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Posted: November 30, 2018

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

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

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

Brief Overview of the Alleged Collusion

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

What is an Efficient Enforcer?

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

What is an Umbrella Purchaser?


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

Judge Caproni Punts the Question

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

Judge Woods Dismisses the Umbrella Purchaser Plaintiffs’ Claims

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

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

Judge Caproni Dismisses Umbrella Purchaser Claims Against Non-Fixing Defendants

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

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

This post was written by Lee J. Rubin.

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

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