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Posted: August 13, 2018

Stock Loan Lowdown: Third Time Through the Order

Welcome back, followers, friends and fellow antitrust fans, to this third installment of the Stock Loan Lowdown. This time around, we examine the full-blown fortress forged by our persistent plaintiffs in response to the defendants frighteningly (or frustratingly?) far-reaching motion to dismiss. If you’re new around here and wondering just what that motion said, who the parties are, or why these soporific sentences contain such frequent forays in to the fertile forests of alliteration—feel free to ferret out former posts on the first few fields by clicking here for the who, and here for the what.

Plaintiffs, understandably, had a lot of ground to cover in their opposition, and did so admirably. Their brief starts with a review of group boycotts and the Rule 8 pleading standard. Specifically, Plaintiffs posit that the antitrust claim they made is a “classic example” of a group boycott, of the type long recognized by courts as unlawful per se.” More to the point, they accuse the Prime Broker Defendants of “ignoring” the Second Circuit’s holding in Anderson News, a case which found the joint decision of a group of publishers and distributors boycott certain magazine wholesalers—each of whom has attempted to charge publishers a per-issue fee to cover the cost of collecting and disposing of unsold magazines—to be a per se violation justifying reversal of the lower court’s dismissal. Both Anderson News and their own case, Plaintiffs insist, are illustrations of the “well-recognized principal” that boycotts involving horizontal agreements among direct competitors are illegal per se.

Plaintiffs use the section on Rule 8 not only to address the general pleading standard—no heightened pleading standard exists, and while plaintiffs must plausibly allege an unlawful agreement, plausibility must be judged by reading the complaint as a whole, and may be alleged through direct or circumstantial evidence—but also to point out that “only facts that actually appear in the Complaint should be taken as true,” and, as such, extrinsic material submitted by Defendants should not be considered.

This is Plausible! The Direct and Circumstantial Evidence Alleged

The next two sections of the brief focus largely on plausibility: how the complaint alleged direct and circumstantial evidence of agreement, followed by an examination of why defendant’s arguments against plausibility fail. With respect to direct evidence, Plaintiffs point to statements, made by named executives of the Defendant organizations, quoted in the complaint, and claim that theirs is “the rare case where Plaintiffs have uncovered direct evidence of an illegal agreement.” In one such example, Plaintiffs highlight an admission by the Prime Broker Defendants, in which an executive stated that they had reached a “general agreement” that “industry advances,” as reflected by AQS, SL-x, and Data Explorers, should only “be achieved from within EquiLend.” The antitrust laws, Plaintiffs go on to say, “do not permit any group of competitors . . . to anoint themselves arbiters of whether innovation can occur in a market.”

Beyond this and other similar examples of direct evidence, Plaintiffs insist that “the Complaint also painstakingly explains how Defendants engaged in parallel and other highly probative circumstantial conduct as they lived up to their ‘general agreement.’” One element of this circumstantial evidence takes the form of individual, yet identical, demands by various Prime Broker Defendants to AQS that AQS become a “broker-only platform”: each insisted that they would not participate on the platform unless AQS barred lenders and borrowers from trading directly. Plaintiffs also push back on Defendants’ conclusion that this allegation is conclusory, despite not quoting precise language from the meetings, on the grounds that it alleges specific content of communications by specific Defendants. Plaintiffs further point to In re Credit Default Swaps Antitrust Litigation (“CDS”), a case in which dealer defendants conspired to block a trading platform from entering the CDS market, and argue that Judge Cote there found that similar “indirect” allegations to those pled here—such as communications made “under the auspices of board or committee meetings”—were sufficient to plausible support an inference of conspiracy.

To support the examples of indirect or circumstantial evidence, Plaintiffs further point to numerous “plus factors,” but take care to point out that such plus factors are only necessary “when a conspiracy claim rests solely on inferences drawn from allegations of parallel behavior”—not a situation Plaintiffs believe to apply to them, given their allegations of direct evidence. The plus factors they do cite, however, cover: (1) the high level at which the identified communications took place; (2) the common motive to conspire; and (3) an assertion that, absent the a conspiracy, it would have been against the self-interest of the individual defendants to boycott the new platforms—they would have been at risk of being left behind a market shifting in response to strong demand.

No, Really – This is Plausible! Defendants’ Implausibility Arguments Fail

In their opening brief, Defendants presented an assortment of arguments for why the group boycott alleged was, supposedly, implausible. Plaintiffs devote a portion of their brief to undercutting each of these arguments in turn. First, as regards the nine-year length of the conspiracy: Plaintiffs note Defendant’s failure to identify any case holding that conspiracies have a maximum time limit, and further drop a cite to a case finding it plausible that some of the very same defendants engaged in a “long-running conspiracy” lasting over a decade. The members of the conspiracy are similarly plausible, despite the presence in the market of, as defendant note, “dozens of other prime brokers,” because the six prime brokers named held more than three quarters of the total market share, and thus possessed not small amount of clout. Moreover, the Prime Broker Defendants together controlled a sufficient share of the industry that those other brokers alone could not provide sufficient liquidity. The Defendants had further argued that the very goals of the conspiracy were implausible, as the stock loan market was fundamentally unsuited for anonymous exchange, and that no market demand existed. In response, Plaintiffs note that, contrary to Defendant’s insistence that the identity of the lender is critical to assess the risk of a stock loan, most borrowers in the current OTC market do not demand to know the identity of lenders—nor would such information give any definite information as to the lender’s future intentions for the stock. Moreover, for those that did concern themselves with such details, anonymity on both the AQS and SL-x platforms was optional, not mandatory. More generally, Plaintiffs assert, if the market was so ill-suited to anonymous trading as Defendants contend, how did AQS attract the support of some of the largest lenders and borrowers of stock, or the oldest American venture capital fund, or one of the largest exchanges? Similarly, why was Quadriserve’s first anonymous trading offering so immediately popular with borrowers and lenders? Or why would Bank of America have initially provided so much support? Good questions, guys.

They’re a Team, but . . . [Addressing Group Pleading Contentions]

Plaintiffs counter Defendant’s allegation of impermissible group pleading first by pointing out the array of Defendant-specific detail in the Complaint—and further, by noting that the court in CDS rejected similar arguments where the complaint alleged the “conspiratorial participation of each defendant and listed the representatives attending various meetings at which the attendees were alleged to have colluded.”

With respect to Defendant’s argument that allegations against various members of the corporate families were insufficient, Plaintiffs point out that this type of pleading is “routinely allowed” at the corporate family level. This is particularly true, they claim, where the named employees have held themselves out as representing the interest of the corporate family as a whole.

Rule of Reason is not the Rule of this Road

In response to Defendant’s argument that the Court should apply the “rule of reason” to allegations concerning EquiLend, Plaintiffs again argue that per se treatment is most appropriate because the question of liability must be made by looking at the type claim as a whole, and not on individual allegations taken in isolation of one another. A per se claim, Plaintiffs, by way of the Second Circuit, explain, “does not lose that character simply because some individual allegations concern joint venture conduct.” Allegations involving Equilent, therefore, should not be taken in isolation, but considered as part of the whole.

Moreover, the Complaint does not, as Defendants suggest, center on actions taken by EquiLend, but on agreements Defendants made to restrain their actions in the stock loan market itself, outside of the joint venture. This makes the case fundamentally different, Plaintiffs explain, from Texaco, relied on the Defendants, which found that two companies which participated in a market only through a joint venture investment, and not also independently. The Prime Broker Defendants did not act as a “single firm” in the stock loan market, the way the Texaco defendants did, but instead remained horizontal competitors (or is that “competitors”?) and separate economic actors. With respect to the allegations concerning DataLend, which the Complaint alleges was created to “kill” DataExplorers by offering just enough data to undermine that entity, while preventing dissemination of real-time data in the market—a development Defendants knew would lead to pricing compression and reductions in their fees. Because each Prime Broker Defendant negotiated distribution agreements with DataLend in parallel, the actions constituted, according to Plaintiffs “plainly unlawful, naked restraint” of competition in the stock loan market.

And even if the court were to decide that the claims warranted some scrutiny beyond per se, Plaintiffs posit that such scrutiny would involve, at most, a “quick look” or truncated rule of reason analysis—a standard, Plaintiffs insist, they would easily satisfy. To that end, Plaintiffs point to an array of “truncation” cases, including one in which the deciding court took guidance from Moore to find that the rule of reason could sometimes, like the good St. Nick, “be applied in the twinkling of an eye.” (And for those of you unfamiliar with the reference, please note that those twinkling eyes were further accompanied by dimples—how merry!—and a nose like a cherry, neither of which have yet made it into an antitrust-related holding.)

Here we Stand: Plaintiffs have Antitrust Standing

Of the four “efficient enforcer” standards, Defendants argue that Plaintiffs fails to meet one criteria: speculativeness. Plaintiffs respond, however, that there is nothing speculative about the injuries suffered by borrowers and lenders in the stock loan market: they were deprived of more efficient, competitive, and transparent trading options, and that deprivation was a direct result of Defendants boycott. The goal of the conspiracy was to maintain inflated spreads, and the result—higher prices paid by borrowers and lenders—was the not just the logical and foreseeable result of Defendants actions, but, indeed, their intent. And while every antitrust lawsuit demands some degree of speculation—all plaintiffs must present an account of how the situation would have unfolded “but for” the wrongful conduct—that does not mean that those effects cannot be sufficiently estimated and measured. Indeed, Plaintiffs point out that AQS had in conducted analyses to quantify the economic benefits that borrowers and lenders would enjoy by way of its new platform.

No Time Outs Here: Plaintiff’s Claims are Timely

Plaintiffs can recover for antitrust injuries occurring prior to August 16, 2013, they argue, because the complaint readily satisfies the pleading standard for tolling. First, concealment may be pled where the wrongful behavior was of a self-concealing nature. As the CDS court has previously found, “[a] group boycott of exchange trading has the characteristics of other types of conspiracies that have been held to be self-concealing.” The next factor requires that Plaintiffs adequately plead their ignorance of the conspiracy; because key parts of Defendant’s misconduct, such as the secret meetings, were non-public facts uncovered by counsel during a thorough investigation, Plaintiffs could not have acquired knowledge sufficient to put them on notice. As for the 2009 news article cited by Defendants, Plaintiffs brush away: it contained no discussion of a boycott, nor, in almost 9000 words, more than a single passing mention of EquiLend. It provided no specific facts related to the conduct alleged by the complaint. Plaintiffs further point out that all of Defendant’s assertions regarding timeliness are highly fact specific, determination of which would require the development of an appropriate factual record.

EquiLend’s Participation

In response to the EquiLend Defendant’s motion, Plaintiffs focus on two arguments: the complaint plausibly alleged participation by EquiLend in a per se illegal conspiracy, and that specific personal jurisdiction does exist over EquiLend Europe.

Plaintiff’s assertions regarding EquiLend’s participation closely track behavior discussed in the main brief, so I’ll spend little time here on the topic. Let it suffice to say that EquiLend’s anticompetitive actions were illustrated through, among other things, the “general agreement” with the Prime Broker Defendants to accomplish all industry advances through that entity, the result of which was actions by EquiLend, like their agreement not to release valuable pricing data, that were clearly anti-competitive and thus, as per Plaintiffs, “more than sufficient to establish EquiLend’s participation in a per se illegal conspiracy.”

Shifting to the question of jurisdiction: EquiLend Europe is subject to jurisdiction under any one of three well-established doctrines: the “effects” test, the “conspiracy theory” of jurisdiction, and the “alter ego” doctrine. First, Plaintiffs note that the complaint details statements by individuals who sat on the board of EquiLend Europe—and who did not also sit on the board of the U.S. parent entity—in which those individuals invoked their involvement with EquiLend in a manner that suggests involvement in the conspiracy’s collective strategy.

Under the “effects” test, acts taking place as part of a conspiracy meet the test where those acts took place. Because EquiLend Europe’s conspiracy concerned the U.S. stock lending market, and caused harm to U.S. investors, the test has been met. The “conspiracy theory” test is met where a conspiracy existed, the defendant participated in that conspiracy, and the co-conspirator’s overt acts had sufficient contacts with the state to subject that co-conspirator to jurisdiction. Here, Plaintiffs argue, the conspiracy is well-pled, it is undeniable that acts of the co-conspirators took place in the state—for example, those executive dinners in New York—and those contacts can thus be imputed to EquiLend Europe. Third, the “alter ego” doctrine also allows for jurisdiction: EquiLend Europe has no separate website, CED, or other “C-suite” officers of it’s own, and Mr. Brian Lamb is responsible for global operations of not just EquiLend, but, to cite the EquiLend website, it’s affiliates as well. There is ample evidence, Plaintiffs argue, to pierce the corporate veil in these circumstances.

Conclusion

And that, my friends, concludes this installation of the Stock Loan Lowdown. You know there’s one more set of briefs out there, though, so watch this space for our review of the reply.

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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