees they earn and have conspired to keep electronic trading that would provide more transparency on the spreads between bid and asked prices out of the market.

An example of a stock loan suit Iowa Public Employees’ Retirement System et al v. Bank of America Corporation et al., No. 1:17-cv-06221 (SDNY).

Swap Market Manipulation

Many suits—now consolidated into two multi-district litigations—relate to manipulation of the credit default swaps and interest rate swaps markets by conspiring to keep competing trading platforms out of the markets, making these allegation similar to the allegations in the stock loan suits.

Examples swap market manipulation suits are In re: Credit Default Swaps Antitrust Litigation, No. 1:13-md-02476 (SDNY) and In re: Interest Rate Swaps Antitrust Litigation, No. 1:16-md-02704 (SDNY).

Recurring Issues

Personal Jurisdiction and Applicability of US Antitrust Laws: The financial markets are global. Many of the actors in these suits are located outside the United States. There often is a question whether the plaintiff—particularly a foreign plaintiff—has a claim under US law and whether a US court has jurisdiction over the defendants.

Market Definition and Indirect Purchasers: The scope of the US antitrust laws is not unlimited. Questions regarding what the affected market really is and how the plaintiff was injured in that market can determine the survival of a claim.

Proof: Traders must communicate to trade. And to collude. Modern statistical analysis helps, but sometimes the dividing line between permissible and impermissible communications can be unclear.

Class Actions: Many of these actions are brought as class actions. This presents both opportunities and challenges for victims. It’s appealing to let someone else bear the expense and disruption of bringing an action on behalf of a class. But of course, when it comes time to settle, a victim might not always like the deal class counsel and representatives reach with the defendants.

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

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