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Posted: September 10, 2018

The LIBOR Over-the-Counter Defendants Argue That Their Transactions Were Above the Board

In this post, we provide an update on our August 20, 2018, post that reported on the motion of LIBOR Defendants Bank of America, N.A. and JP Morgan Chase Bank, N.A. (together, the “OTC Defendants” or “Defendants”) for partial judgment on the pleadings, under Federal Rule of Civil Procedure 12(c) to dismiss the OTC Plaintiff Class’ antitrust claims, and the OTC Plaintiffs’ related opposition. In their motion, the OTC Defendants seek to eliminate antitrust claims for transactions where a member of the panel involved in setting the LIBOR interest rate was not both the issuer and direct seller by arguing that the OTC Plaintiffs cannot be “efficient enforcers” of antitrust claims in order to have standing to bring antitrust claims for such transactions.

On August 24, 2018, the OTC Defendants filed their reply memorandum of law. We will summarize the arguments made in the OTC Defendants’ reply.

Affiliated Counterparties

Concerning transactions where plaintiff’s only counterparties were the panel members’ affiliates or subsidiaries, the OTC Plaintiffs’ argued in their opposition that the OTC Defendants’ assertions that the panel members were not involved and did not benefit from LIBOR-based transactions were belied by reports showing that the purpose of the subsidiaries and/or affiliates was to serve the management of interest rate risk across an entire corporate structure. On reply, the Defendants argue that these reports cannot be considered on a motion for judgment on the pleadings, as they are extrinsic to the OTC Plaintiffs’ complaint, which, according to Defendants, does not even plead that the panel members were involved in their affiliates’ decisions to incorporate LIBOR. Defendants also make the point that it does not follow that since subsidiaries and affiliates were a part of a corporate structure that managed interest rate risk, that panel member banks influenced decisions of affiliates to incorporate LIBOR-interest rate into transactions.

The OTC Plaintiffs also argued in the opposition that the panel members and their related affiliates could be found to be a “single enterprise” for purposes of antitrust liability, since the panel members fixed LIBOR-interest rates and the affiliates and subsidiaries sold them. The OTC Defendants argue in response that the case cited by the OTC Plaintiffs in support of this argument, Arandell Corp. v. Centerpoint Energy Servs., 2018 WL 3716026 (9th Cir. Aug. 6, 2018), requires independent participation by each party in the enterprise, but OTC Plaintiffs have not shown that the decisions by affiliates to incorporate the LIBOR-interest rate were part of an actual conspiracy, or anything but independent decisions.

Efficient Enforcer

The OTC Defendants also addressed each of the factors in the “efficient enforcement” test in their reply. The OTC Defendants assert that even if all the other factors besides that of the chain of causation to the asserted injury weighed in the OTC Plaintiffs’ favor, it would not matter, since In re Libor (“LIBOR VI”), 2016 WL 7378980 (S.D.N.Y. Dec. 20, 2016), found the chain of causation factor to be dispositive. Defendants also push back against the assertion that the other factors balance out in the OTC Plaintiffs’ favor: the “more direct victims” factor carries little weight since it vitiates the chain of causation factor, and, in any event, does not favor Plaintiffs because transactions with panel members are “more direct” than transactions with panel members’ subsidiaries or affiliates. Defendants also asserted that the speculation of damages factor did not favor the OTC Plaintiffs.

Regarding the transactions where the panel banks were merely the sellers and the issuers were affiliates or subsidiaries of the panel members, the OTC Defendants again argue that the decision to incorporate the LIBOR-interest rate is an “independent decision” of the affiliate or subsidiary, and “breaks the chain” of causation such that the efficient enforcer test cannot be met.

In its opposition, the OTC Plaintiffs cited In re Libor (“LIBOR V”), 2015 WL 6696407 (S.D.N.Y. Nov. 3, 2015) for the proposition that the panel members could still be liable for subsidiary or affiliate-issued LIBOR-based bonds. Defendants retort that LIBOR V instead held that panel member Credit Suisse Group AG was a counterparty to the transaction at issue because its affiliate acted as its agent in the transactions. LIBOR V is inapplicable because the OTC Plaintiffs’ complaint does not contain any agency allegations and, as LIBOR V held, mere corporate ownership does not create a principal-agent relationship.

Panel Member – Issuers

Concerning transactions where the panel member was an issuer, but the seller was an affiliate or another panel member’s affiliate, the OTC Defendants contest the OTC Plaintiffs’ argument that the direct purchaser rule under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) (“Illinois Brick”), which requires that the price-fixed product be purchased directly from the alleged co-conspirator in order for the purchaser to have standing to bring antitrust claims, is inapplicable. The OTC Plaintiffs argued that the Illinois Brick rule applies to price-fixed goods, not securities. The OTC Defendants point out, however, that In re NASDAQ Mkt.-Makers Antitrust Litig., 169 F.R.D. 493 (S.D.N.Y. 1996), upon which the OTC Plaintiffs relied for that proposition, did not apply the direct purchaser rule because the brokers who owned the securities were not defendant-owned, and thus the “control” exception did not apply, not because the securities did not move up and downstream in the market such that duplicative recovery is a concern, as the OTC Plaintiffs suggested.

The OTC Defendants also push back against the OTC Plaintiffs’ assertions that the concerns about double-recovery and apportionment do not exist here as they do with the price-fixed goods in Illinois Brick. Defendants provide an example wherein a plaintiff buys a security at a reduced price because of the alleged suppression of the LIBOR-interest rate, and then sells the security at a reduced price, also because of the alleged suppression. “If the instrument is then resold during the alleged suppression period, the reduced price will be passed on to the subsequent purchaser, triggering the same double recovery/apportionment concern that animates Illinois Brick.”

Finally, the OTC Defendants insist that there are no “practical considerations” which warrant an exception to Illinois Brick, since this case involves direct purchasers, Illinois Brick is on point.

Conclusion

We will be sure to update this series again when the motion to dismiss is decided by the Court; stay tuned to this blog.

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 jlundin@schlamstone.com or John F. Whelan at jwhelan@schlamstone.com or call John Lundin or John Whelan at (212) 344-5400.

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