Source: https://www.schlamstone.com/financial/page/2/
Timestamp: 2019-04-18 18:15:55+00:00

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Law360 is reporting that on Thursday, S.D.N.Y. Judge Naomi Reice Buchwald awarded Susman Godfrey LLP and Hausfeld LLP almost $63 million in attorney fees for their part in a $340 million settlement of claims that Deutsche Bank and HSBC participate din a scheme to manipulate the London Interbank Offered Rate (LIBOR) for short-term loans.
SSA Swindling? – Part III – Repleading After Dismissal – Is Plaintiffs’ Statistical Analysis Enough to Save Plaintiffs’ Claims?
This week, we return to In re SSA Bonds Antitrust Litigation, No. 1:16-cv-03711-ER (SDNY) (“In re SSA“), an action first introduced in our June 27, 2018, post, which gives a full account of the alleged collusion in the Consolidated Amended Complaint. In this post, we revisit Judge Ramos’ August 24, 2018, Opinion and Order granting the Motion to Dismiss Plaintiffs’ Consolidated Amended Complaint, previously covered in our September 4, 2018 post, and look to the Second Consolidated Amended Class Action Complaint (“SCAC” or “Second Amended Complaint”) filed November 13, 2018, after Plaintiffs were granted leave to replead and shore up deficiencies in their pleading of injury-in-fact.
In brief, Plaintiffs are buy side funds, such as pension and retirement funds and asset management companies. They alleged that the Defendants, large dealer banks including but not limited to Bank of America, Barclays, and Credit Suisse, used their position as major players in the supranational, sub-Sovereign, and agency bonds (“SSA”) market to manipulate the bid-ask spread on SSA bonds. Plaintiffs based their allegations primarily on about 150 chats, phone calls, and other correspondence among individuals employed at the dealer-banks regarding certain deals. These 150 communications were produced by Bank of America and Deutsche Bank, who settled for a combined $65.5 million in August of 2017.
In late August of 2018, Judge Ramos granted Defendants’ motion dismissing Plaintiffs’ Consolidated Amended Complaint for failure to state a claim because Plaintiffs failed to allege injury-in-fact sufficient to establish antitrust standing. Judge Ramos however granted Plaintiffs leave to replead until later in the fall of 2018. Judge Ramos based his decision primarily on the fact that, as Plaintiffs had not allegedly purchased any of the deals in question, the 150 communications on which Plaintiffs relied were not sufficient to plausibly allege a widespread conspiracy which harmed Plaintiffs, and therefore Plaintiffs had not alleged injury-in-fact sufficient to establish standing. In reaching his conclusion, Judge Ramos noted that deficiencies could potentially be shored up with, “statistical analysis of market prices and quotes or allegations based on government enforcement actions [which] may suffice to allege the expected impact of a manipulative tactic on a given market and the expected frequency of manipulation.” In re SSA Bonds Antitrust Litig., No. 16 CIV. 3711 (ER), 2018 WL 4118979, at *7 (S.D.N.Y. Aug. 28, 2018) (Citing In re London Silver Fixing, Ltd., Antitrust Litig., Nos. 14 MDL 2573, 14 Misc. 2573 (VEC), 2018 WL 3585277, at *27 n.36 (S.D.N.Y. July 25, 2018)). However, Plaintiffs only pleaded generalized academic literature, and did not plead statistical analysis, applying this literature to the facts of their case. Moreover, while Plaintiffs cited media reports that the government was investigating collusion in the SSA bond market, the reports did not go into sufficient specifics to help Plaintiffs plead injury-in-fact. Thus, “[b]ecause ‘Plaintiffs [did] not even present evidence that they traded at ‘artificial prices,’’ they have alleged ‘no actual injury …, let alone a connection between Defendants’ unlawful conduct and that non-injury.’” Id. (Citing Harry v. Total Gas & Power N. Am., Inc., 889 F.3d 104, 116 (2d Cir. 2018)).
The Second Consolidated Amended Class Action Complaint Provides Statistical Analysis, but Is it Enough?
While Judge Ramos indicated that statistical analysis may be enough to plead injury-in-fact, he stopped short of discussing at length what that statistical analysis should say in order to be sufficient. Judge Ramos at best indicated that the absence of an alleged analysis of spreads paid during and after the period of collusion was fatal. Plaintiffs revisited statistical analysis in the Second Amended Complaint noting that estimating the extent to which prices were effected by collusion could be quantified using a comparison of bid-ask spreads, as previously noted, or using an analysis of the profit margins and spreads on similar types of bonds or investment vehicles. SCAC ¶ 507.
For their analysis, Plaintiffs turned to the publicly available data from Bloomberg, which provides market-wide pricing data of the US SSA market but not data at the trade or quote level. SCAC ¶ 509. First, Plaintiffs performed a regression analysis, which, according to the Plaintiffs, included a “Collusion Indicator” or “a variable indicating whether or not the pricing information is being drawn from the core conspiracy period . .. to detect if bid-ask spreads were higher (or lower) during the alleged core conspiracy period than before or after, after controlling for [factors] that can legitimately cause spreads to vary across bonds and over time.” Those factors included: “(a) the default risk of the bond; (b) the coupon rate of the bond; (c) the time since issuance of the bond; (d) the time to maturity for the bond; (e) the issue size of the bond; (f) the total size of other issues outstanding from the same issuer; and (g) the inverse of the bond’s price. These factors are consistent with what other studies have found to be important drivers of the bid-ask spread for bonds.” This regression analysis found to a statistically significant degree, that the “Collusion Indicator was positively associated with spreads, which indicates that the alleged presence of the conspiracy is associated with higher bid-ask spreads, while its comparative absence is associated with lower bid-ask spreads.” SCAC ¶¶ 512-522.
Using this Bloomberg data, Plaintiffs also allegedly performed regression analysis to create a predictive model during the alleged conspiracy period of what bid-ask spreads “should” be based only on “legitimate economic factors” and compared that predictive model with real life market-wide data for that same period, finding that bid-ask spreads were “always higher during the core conspiracy period—and only during that period— than what can be explained by legitimate economic factors.” SCAC ¶¶ 523-525. A second predictive model was also allegedly created to predict the yields on SSA bonds rather than the spreads. While this model and actual market data were allegedly synchronized before and after the conspiracy period, with the predictive model explaining 96% of spreads and movements during those years, this yield-based predictive model was worse at predicting actual outcomes during the alleged conspiracy period by an allegedly statistically significant degree. SCAC ¶¶ 526-527. Third, Plaintiffs allegedly created a predictive regression model to predict the volatility of yields that were not explainable by legitimate economic factors, and measured this “excess” volatility, finding that when compared to real world data this excess volatility was low during the pre and post conspiracy time frame, but higher during the core conspiracy period, “consistent with Defendants pushing yields artificially low when selling, then pressing yields artificially high when buying, causing yields to bounce around more than what the economic model can account for during the core conspiracy period.” SCAC ¶¶ 528-529. Fourth, Plaintiffs allegedly created a volatility based predictive model to determine whether bid-ask spreads were higher. This again allegedly showed abnormally high bid-ask spreads during the core-conspiracy period. SCAC ¶¶ 530-531.
Plaintiffs allegedly also compared pricing behavior to determine whether bid-ask spreads were higher during the conspiracy period. They allegedly were. SCAC ¶ 533. Similar spread-based analysis was allegedly performed for US Treasury Bonds and foreign sovereign debt, again allegedly showing inflated bid-asks spreads during the core conspiracy period when compared to these other debt instruments. SCAC ¶¶ 534-537. Variation based analysis on bid-ask spreads in SSA was also performed allegedly showing that bid-ask spreads were most predictable day to day during the core-conspiracy period. This test was also run using the U.S. Treasuries as a control, and even controlling for change in the treasury market, the bid-ask spreads in USD SSA bonds showed greater diversity of spreads after the end of the core-conspiracy period when compared to before that date. SCAC ¶¶ 538-543. On the flip side, while the conspiracy was allegedly keeping bid-asks spreads consistently higher, the yields of SSA were allegedly more volatile during the core-conspiracy period based on analysis of market data. SCAC ¶¶ 544-548. Finally, Plaintiffs allegedly analyzed multiple bonds from the same issuer, which allegedly should have had a high level of yield correlation, and while yield correlation was allegedly high during the class period, it was lower when compared to the pre and post-class period. SCAC ¶¶ 549-551.
Plaintiffs thus have now allegedly analyzed many different metrics with the intent of showing that they have suffered an injury-in-fact as a consequence of Defendant’s alleged conspiracy. It will be interesting to see whether, if the Second Amended Complaint is again challenged, these metrics and “legitimate market forces controlled” models will be enough to state a claim on which relief can be granted, or if Plaintiffs still have failed to allege Defendants causation of injury-in-fact.
Law360 reports that the judge overseeing an antitrust lawsuit alleging that a group of financial firms manipulated global swaps and options benchmark ISDAfix has awarded plaintiffs’ counsel $126.4 million in fees and $18.4 million in expenses, representing 26% (net) of settlements valued at $504 million. The defendant banks included Bank of America, Barclays, Citigroup, Credit Suisse, Goldman Sachs, RBS, UBS, and others.
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.
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.
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.
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.
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.
Law360, Yahoo Finance, and MSN Money are all reporting that JP Morgan Chase and Citigroup have reached an agreement to settle claims that they rigged the European Interbank Offered Rate (“EURIBOR”) for $182.5 million. Deutsche Bank, Barclays, and HSBC have settled similar claims in the same action for a combined $309 million. The settlement will require judicial approval.
Stock Loan Lowdown: Is the Answer a Lemon?
Following the defeat of their motion to dismiss – you can review our riveting recap here – the Stock Loan Defendants each recently filed answers and affirmative defenses to the Amended Class Action Complaint. This brief post will take a look at the highlights of those answers and defenses, and provide a quick rundown of the current Case Management Order (“CMO”), filed on November 15th.
Ranging in length from 44 to 73 pages (pithiness points going to EquiLend), the contents of the seven filed answers demonstrate greater uniformity than that range would suggest. As would be expected, denials of allegations abound, as does the useful position of “lack [of] knowledge and information sufficient to form a belief” position.
Specific denials were made as regards statements by various officials of the Defendants: JPMorgan, for example, denies that John Shellard made statements attributed to him, including the comment confirming the existence of a “general agreement among Directors” of EquiLend, and “that industry advances should be achieved from within EquiLend.” Along the same lines, EquiLend denies that Brian Lamb stated that the goal of DataLend was to “kill” DataExplorers, while Morgan Stanley denies that their Gliobal Head of Bank Resource Management, Thomas Wipf, had stated that the institutions needed to “get a hold of this thing,” referring to AQS. On the other hand, with respect to the somewhat infamous (or, perhaps, as infamous as one can be within the world of stock loans) statement by Credit Suisse director Shawn Sullivan recommending that they “get all the members of the five families together,” Credit Suisse “admits that Plaintiffs purpose to quote certain communications . . . and refers to any such communication for their complete content and context.” Not that I envy the poor associate that will be doing the review, but it sounds as though there may be a few gems to be found in document discovery . . .
As far as defenses are concerned, JPMorgan, Credit Suisse, Goldman Sachs, UBS, and Merrill Lynch each raise affirmative defenses similar to the arguments made at the motion to dismiss level. These include items such as lack of standing; lack of or speculative and uncertain damages; failure to mitigate damages; statute of limitations, waiver, and estoppel; the nature of the alleged conduct as permissible competitive activity (a factor which Defendants point out that, despite it’s inclusion in their affirmative defenses, they view it as a factor for which Plaintiffs bear the burden of proof); the nature of the alleged conduct as pro-competitive activity; that none of the challenged actions or omissions substantially lessened competition within any properly defined market; that injuries to Plaintiffs, to the extent they exist, were caused by third parties and marketplace forces for which Defendants are not responsible; and a failure to plead fraudulent concealment with particularity. EquiLend presented a series of very similar affirmative defenses, but further added claims concerning lack of personal jurisdiction over EquiLend Europe Limited.
The Case Management Order now governing this matter requires all motions for joinder or to amend the pleadings be filed within three months. The ESI protocol is to be filed within thirty days, while initial request for production of documents are to be served by December 18, with a February 15, 2019, deadline for the parties to reach agreement or impasse on all issues related to the initial requests for production and custodians. Rolling production of documents is to begin late April, with substantial completion of document production to be accomplished by September 1, 2019. Is it too soon to make comments about “best laid plans”?
Fact discovery, including deposition of fact witnesses is currently set to close on May 1, 2020, while requests to admit are to be served by April 1, 2010. The class certification briefing schedule is also set for the same time frame – Plaintiffs’ opening motion and expert reports are due in March 2020, with the briefing schedule wrapping up with a reply due in September.
The Manipulation Monitor will continue to update the Stock Loan Lowdown series to report on any discovery disputes that may (will likely) arise, but we’ll otherwise be putting the stock loans stories to bed for the time being. For other magnetic tales of mischief in the markets, I’ll take a moment to recommend the Manipulation Monitor’s The VIX is Fixed?! series for those of you looking for your next read.
Law 360 reports that Eastman Kodak has filed claims against Goldman Sachs, JP Morgan Chase, Glencore, and other entities, accusing them of violating UK and EU competition law by manipulating or distorting the aluminum market by conspiring with aluminium warehousers affiliated with the London Metal Exchange to withhold or delay supplies. A similar lawsuit in the United States was dismissed on the grounds that Eastman Kodak and other direct purchasers lacked antitrust standing, and that decision is on appeal to the Second Circuit.
SEF Scuttling? Alleged Manipulation of the Interest Rate Swap Market – Part II – Buy-Side Funds Claims Survive Motion to Dismiss Shelling, but Not Unscathed.
This week we cover the July 28, 2017, decision on the Motion to Dismiss the Second Amended Complaint in Interest Rate Swaps Antitrust Litigation, No. 1:16-md-02704 (SDNY) (“IRS Antitrust Litigation”), an action previously introduced in our August 6, 2018, post, where one can find a full account of the alleged collusion. The Court granted Defendants’ motion for the time period of 2007-2012, but predominately denied it for the period of 2013-2016.
In brief, Plaintiffs, buy-side funds such as pension and retirement funds, along with several all-to-all trading Swap Execution Facilities (“SEFs”) including Tera and Javelin, alleged that Defendants have used their heavy hand to prevent the development of truly all-to-all platforms for trading of interest rate swaps (“IRS”), along with central clearing of IRS transactions. Defendants’ aim was to maintain a two-tiered system of trading, where the broker-dealer banks traded with one another on all-to-all inter-dealer bank (“IDB”) platforms, but their buy-side clients were still forced to purchase through the broker-dealers, with more limited pricing information than they could have obtained through an all-to-all platform. Plaintiffs allege that the Dealer Defendants accomplished this by blackballing several companies attempting to offer all-to-all trading platforms, including Javelin and Tera. Defendants’ aim was to limit buy-side firms to purchasing IRS from the major sell-side dealers, through request for quote (“RFQ”) protocols that mimicked many of the informational and pricing inefficiencies of over the phone requests for price quotations, and likewise widened bid/ask spreads for prices that the buy-side Plaintiffs would have to pay, causing those Plaintiffs’ damages. See In re Interest Rate Swaps Antitrust Litig., 261 F. Supp. 3d 430 (S.D.N.Y. 2017).
Generally speaking, the Plaintiffs’ claims for conduct prior to 2013 were dismissed, but their claims for conduct between 2013 and 2016 mostly survived Defendants’ motion. See id.
According to Judge Engelmayer, Plaintiffs’ claims for the period 2007-2012 plead parallel inaction which was not sufficient to survive under Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). Plaintiffs’ claim that Dealer Defendants threatened to deny liquidity to IDBs that allowed buy-side firms to make purchases and sales on their platforms, and insisted on clearing through dealer-controlled platforms. The Court found that Plaintiffs’ claims of parallel inaction on the part of the various dealer banks however were not enough to give rise to a claim under Twombly.
The dealer banks’ actions were consistent with self-interested behavior, rather than an active conspiracy. The Dealer Defendants had no reason to change a system where they were reaping profits, and promote a system which would foster their own disintermediation. Of particular importance to the court’s determination was the fact that the central clearing infrastructure necessary to facilitate all-to-all trading was not present at this time, and as such, bilateral trade specific inquiries, into, inter alia, creditworthiness, were still needed prior to finalizing IRS deals. This made all-to-all trading all but impossible. Rather, central clearing, was only forced into existence later in 2013, when it was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). The introduction of central clearing obviated the need for deal specific inquiries into creditworthiness. See IRS Antitrust Litigation, 261 F. Supp. 3d at 463-65.
Similarly, Plaintiffs’ claims were too speculative because the foundational clearing infrastructure needed was not present. The “alternative history of IRS trading for the first five years of the class period (2008-2012) require[d] too many leaps of imagination and guesswork for a claim of class injury to be viable.” Id. at 493.
Moreover, while Plaintiffs did allege that as part of “Project Fusion” most of the Dealer Defendants acquired a controlling stake in Tradeweb and forced it to remain a RFQ platform, rather than an all-to-all platform, Plaintiffs’ allegations as to the “Project Fusion” conspiracy likewise failed. This was because Plaintiffs plead conclusory allegations and inferences, did not plead the existence of a per se unlawful agreement, as the mere joint investment into a legitimate business does not fit into any category of agreement that is recognized as per se illegal, and did not plead facts sufficient to support an unlawful restraint of trade under a rule of reason analysis, as there were no allegations of an applicable market for Tradeweb’s product, or that Tradeweb had any power in any market, or even what the anti-competitive harms were from Tradeweb’s conduct. Id. at 465-69. For these reasons, Plaintiffs’ Sherman Act § 1 claims for this 2007-2012 time period were dismissed. Id. at 472. Such pre-2012 claims also were time-barred, as the court rejected arguments of tolling due to fraudulent concealment of Dealer Defendants majority interest in Tradeweb. Id. at 487-90.
Likewise the Buy-Side Class Plaintiffs’ state law claims for unjust enrichment for this time period were dismissed. Id. at 500-501. Further, Javelin and Tera’s claims under New York State Donnelly Act were also dismissed for this time period. Id. at 498-99.
According to Judge Engelmayer, Plaintiffs’ claims for the period of 2013-2016 in contrast did plead a per se unlawful Section 1 conspiracy, as Plaintiffs plead a group boycott of new all-to-all platforms by the Dealer Defendants. As alleged, this could be inferred from, among other things, the Dealer Defendants’ parallel refusals to trade on the Javeline, Tera, and TrueEx platforms, their common excuses and vocabulary for why they would not trade on these platforms, their similar bait and switch tactics to attempt to buy-out and undermine these platforms, their withholding of consent to IDB’s to use these platforms, their threats, pressure, and penalties, applied to buy-side customers who used these platforms, and their withholding, and threats of withholding, of clearing services to these platforms and the buy-side firms who used them. Id. at 472-75.
While it was true that Defendants had a natural explanation under Twombly for not supporting and supplying liquidity to these all-to-all platforms, namely their concerns about their own disintermediation, the alleged common behavior during this period was not purely explainable by self-interest. Rather, the Dealer Defendants actions as alleged, while not irrational, were so symmetrical, and so similar, so as to support the conclusion that they were acting in unison in a fashion that goes beyond simple self-interest, which would have been satisfied by refusing to do business with these platforms. Id. at 475-76. Judge Engelmayer’s decision was also supported by certain “plus-factors,” namely, the presence of a motive to starve these platforms of sufficient liquidity to be viable, a high degree of communications among the Dealer Defendants, and certain suspicious behaviors by the Dealer Defendants, including the alleged statement by a smaller IDB that it could not do business with an all-to-all trading platform because the Dealers “would not allow it.” Id. at 475-77.
Viewed as a whole Plaintiffs’ allegations were sufficient to plead a per se group boycott conspiracy under Sherman Act § 1. See Id. In coming to this conclusion, Judge Engelmayer rejected arguments of impermissible group pleading, and lack of uniformity of action by the Dealer Defendants. Id. at 478-79. He likewise rejected arguments that certain “market realities,” as evidenced by certain secondary sources, made this argument implausible. These “market realities” included (1) that buy-side support for all-to-all trading was limited because most IRS are “bespoke,” specially tailored contracts in which there is insufficient liquidity for trading on all-to-all platforms; (2) that at least for one all-to-all platform, TrueEx, there was support from many IRS dealers and a high amount of trading volume; and (3) that several of the all-to-all trading platforms failed due to reasons outside of a group boycott. Judge Engelmayer noted that while these “market realities” could be probative as to the merits of Plaintiffs’ claims if explored more in discovery, he was constrained not to second-guess Plaintiffs’ well-pled § 1 claims at the pleading stage on the basis of a few secondary sources. Id. at 479-81.
That being said, the Court did go on to caution that Plaintiffs’ claims would be limited to proceeding on claims for “plain vanilla” IRS, as claims for bespoke IRS were too speculative. Bespoke IRS, with their idiosyncratic terms that must be negotiated prior to closing, have more intermittent liquidity, and lack general “commodity-like” uniformity that make them amenable to trading on an all-to-all trading platform. While class counsel argued that such all-to-all trading platforms would foster greater price transparency and competition for all IRS, including bespoke IRS, he all but conceded that the class was intended only to be limited to purchasers of “plain vanilla” IRS. See id. 494-95.
The court did however grant some of the individual motions to dismiss some of the Defendants for failure to allege facts sufficient to tie them to the conspiracy, including those of HSBC, ICAP, a London-based IDB, and Tradeweb, but the Court rejected similar arguments from BNPP and UBS. Id. at 482-87. Tera and Javelin’s claims under the Donnelly Act and for unjust enrichment were likewise dismissed against HSCB, ICAP and Tradeweb. Tera and Javelin’s claims for tortious interference were also dismissed in their entirety. See id. at 497-501.
Further, the court held that Plaintiffs did allege that they suffered a direct injury and were efficient enforcers. The prevention of all-to-all exchange trading on these platforms left buy-side Plaintiffs with no alternative but to continue to make trades at wider bid/ask spreads. “As alleged this scheme proximately and predictably harmed buy-side investors who were denied the superior prices of an allegedly tighter-priced trading platform.” Id. at 491 citing Blue Shield of Virginia v. McCready, 457 U.S. 465, 480-84 (1982). The court goes on to distinguish the Court’s opinion in In re Aluminum Warehousing Antitrust Litig., No. 13-MD-2481 KBF, 2014 WL 4277510 (S.D.N.Y. Aug. 29, 2014) and In re Aluminum Warehousing Antitrust Litig., 833 F.3d 151, 161-163 (2d Cir. 2016), covered in more detail in our October 17, 2018 post, on the grounds that this action as alleged involves manipulation of a single market, rather than multiple markets.
While Defendants claimed that Javelin and Tera, the all-to-all trading platforms, were more efficient enforcers, the Court noted that “[i]nferiority to other potential plaintiffs can be relevant, but is not dispositive.” Id. at 493 citing In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 689 (2d Cir. 2009). Moreover, effective enforcement of the antitrust laws would be enhanced by collaboration between the buy-side Plaintiffs and Javelin and Tera, and that given that those SEF all-to-all trading platforms may not be able to fund discovery on their own, partnership with the class, and their resources, would help make sure that the antitrust claims were vigorously prosecuted. As such, the court rejected arguments that the class Plaintiffs were not efficient enforcers. The court also rejected that the potential for tension and negative correlation between the damages of buy-side Plaintiffs, and the SEFs, Tera and Javelin, are not fatal to the Plaintiffs’ claims. Id. at 495.
Finally, Defendants’ argument that applying the analysis in Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007), Dodd-Frank precludes application of the antitrust laws, including Sherman Act § 1. The court rejected this, noting that Dodd-Frank, particularly 12 U.S.C. § 5303, includes an “antitrust savings clause” prohibiting the inference that Dodd-Frank precludes application of the antitrust laws. See IRS Antitrust Litigation, 261 F. Supp. 3d at 495-97. Judge Engelmayer, in part relying on the analysis in In re Credit Default Swaps Antitrust Litig., No. 13MD2476 DLC, 2014 WL 4379112, at *16-17 (S.D.N.Y. Sept. 4, 2014), further rejected Dealer Defendants’ reliance on 7 U.S.C. § 6s(j)(6); and 15 U.S.C. § 78o-10(j)(6), as an exception to the antitrust savings clause, as the Dealer Defendants’ SEF boycott, as alleged, would not be “necessary or appropriate” to achieve the purposes of Dodd-Frank, as required by those cited provisions, and, more importantly, because those provisions are not exceptions to the antitrust savings provisions, but are rather provisions that “impose additional duties on swap dealers.” IRS Antitrust Litigation, 261 F. Supp. 3d at 497-98 (emphasis in original).
We closed out our first VIX-is-Fixed post with a promise to deliver real-time updates on the state of the VIX complaint. While we’ve failed a bit in that regard, we’ve added a timely discovery update to this post to make up for it – keep scrolling to find out just what tricks the Plaintiffs have up their sleeves.
For an overview of the main players in the VIX action and an overview of the index itself, I’d suggest you review our Preview of the Tricks post. If you’re up to speed already, then buckle up for a deep dive into the zeros, banging, and a small ocean’s worth of data. The Consolidated Amended Complaint alleges negligence and violations of the Securities Exchange Act, Commodity Exchange Act, and Sherman Act, but gives over the majority of its eighty-odd pages to detailed explanations of the factual review and research carried out by Plaintiff’s attorneys that breaks down the vulnerabilities present in the VIX.
Plaintiffs devote some time in outset of their complaint to break down the two processes that Defendants used to manipulate the settlement process. These include “banging the close” and abuse of the “two-zero bid rule,” both of which I’ll take a minute to discuss here.
While “banging the close,” would, in other markets, refer to a form of manipulation in which a trader bought or sold large numbers of futures contracts during the closing period (clever naming!), in order to benefit futures positions purchased earlier in the day. Given what we already know about the way the VIX settlement process works (recap: highly dependent on thinly traded and illiquid financial instruments – namely, out-of-the-money SPX Options – and a short window trading window closing at 8:20 AM), the term isn’t quite on point for this particular form of manipulation, if only for the timing. “Banging the once-monthly, early-morning opening auction” didn’t have quite the same ring to it, I suppose. The complaint takes care to point out that a longer settlement window that occurred during normal market hours, or a more frequent measurement, would have made the manipulation more difficult—and that the CBOE declined to take such preventative steps. As a result, Plaintiffs claim, by placing higher mid premiums on puts at particular strike prices, the John Doe Defendants were able to “bang up” the level of the bid premium of that strike, and thus increase the settlement value for corresponding VIX Options and Futures. The process worked in reverse, too—Defendants could “bang down” the mid premium by placing lower ask premiums on puts at particular strike prices, and so decrease settlement values for the corresponding bids.
The second method of manipulation has to do with the process of the SOQ calculation. The calculation starts in the center of the pricing circle, and works its way outwards through increasingly out-of-the-money strike prices. The “two-zero bid rule” is so named because the calculation is supposed to stop at the point in which two zeros are found in a row—an indication, first, that the SPX Option is so far out of the money that pricing is no longer reliable for the settlement calculation, and, second, that traders are not particularly creative when it comes to assigning monikers. To circumvent the two-zero bid rule, Plaintiffs posit that the John Doe Defendants were spreading bids out across strike prices to ensure that there were never more than two consecutive zero bids ahead of the strike prices that Defendants wanted the SOQ process to take into account. By preventing two zero bids in a row from appearing naturally, Defendants forced the calculation to consider out-of-the-money strike prices appearing much deeper in the range than they otherwise would, thus skewing the settlement values for the expiring VIX Options and VIX Futures.
The formula used by the CBOE to calculate the VIX weighs the difference between strike prices on either side of a given strike price—a number that will nearly always be larger for more out of the money options—and that weighing factor will increase when the given strike price is smaller. That means that out-of-the-money put options (as opposed to call options) will have a greater impact on the ultimate VIX settlement price. This is the case because the strike prices for out-of-the-money put options will always be less than the prevailing at-the-money strike; out-of-the-money call options, in contrast, are always greater than the prevailing at-the-money strike price. While the complaint offers a much more in-depth look at the VIX calculation, let it suffice to say that these two factors lead to the result that put options that are the most out of the money have a disproportionate impact on the ultimate VIX settlement price. By circumventing the two-zero bid rule, defendants push the formula to consider bids deeper and deeper out of the money, thus amplifying the impact of their manipulations.
In addition to the academic analysis performed by Professor Griffin and Mr. Shams—whose results we discussed in our first installment—Plaintiffs also undertook their own extensive economic analysis to further demonstrate their the VIX process had been routinely exploited. By tracking trends in trading volume over time—and putting together into neat and colorful graphs for the more visual learners out there—Plaintiffs very effectively make their case for intentional manipulation.
Second, Plaintiffs track increases in trading volumes on settlement days, particularly for the SPX Options that would have a more significant impact on the SOQ process. Notably, prior to February 13, 2018, 92% of settlement days saw higher trading volume than the Tuesday that preceded them. This pattern of higher trading volume held true for SPX put options that were out of the money—an unusual thing to see, because, in a manipulation-free market, one would expect to see lower trading volumes simply because, as the option is less and less likely to be exercised, there will be less and reason to pay for that option. What Plaintiff’s data shows, however, is that the more out of the money an SPX put option was, the more it was being traded. Weird. What’s more, this abnormality was particularly present for options that had a wider gap between strike prices—as discussed above, these are the trades that would have the biggest impact on the VIX SOQ settlement process. And, again, this is a pattern true only for trades within the settlement window. Weirder? Finally, the data also shows that, at exactly 30 days to maturity, out-of-the-money options (and only out of the money options) saw a spike in trading volume. As a reminder: SPX Options were only included in the VIX SOQ calculation if they were 30 days to maturity, and out of the money. Therefore, the increased trading volume on settlement days is being driven by trading only in those instruments that could have an impact on the SOQ process. Weirdest!
Third, Plaintiffs argue that the data shows “routine” exploitation of the two-zero bid rule. Such exploitation must be occurring, they posit, because the total number of actively quoted SPX Options (that is, options with a non-zero ask quote) did not change very much between 8:30 AM and 8:40 AM on settlement days. What did change, and to a statistically significant degree, was the number of those SPX Options in that time that were VIX-eligible: two zero bids in a row, the circumstance or “gap” that would render subsequent bids ineligible, occurred far less frequently during settlement windows than it did during other time periods.
Plaintiffs next compared the VIX benchmark to the VIX itself. While careful to stress that the question is not whether the VIX moved, but whether it move differently when a settlement was involved, Plaintiffs make several arguments that the data does show the VIX acting differently around the settlement window. For example, they point to the fact that there was a much larger gap between the start and end of the day for settlement Wednesdays, and that, on settlement Wednesdays, there is a much larger gap between the VIX at the start of the day as compared to fifteen minutes later. All of the differences identified, Plaintiffs note, were statistically significant.
Finally, Plaintiffs point to one final, telling oddity in the data. All of these patterns suggesting market manipulation were consistent across the time frame studied, up until February 2018. After this date, many of the volume anomalies surrounding settlement Wednesdays abated. Why the change, one might ask? Well, Plaintiffs have a pretty good answer to that question: on February 13, 2018, it was for the first time publicly reported that FINRA was investigating the manipulation of VIX pricing. What better motivation to desist manipulations than the menace of unmasking?
They don’t know that we know that they know . . .
The next section of Plaintiff’s complaint aimed to show that the CBOE knew or was reckless in its disregard of the fact that the VIX settlement process was being manipulated. Unlike all other participants, the CBOE had a front-row seat to all of the settlements, and access to all of the data needed to determine the identity of the manipulators responsible for the rigging.
Rather than disclosing the manipulations that they could easily have observed, the CBOE instead, according to Plaintiffs, made misleading statements about the integrity of the VIX Options and VIX Futures. It further failed to take advantage of the many viable alternatives to its flawed settlement processes—such as calculating prices by using the average of prices across a three-hour window during normal market trading time, as other volatility-related products typically do.
Plaintiffs also point to the CBOE’s glaring motivation to maintain the VIX as a “premier” product. The CBOE has an exclusive licensing agreement with Standard & Poors, which permits only CBOE to list SPX Options. This gives the CBOE a lock on the SPX and VIX markets, and those proprietary products generate far higher revenue for the CBOE than any of their multiply-listed options. Plaintiffs go further, describing the three products—SPX Options, VIX Options, and VIX Futures—as “cash cows” for the CBOE, consistently representing about half of that entity’s total revenues. At risk of mixing metaphors, it would be detrimental to the CBOE, or so Plaintiffs argue, for the company to bite the cow that feeds it.
The complaint further reviews the CBOE’s actions with respect to the VIX, and to products with similar settlement process. These show that the CBOE is, contrary to appearances, able to identify manipulative acts, and to address them—albeit only publicly years after the manipulation originally occurred.
What is a complaint without some damages? Plaintiffs make the general assertion that, based on assurances by the CBOE as to the accuracy and fairness of the settlement process, investors—plaintiffs and members of the class—were harmed because they “poured billions of dollars” into transactions in products that were “not the result of regular forces of supply and demand.” Instead, Plaintiffs and class members were “tricked” into trading SPX Options, VIX Options, and VIX Futures at prices that were made inaccurate as a result of misconduct on the part of the CBOE and the Doe Defendants. That manipulation mean that Plaintiffs and class members were forced to pay more, or accept less, for those products than they would otherwise have done, had the market been a truly free on.
The complaint goes on to explain in detail the different ways that such harm occurred, depending on what options and futures the various plaintiffs and class members held, and what they did with them. They argue reliance on the fairness of the VIX SOQ process: such transactions would not have occurred had they known of the manipulation. In the alternative, Plaintiffs also put argue for a presumption of reliance under Affiliated Ute, because their claims are partially predicated upon material omissions of fact by the Defendants, and, in the alternative, a presumption of reliance pursuant to the fraud-on-the-market doctrine.
The final section of Plaintiff’s brief argues that Defendants, being the overachievers that they were, took their inherently self-concealing manipulation, and worked to affirmatively conceal it. Any applicable statute of limitations has been tolled, Plaintiffs argue, because Plaintiffs and class members did not—and could not have, due to Defendant’s hidden misconduct—discover that Defendants were manipulating the VIX or VIX-linked instruments.
The very nature of the SOQ process, with its anonymized trading, made it impossible for Plaintiffs to discover the facts comprising their claim until very recently. Moreover, Plaintiffs claim that Defendants not only knew of the practices detailed in their brief, but “knowingly, actively, and affirmatively concealed th[ose] facts,” and “actively misled Plaintiffs as to the true nature of VIX Options and VIX Futures, as well as the SOQ Process,” through public statements—such as those denouncing the whistleblower letter sent to the SEC and CFTC.
In making these arguments, Plaintiffs invoke the discovery rule, the doctrine of equitable tolling, and fraudulent concealment, and further claim that Defendants are estopped from relying on any statute of limitations defense in this action.
The specificity and robustness of plaintiffs’ complaint allegations show that the court need not wait for completion of the motion to dismiss process to know this is not a blind fishing expedition. […] Granting this motion is also appropriate because plaintiffs’ proposed discovery requests are narrowly targeted to their need to identify the Doe defendants.
This request is being made now largely out of fear that the statute of limitations will run before the motion to dismiss process is complete and formal discovery begins (likely not before summer 2019, assuming the claims survive the motion to dismiss). The Doe Defendants, once identified and named, will surely contend that the two-year statute of limitations clock began to run when the Griffin & Shams paper was published in May of 2017.
While Judge Shah considers this request, the Defendants—the identified ones, at least—will be hard at work on their motion to dismiss this complaint. Considering the level of detail Plaintiffs’ analysis provided, it may be an uphill battle, but the SSD Manipulation Monitors look forward to their efforts, and to summarizing the same for you. For that update—barring any adjustments to the currently-posted briefing schedule—watch this space sometime after the 19th of November.

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