Posted: April 5, 2021

SOS to GSEs: A Resurrection

I know I said that our last post on the GSE litigation would be the last in that series (heck, I even called it the “Wrap-Up”!), but I hope you’ll forgive the lapse. This update actually comes, not from the Southern District case we all know and love, but from a nearly-identical case that has been progressing in the Pelican State.

Last week, U.S. District Judge Shelly Dick issued five decisions in State of Louisiana v. Bank of America, N.A. et al, Case No. 3:19-cv-00638, Middle District of Louisiana (Baton Rouge). This case dates back to 2019, and has already seen two amended complaints filed. Like the SDNY action, the Louisiana case names all of the usual suspects – the big banks, that is – and alleges a “conspiracy by all Defendants to fix the prices of unsecured debt issued by government sponsored entities (‘GSEs’) including the Federal National Mortgage Association (‘Fannie Mae’), Federal Home Loan Mortgage Corporation (‘Freddie Mac’), Federal Farm Credit Banks (‘FFCB’), and Federal Home Loan Banks (‘FHLB’)[.]” See Second Amended Complaint. Specifically, it is alleged that, between 2009 and 2016, the GSE bond prices were artificially inflated, and that the sharp decrease in prices after the alleged conspiracy ended (from a 10.6 basis point difference between Defendants’ buy/sell prices down to just 1.2 basis points) would not have been observed in a competitive market. Id. at 67-69.

The five recent decisions decide motions to dismiss filed by Defendants Stifel Nicolaus & Co., Inc. (“Stifel”), Jefferies Group LLC (“Jefferies”), Barclays Bank PLC (“BBPLC”), Mizuho Securities USA (“Mizuho”), Robert W. Baird & Co (“Baird”) and Hilltop Securities, Inc. (“Hilltop”). With respect to the UK-based BBPLC, the decision was jurisdictional – not only did the entity have “no GSE bond transaction with State of Louisiana during the relevant time period” (thus precluding jurisdiction based on contacts), but plaintiffs further “failed to rebut the presumption of corporate independence,” meaning that BBPLC could not be found to have contacts sufficient for personal jurisdiction only through its relationship with its subsidiary Barclays Capital Investments. See BBPLC Order at 7-8.

The claims against Stifel were dismissed when Judge Dick found a lack of antitrust standing. While two of the standing prongs were “not seriously in dispute” – the state, as “a consumer in the allegedly price fixed market,” was a “proper plaintiff” who had sufficiently alleged an antitrust injury – they were unable to adequately allege an injury-in-fact, that is, “that the conspiracy in fact affected the prices paid.” See Stifel Order at 14. Notably, while the court did find that “Plaintiff’s market allegations are probative of the possibility of a conspiracy pervasive enough to affect some of Plaintiff’s transactions,” the complaint’s failure to allege anything about Stifel’s market share means that is “impossibly to determine the extent, if any, that Stifel’s alleged pricing behaviour influenced market prices.”  Id. at 15.

Judge Dick also had some choice words for the drafters of the Second Amended Complaint; apparently, there were “numerous” mistakes that “can only be viewed as egregious typographical errors or examples of a haphazard copy-paste job,” all of which suggested a wholesale copying of the SDNY complaint. Id. at 10. I am writhing in sympathy for the poor associate that will surely be feeling the brunt of that comment.

Shifting back to substance, the Court found granted the Jefferies motion to dismiss on grounds that may well have been the result of similarly sloppy drafting.  Specifically, the Court observes that Jefferies’ opposition argued that the “only Jefferies entity named as a defendant, Jefferies Group LLC, is the non-operating corporate parent of Jefferies LLC, the broker-dealer involved in syndicating and trading GSE Bonds.”  The opposition went on to argue that “Plaintiff has [thus] failed to state a claim against Jefferies because Plaintiff seeks to hold Jefferies accountable for the actions of its corporate subsidiary. Jefferies Order at 2. Because Plaintiff entirely failed to oppose Jefferies wrong entity argument, the Court held that “Plaintiff has conceded” that it sued the wrong entity, and was dismissed on those grounds.

The Court’s decision on the Mizuho claims closely tracks that of Stifel, observing that “the causation between Plaintiff’s injuries, buying price-fixed bonds and/or selling bonds at a supposedly depressed price, and Mizuho’s alleged injury causing act, is attenuated.” Mizuho Order at 8-9. The Court also found that, “[a]lthough Plaintiff alleges that Mizuho engaged in price fixing as to two bonds, there is nothing to connect those bonds or Mizuho to a broader scheme.” Accordingly, “because there are no allegations plausibly suggesting Mizuho was part of the alleged market-wide conspiracy,” the market-wide analyses of pricing data which may suggest a conspiracy could not implicate Mizuho – the antitrust claims were, therefore, dismissed.

By this point, you probably have a pretty good idea what Judge Dick did with the final decision of her very productive week. Unsurprisingly, Plaintiffs did not fare any better in their claims against Baird and Hilltop. Because Plaintiff had indicated in prior briefing that it was withdrawing its federal antitrust claims against these two entities, the Court’s decision focused on the remaining negligence claims. Finding that Plaintiffs allegations as to its relationships with Baird and Hilltop were insufficient to permit the Court to “determine what degree of control any party exercised in the transactions or over the accounts,” those allegations were accordingly found to be “insufficient to allege the nature of the fiduciary duty owed.” B&H Order at 7.  The Court made similarly short work of Plaintiff’s arguments about the creation of duty by way of FINRA regulations and website-based “guidelines and standards,” ultimately dismissing the negligence claims as well.

With all those dismissals, one might ask, what’s left? From Judge Dick’s point of view, not much: “Plaintiffs has now filed three Complaints. There is no reason to believe that on a fourth try, Plaintiff would finally cure these deficiencies.” But while it is clearly the end of the road for these five Defendants, there still remain a handful of others in the game – is another settlement in the wind? Time will tell, and we’ll keep you posted.

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 jlundin@schlamstone.com or Alexandra M.C. Douglas at adouglas@schlamstone.com or call John or Alexandra at (212) 344-5400.

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