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From Antitrust Law Daily, March 28, 2016

Banks can’t evade ISDAfix manipulation conspiracy claims

By Greg Hammond, J.D.

Institutional investors have standing to bring claims against 14 banks and an inter-dealer broker for an alleged conspiracy to manipulate ISDAfix—a benchmark interest rate incorporated into a broad range of financial derivatives. The federal district court in New York City consequently denied the banks’ motion to dismiss the Sherman Act claim (Alaska Electrical Pension Fund v. Bank of America Corp., March 28, 2016, Furman, J.).

Several institutional investors filed suit against 14 banks and inter-dealer broker ICAP Capital Markets LLC, alleging that the defendants abused their respective roles in the rate-setting process to manipulate ISDAfix for their own personal gain. Specifically, investors claimed that the banks manipulated daily ISDAfix rates to benefit their own trading positions and ICAP assisted in the manipulation in order to earn brokerage commissions.

The institutional investors asserted that: (1) the defendants agreed to rubberstamp the reference rate posted by ICAP each day in contravention of ICAP’s publicly disseminated submission rules; (2) the banks manipulated the reference rate itself by flooding the inter-dealer swap market with transactions designed to move ICAP’s reference rate to whatever point the banks desired—a process called “banging the close”; (3) the defendants shared information with one another in order to coordinate their trading activities; and (4) when “banging the close” failed to move the reference rate to the desired level, ICAP would set the reference rate at the predetermined level irrespective of the state of the market. The defendants moved to dismiss the Sherman Act conspiracy claim, alleging that the institutional investors lacked Article III standing; failed to adequately allege a conspiracy to restrain trade; and lacked “antitrust standing.”

Article III standing. The court first concluded that the investors have standing under Article III, noting that the defendants “do not seriously contest” that a plaintiff could establish injury-in-fact if it were to demonstrate that, because of an artificially induced shift in ISDAfix on a given day, it paid more or less than it should have under the terms of a particular transaction. This sort of “paid too much” or “received too little” harm is “classic economic injury-in-fact,” the court stated.

Conspiracy. Next, the court found that the plaintiffs plausibly alleged that a conspiracy among the banks and ICAP existed. First, there were extensive allegations of parallel conduct, in that the banks claimed to have the exact same bid/ask spread for “nearly every day for multiple years” and coordinated open-market trades before 11 a.m. to “bang the close.” In addition, several plus factors raised a suggestion of illegal agreement rather than mere independent action, including: (1) common motive to conspire, because the defendants were major players in the market for interest rate derivatives who were jointly motivated by a desire to maximize profits by manipulating the ISDAfix benchmark rates; (2) taking action against their own economic self-interest, in that the defendants purportedly shared commercially sensitive information with one another and the alleged rubberstamping violated ISDA rules, thereby exposing defendants to scrutiny and penalties if their behavior became public; and (3) ongoing investigations into manipulation of ISDAfix, when combined with parallel behavior, might allow a jury to infer the existence of an agreement.

Antitrust standing. Lastly, the court determined that the institutional investors have antitrust standing to pursue their conspiracy claim under the Sherman Act. In particular, the complaint alleges that the plaintiffs “are purchasers” of defendants’ products “who allege being forced to pay supra-competitive prices as a result of” the defendants’ anticompetitive conduct. This type of injury plainly is “of the type the antitrust laws were intended to prevent,” the court stated.

The plaintiffs were deemed “efficient enforcers” because they alleged that they were directly harmed by the defendants’ anticompetitive conduct by having to pay higher prices or earning lower profits from instruments tied to ISDAfix. There also was nothing particularly speculative about the injury alleged, and the damages at issue were tied to particular transactions and contracts, obviating the danger of duplicative recovery.

The case is No. 14-CV-7126 (JMF).

Attorneys: Christopher M. Burke (Scott + Scott, LLP) for Alaska Electrical Pension Fund. Adam Selim Hakki (Shearman & Sterling LLP) for Bank of America Corp.

Companies: Alaska Electrical Pension Fund; Bank of America Corp.

MainStory: TopStory Antitrust NewYorkNews

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