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: June 17, 2018

Citigroup Agrees to Pay $100 Million to Settle State LIBOR Investigations

Bloomberg reports that Citigroup has agreed to pay $100 million to settle claims by 42 states against it relating to”misrepresent[ing] the integrity of the Libor benchmark to state and local governments, not-for-profit organizations and institutional trading counterparties.”

According to Bloomberg,

“[t]he settlement agreement quoted extensive electronic and phone communications obtained in the case, including a communication on March 28, 2008, between a New York-based manager and former Libor submitter to one of his backups.

‘Avoid Being Highest’
“Also I note that our 1-6mths LIBORS were the highest out of all contributors,” the submitter said. “Given the potential negative publicity that this could have I would go lower (and certainly try to avoid being the highest).”

Other messages showed submitters expressing concern that a high Libor would signal the bank was “in trouble” while one that’s too low would attract unwanted attention, according to the settlement agreement. The bank moved its submissions up after a Wall Street Journal report in April 2008 questioned whether Libor submissions truly reflected the banks’ borrowing rates, according to the settlement.

“[T]here is a little bit of internal political pressures for us to be seen, but not heard anywhere at all in the market,” one message said.

Another message by a Citi financial strategist said the British Bankers’ Association, which used to oversee Libor, was “simply sticking its head in the sand and not acknowledging what everyone in the market recognizes — LIBOR is nowhere near where banks may (or may not) extend unsecured credit.”

Posted: June 6, 2018

Banks Put the “Lie” in LIBOR

There have been at least 76 actions filed across the United States since 2011 relating to manipulation of LIBOR or the London Interbank Offered Rate for the U.S. dollar. Since August 2011, 71 of these actions have been transferred to a Multi-District Litigation in the Southern District of New York: In Re: Libor-Based Financial Instruments Antitrust Litigation, 11-MD-02262 (“In re Libor“). Because In re Libor encompasses so many of the civil cases brought by plaintiffs for claims relating to LIBOR benchmark manipulation, we will treat it as one case for purposes of our discussion of LIBOR. Unless otherwise specified, the allegations made are taken from the [Corrected] Fourth Amended Consolidated Class Action Complaint, available here. In this post, we focus on the alleged facts and identification of parties in In re Libor. In an upcoming post we will discuss the procedural posture of class certification of the various parties and the claims asserted.

Overview of How LIBOR Works

LIBOR is a daily interest rate relating to ten currencies for different ranges of maturity published by the British Bankers Association (BBA), a trade association. In this context, it refers specifically to the rate published for the U.S. dollar. It is a “benchmark” rate in that it is used to determine the interest rates for notes, futures, options, and other transactions. For example, a note with a variable interest rate might be calculated as the LIBOR rate plus a certain other percentage.

The BBA calculates LIBOR using submissions received by its agent Thompson Reuters from each of the sixteen members of a panel composed by the BBA, made up of banks in the London interbank money market for U.S. dollars. Each panel member-bank’s submission was a response to the following question from the BBA: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” In other words, each bank submits a prediction on what interest rate it would pay to borrow unsecured U.S. currency in the London interbank market. The BBA’s rules require the submission to be based on “that bank’s perception of its costs of unsecured funds in the London interbank market.” According to plaintiffs, this requires the banks to “independently exercise its good faith judgment each day about the competitive interest rate that it would be required to pay, based upon its own expert knowledge of market conditions, including supply and demand conditions and the panel bank’s own competitive posture as a borrower within the market for interbank loan funds.”

Thomson Reuters, on BBA’s behalf, calculates the LIBOR rate for each maturity by disregarding the highest four and lowest four submissions, and calculating the mean of the middle eight submissions. Thomson Reuters then publishes the calculated LIBOR as well as the individual rates that each bank submitted at around 11:30 am each business day. According to the BBA’s own rules, each bank’s daily submissions remain confidential before its publication by Thomson Reuters.

Overview of the Alleged Collusion

Plaintiffs allege that the panel-members colluded by each agreeing to lower the interest rates in their LIBOR submissions far below what each was actually paying to borrow unsecured U.S. currency. Plaintiffs offer several motives for the banks’ alleged collusion. For one, it was in each bank’s interest to report having to pay a lower rather than higher interest rate, because paying a higher interest rate would reflect poorer creditworthiness and thus a greater risk associated with that bank. Especially since no bank wanted to stand out as being associated with more risk than other banks in the market, each bank had all the more incentive to coordinate its LIBOR submissions with each other. Finally, Plaintiffs allege that the banks artificially lowered their LIBOR submissions in order to manipulate futures contracts for Eurodollars (U.S. dollars held in commercial banks outside the United States), the interest rates for which are tied to LIBOR.

Plaintiffs have offered proof of their allegations from several different sources, including instant messages and e-mails made public from various settlements by some of the panel-member banks with governmental authorities and other civil settlements; these communications show agreements by those responsible for LIBOR submissions to accommodate requests from internal and external swap traders and other panel member banks to set a bank’s LIBOR submission at a certain rate. These communications also show, according to plaintiffs, that the banks based their submissions on how they wanted to be perceived compared to each other, not on what actual interest rates each was paying to borrow U.S. Currency.


There are several different classes of plaintiffs that have sought class certification in In re Libor. The following is a brief description of the different types of plaintiffs that have sought class certification.

Over-the-Counter (“OTC”) Plaintiffs: generally consists of persons or entities in the United States who bought an interest rate swap or bond/floating rate note directly from a panel-member bank (or one of its affiliates) that required that panel-member bank to pay interest at a rate tied to the 1 or 3 month LIBOR rate.

Lender Plaintiffs: generally consists of lending institutions headquartered in the United States that originated, held, or purchased loans, or purchased or sold interests in loans tied to LIBOR between August 1, 2007 and May 31, 2010.

Exchange-Based Plaintiffs: generally consists of those who purchased or sold Eurodollar futures contracts or call options on Eurodollar dollars, or bought put options on them on the Chicago Mercantile Exchange on or between certain specified dates.


The panel-member banks during at least some of the relevant time period consisted of Bank of America, N.A., Barclays Bank plc, Citibank, N.A., Credit Suisse Group AG, JPMorgan Chase Bank, N.A., HBOS plc, HSBC Bank plc, Lloyds Bank plc, WestLB, UBS AG, Royal Bank of Scotland plc, Deutsche Bank, AG, Royal Bank of Canada, Société Générale S.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., Rabobank U.A., The Norinchukin Bank. However, certain of these entities (or their related successor entities) have since settled and are no longer defendants, or are in the process of having settlements approved by the Court.

Interdealer brokers who Plaintiffs allege aided and abetted the panel-member defendants by assisting the banks in communicating their LIBOR submissions also were made defendants. These actors, which included ICAP plc, Tradition (UK) Limited, and Tullett Prebon plc are no longer parties to the case, however.

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: June 1, 2018

Trickery in [High Frequency] Trading

Coming up today on the Manipulation Monitor’s compendium of curious competition cases is an overview of claims of chicanery in the high frequency trading markets. Specifically, this post will provide an overview of five litigations, listed below, all of which concern the operation of stock exchanges and the Barclay’s Liquidity Cross (or “LX”) dark pool, and which have been MDL’d under In Re: Barclays Liquidity Cross and High Frequency Trading Litigation, 1:14-md-02589-JMF (SDNY).

City of Providence, Rhode Island v. Bats Global Markets, Inc. et al., 1:14-cv-02811-JMF 2014 (S.D.N.Y.)
American European Insurance Company v. Bats Global Markets, Inc. et al., 1:14-cv-03133-JMF 2014 (S.D.N.Y.)
Harel Insurance Co, Ltd. v. Bats Global Markets, Inc. et al., 1:14-cv-03608-JMF 2014 (S.D.N.Y.)
Flynn et al v. Bank of America Corporation et al., 1:14-cv-04321-JMF 2014 (S.D.N.Y.)
Great Pacific Securities v. Barclays PLC et al., 1:15-cv-00168-JMF 2015 (C.D. Cal.)

Procedural Posture

The four cases initially brought in the Southern District of New York had previously been consolidated, for pre-trial purposes, as City of Providence v. BATS Global Markets, Inc., No. 14-cv-2811. In these four cases, various investors (collectively, the “SDNY Plaintiffs”) brought claims under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., against seven stock exchanges—BATS Global Markets, Inc., Chicago Stock Exchange, Inc., Direct Edge ECN, LLC, the NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., New York Stock Exchange, LLC, and NYSE Arca, Inc. (collectively, “the Exchanges”)—as well Barclays PLC and Barclays Capital Inc. (together, “Barclays”). The fifth action, Great Pacific Securities v. Barclays PLC et al., 1:15-cv-00168-JMF, was initially filed in the US District Court for the Central District of California, but consolidated by order of the Judicial Panel on Multidistrict Litigation in December of 2014. In this fifth action, Plaintiff Great Pacific Securities (“Great Pacific”) sued Barclays alleging violations of California state law.

On January 23, 2015, Barclays’ and the Exchange defendants each filed motions to dismiss the second consolidated amended complaint (“SCAC”). Barclays further filed an addition motion to dismiss the claims brought by Great Pacific. All three motions were argued on June 18, 2015.

On August 26, 2015, Judge Jesse M. Furman granted all three motions to dismiss, though granting leave for Great Pacific to amend its complaint. With respect to the claims against the Exchanges, the court found the behavior complained of fell “within the scope of the quasi-governmental powers delegated to the Exchanges” by the SEC, and that the Exchanges were thus immune from suit. The court further found that, even if the Exchanges were not immune, the SDNY Plaintiff’s manipulative-scheme claims failed to meet the heightened pleading standards required for fraud under FRCP Rule 9(b), and, moreover, that no private right of action exists under the relevant statute, Section 6(b) of the Exchange Act. The claims against Barclays by both the SDNY Plaintiffs and Great Pacific, while arising under different statutory schemes—SDNY Plaintiff’s claims under federal securities law, and Grand Pacific’s under California state law—both were dismissed for failure to identify any manipulative acts on which Plaintiffs reasonably relied. The court was further of the opinion that the SDNY Plaintiff’s allegations against both defendants amounted to, at most, the contention that Barclays and the Exchanges aided and abetted the HFT firms by creating conditions through which those firms could influence the price at which securities were traded—but neither Section 10(b) nor Rule 10b-5 create liability for aiding and abetting the violation of another party, thus further justifying dismissal.

The SDNY Plaintiffs appealed this order. In a decision issued on December 19, 2017, the Second Circuit concluded first, that the defendant Exchanges were not entitled to absolute immunity with respect to the securities fraud claims; second, that Plaintiffs had sufficiently alleged that the exchanges were engaged in manipulative conduct; and, third, that Plaintiffs had alleged participation by the Exchanges in a fraudulent scheme, rather than merely aiding and abetting. Accordingly, the decision of the district court in favor of the defendants was vacated, and the case remanded for proceedings consistent with the appellate decision.

The Barclays defendants were not parties to the appeal, and the SDNY Plaintiffs did not appeal the lower court’s decision with respect to their claims under Section 6(b) of the Exchange Act, dismissed on the grounds that the section provides for no private cause of action. A court conferenced followed the appellate decision, and, as a result, member cases Flynn v. Bank of Am. Corp., 14-CV-4321, and Great Pac. Sec. v. Barclays PLC, 15-CV-168 were closed, while Plaintiff Foresta AP-fonden was terminated from both the MDL’d case and member case 14-cv-2811. For those keeping track, this leaves just three of the five actions still in play, each of which allege violations of Section 10(b) of the Exchange Act, and Rule 10b-5, against the Exchange defendants.

The Remaining Claims

Now that we’ve established the somewhat convoluted procedural posture, let’s delve into the allegations being made in the remaining actions.

Who are the “SDNY Plaintiffs,” anyway? Each of the plaintiffs in the remaining cases are institutional investors who participated in the buying and selling of shares of U.S.-based stock exchange listed stock for investment purposes, including on the Exchanges named in this action. These include City of Providence, Rhode Island; Plumbers and Pipefitters National Pension Fund; Employee’s Retirement System of the Government of the Virgin Islands; and State-Boston Retirement System. The case was brought as a class action on behalf of all public investors who purchased and/or sold shares of stock in the United States between April 18, 2009, and the present, and generally alleges a “scheme and wrongful course of business” whereby the Exchange Defendants (and Barclays, though this write up will, given the result of the appeal, focus on the Exchanges) employed various devices and manipulations to defraud investors in a manner that, by design, manipulated the U.S. securities markets and trading on those markets, diverting “billions of dollars annually” from other market participants, and generating every more in kickback payments for the Exchanges.

Some of the basics of the stock trade are important here, so let’s take a step back to look at the rise of high-frequency trading before delving into the specific behavior that Plaintiffs claim to underlie the manipulation. Until (what some may consider to be) quite recently, there was no centralized, national market for the exchange of stocks. In 1975, however, Congress amended the Exchange Act to give the SEC the authority to issue rules stitching together the various disparate exchanges together. The SEC duly promulgated a host of regulations to fulfill this unified vision, all of which were consolidated into a single rule—“Regulation NMS” (“NMS” standing for “National Market System”)—in 2005. Regulation NMS also requires the publication of market plans (“NMS Plans”) which, among other things, compel the exchange to transmit real-time information regarding transactions on that exchange to a centralized entity. This centralized entity, known as the “Processor,” consolidates the information into a single, consolidated data feed.

Immediate acceptance of the most competitive offer by a broker or exchange matching a buyer to a seller is an additional requirement of Regulation NMS, and one that is facilitated by the existence of the centralized feed. This combination of a consolidated price and “best available price,” requirement, together with the authorization, in 1998, for electronic platforms to register as exchanges, has ushered in the rise of high-frequency trading (“HFT”). HFT is a catch-all term that refers to the practice of using computer-driven algorithms to buy and sell stock positions very quickly, taking advantage of small differences in stock prices, often across different exchanges. In the last fifteen years or so, the volume of HFT orders placed has risen from around ten percent of the Exchanges’ trading volume to nearly three-quarters.

This success of the arbitrage described above relies heavily on the ability of high-frequency traders to react expeditiously to information about the stock market. Plaintiffs identified three different practices undertaken by the Exchanges that improve the speed at which high-frequency traders can execute their trades. The Exchanges were motivated to implement these different practices, so the complaint alleges, because they directly benefit from the promotion of high frequency trading practices. Namely, the Exchanges make a commission on each trade that passes through their system: more trades, more profit, and, given the proportion of daily trades conducted by the high-frequency traders, more reason to cater to that group. Plaintiffs believe that these incentives resulted in the exchanges rigging their markets in favor of the HFT firms. To quote from the SCAC (itself quoting market experts),

The primary purpose of the stock exchanges has devolved to catering to a class of highly profitable market participants called [HFTs], who are interested only in hyper-short term trading, investors be damned. The stock exchanges give these HFTs perks and advantages to help them be as profitable as possible, even if doing so adversely affects you, the investors, because HFT firms are the exchanges’ biggest customers.

To satisfy the demands of HFT firms and to attract greater order flow—and yes, more commission fees—the Exchanges (1) designed and implemented complex “order types,” or commands that traders could use to tell the Exchange how to handle their bids and offers; (2) provided HFT firms with enhanced proprietary data feeds; and (3) permitted “co-location,” or the installation of the HFT firm’s servers in close proximity to the servers used by the Exchanges.

Complex Order Types

The implementation of new order types, which the SCAC describes as “exceedingly complex,” has the basic goal of providing customers of the Exchanges different ways to interact with the market. First, Plaintiffs allege that the Exchanges’ disclosures of complex order type functionality and handling practices to the SEC and to the public at large are wholly insufficient “for even the most sophisticated investor” to understand or utilize the new order types. As a result, these complex orders types are only utilized by the HFT firms, to the detriment of Plaintiffs.

Specifically, through these complex order types, HFT firms are able to engage in what the complaint describes as “superior queue positioning.” Standard practice would typically rank bids by price and time of receipt; here, the complex order types allow the bids made by the HFT firms to be placed at the top of the “order book,” rather than positioning them appropriately in the sequence. This lets the HFT firms execute “predatory strategies,” allowing them to profit on their trades to the detriment of unknowing and unsuspecting investors, and further gives the firms an increased opportunity to collect “makers” rebates—and avoid paying the “taker” fee—from the Exchanges. As a result, investor orders that would have been eligible for the makers rebates were converted into unfavorable executions incurring taker fees. The complaint further argues that this practice essentially inserts HFT firms as intermediaries between legitimate customer-to-customer trades, and further results in discriminatory handling of investor orders during sudden price movements.

Because of the complexity, limited marketing, and general lack of clarity surrounding these new order types, Plaintiffs believe that they were created by the Exchanges at the behest of their best customers, the HFT firms, through “exclusive, backroom communications.” The SCAC quotes several different traders and others market participants, including Eric Hunsader, founder of market data firm Nanex; Hunsader is quoted as having observed that “[e]xchanges are losing out to dark pools, so when HFTs ask for a new order type, they get a new order type.” The result was hundreds of new order-type options, many of which are detailed in the complaint.

It is important to note that the creation of these new order types was approved by the SEC. Accordingly, a portion of the complaint was dedicated to detailing how the Exchanges thwarted the rule-making process by failing to include important information about the functioning of the order types in their regulatory filings. The failure to provide the SEC with full information in its filings not only “deprived the SEC of information essential to performing its statutory regulatory function,” but, according to the complaint, derived the investing public of both adequate notice of the new order types, and of the opportunity to comment on the same.

Enhanced Data Feeds

As described above, all of the Exchanges are obligated to transmit real-time transaction information regarding to a centralized entity, the public securities information processor (“SIP” or “Processor”). The Exchanges are not permitted to release market data to private recipients before disseminating the data to SIP, but they do provide the opportunity to subscribe to enhanced or direct data feeds. The information in these feeds is inclusive of the data sent to SIP—or, in the case of enhanced feeds, more detailed—and is sent directly to the private subscribers at the same time as it is transmitted to the SIP. However, because the transmittal of information to SIP is consolidated, the HFT firms subscribing to the enhanced feeds receive market data more quickly than those who are dependent on SIP. Because the cost of receiving these alternative data feeds is beyond the reach of the majority of traditional buy-and-hold investors, the practice means that HFT firms are able to pay for access to public information sooner than the investing public—and thus trade on information before it is publicly disseminated. The allegations in the complaint explain that the more timely receipt, and particularly of enhanced data, allows the HFT firms to track when an investor changes price on their order or how much stock an investor is buying or selling, allowing the firms to predict short-term price movements “with near certainty.”

Regulation NMS requires that all trades be executed on the exchange offering the best price at the time of the order, and this—the national best bid and offer, or “NBBO”—is calculated based on data from SIP. While Regulation NMS did not establish a maximum or minimum speed at which the data destined for SIP must be collected and transmitted, it did require that the SIPs transmit such data so as to be received by all market participants at the same time. Provision of data to the HFT firms either more quickly, by way of direct feeds, or simply with detail more enhanced than that provided to the Processor, via enhanced feeds,” place the Exchanges outside of the ambit of their regulatory function. The high fees charged for these alternative feeds are highly profitable, and, as a result, the Exchange Defendants offering these feeds have a clear incentive to direct their resources towards development of these feeds at the expense of the SIPs and the investors who rely on them.


The last of the practices alleged by the Plaintiffs and still in play today concerns a much simpler method of manipulation: physical proximity. Essentially, what is complained of in this instance is the practice of the Exchanges of permitting the installation of servers belonging to the HFT firms at or extremely close to the servers used by the Exchanges themselves. As anyone with a wireless router just slightly too small for their living space has probably realized, the miracle of wireless transmission is in fact impacted by proximity. The fractions of seconds shaved off transmission time benefits the HFT firms in the same manner as the direct receipt of trade data allegedly does.

Like the direct and enhanced data fees, the cost of co-location is typically beyond that which a traditional buy-and-hold investor could afford. The complaint cites to a 2010 report in the Daily Finance which claims that the Exchanges were at that point collecting more than $1.8 billion per year from HFT firms for co-location fees alone. While both alternative feeds and co-location are in theory available to all investors, they are cost-prohibitive for all but those entities making frequent, speculative, short-term investments. And as the complaint notes—why would the HFT firms be willing to pay such high fees, if not for the “informational and technological advantage” that they receive in return?

Watch this space . . .

This summary merely skims the surface of a lengthy complaint and contested motion practice. While I have focused here on the claims that will be moving forward, I encourage anyone interested in the issues here to review the case documents. The Exchange defendants filed their renewed Motion to Dismiss on May 18, so please stay tuned for the Manipulation Monitor’s review of that brief, and Plaintiff’s opposition, in the coming weeks.

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: 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.

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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.

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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.

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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.”

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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.

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