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From Antitrust Law Daily, September 4, 2014

Claims of credit default swap conspiracy adequately alleged

By Jeffrey May, J.D.

The federal district court in New York City has refused to dismiss claims against major banks, including Bank of America Corporation and JPMorgan Chase & Co., for conspiring with others to restrain trade in the market for credit default swaps (CDS) in violation of Section 1 of the Sherman Act. However, the court rejected a Sherman Act, Section 2 “conspiracy-to-monopolize” claim and prohibited the plaintiffs from seeking damages for investments made prior to the Fall of 2008 (In re: Credit Default Swaps Antitrust Litigation, September 4, 2014, Cote, D.).

A CDS is used as a tool for hedging credit risk. It is a financial derivative contract in which the buyer pays the seller in exchange for the seller’s promise to make the buyer whole on an agreed amount in the event of some “credit event,” such as a default on the debt instrument, by a third party.

Investors who purchased CDS from, or sold CDS to, defending U.S. banks adequately alleged a conspiracy to stifle innovations in the CDS market that would have led to greater transparency and competition. Specifically, they alleged a conspiracy to block the emergence of CDS electronic exchange trading, which purportedly would have created competition on “bid/ask spreads.”

According to the plaintiffs, the alternative means of CDS trading would have diminished the buy-side’s dependence on the over-the-counter trading services offered by the defending banks. As a result, the plaintiffs alleged, the defendants conspired to shut down the nascent Credit Market Derivatives Exchange as it was poised to enter the market. The banks agreed to clear almost all transactions through the one clearinghouse they could control—ICE Clear Credit LLC—according to the plaintiffs.

To support their allegations of conspiracy, the plaintiffs contended the “senior-level employees" of the named investment banks participated in secret meetings and communications in which the conspiratorial agreement was reached. Moreover, the banks allegedly secured agreements from private financial information company Markit Group Holdings Limited and its subsidiary Markit Group Ltd. and from financial trade association International Swaps and Derivatives Association (ISDA) not to license necessary information to CMDX and other nascent clearinghouses and exchanges in an effort to block them from entering the CDS market. The court rejected the defendants' assertion that the allegations were equally consistent with a non-collusive explanation, namely, independent, self-interested conduct in reaction to the global financial crisis.

The court ruled that Markit could have conspired with the defending banks. Markit unsuccessfully contended that it was incapable of conspiring because it either (1) was controlled by the banks or (2) acted with the banks as a single entity engaged in a joint venture. The court also rejected ISDA's assertion that the complaint failed to plead facts plausibly linking the trade group to the “bid/ask conspiracy.”

Antitrust standing. The plaintiffs adequately alleged antitrust standing. They asserted that, as a result of the conspiracy, they were forced to invest in a CDS market lacking transparency and competition and were forced to pay inflated bid/ask spreads.

The court noted that the injury was sufficiently direct. No intermediaries stood between plaintiffs, who paid the supracompetitive prices, and the defending banks, who purportedly pocketed them, the court explained. Absent the alleged agreement to prevent a CDS exchange, CMDX would have entered the market, immediately allowing the plaintiffs to avoid trading directly with the defending banks and paying their inflated bid/ask spreads. According to the court, the defendants' argument that the plaintiffs' injury was too speculative was a repackaged version of their unsuccessful, indirectness-of-injury argument.

Limitations on damages claims. While the plaintiffs alleged antitrust injury, they did not plausibly allege injury-in-fact as early as January 1, 2008—the date specified as the start of the relevant period for the proposed class. Instead, the court noted, the allegations of defendants’ anticompetitive conduct referred, at the earliest, to the Fall of 2008. Thus, claims for damages based on investments made before the Fall of 2008 were dismissed.

The court rejected the defendants' argument that the statute of limitations barred claims arising from conduct that occurred before May 3, 2009—four years before the complaint was filed. For now, the complaint contained sufficient allegations to support a showing of fraudulent concealment to toll the four-year statute of limitations; however, the issue of fraudulent concealment would have to be determined on the merits.

Further, the Dodd-Frank Act did not preclude application of the antitrust laws to conduct occurring after July 21, 2011, when the statute became effective in relevant part, the court ruled. Despite the Dodd-Frank Act's “antitrust savings clause,” the antitrust laws applied with full force to the conduct at issue in the case, according to the court. The defendants' request to dismiss claims based on conduct occurring after July 21, 2011, was denied.

Conspiracy-to-monopolize claim. A claim that defending banks collectively sought to monopolize the CDS market in violation of Section 2 of the Sherman Act was rejected by the court. Even assuming that a “conspiracy-to-monopolize-jointly” claim was theoretically available under Section 2, the complaint did not allege the necessary facts, in the court's view. The plaintiffs merely alleged that the banks sought to maintain their prominence by blocking the development of exchange-trading platforms.

This is Case 1:13-md-02476-DLC.

Attorneys: Daniel L. Brockett (Quinn Emanuel Urquhart & Sullivan, LLP) and Bruce L. Simon (Pearson, Simon & Warshaw, LLP) for plaintiffs. Robert F. Wise, Jr. (Davis Polk & Wardwell LLP) for Bank of America Corporation and Bank of America N.A. Todd S. Fishman (Allen & Overy LLP) for Barclays Bank PLC and BNP Paribas. Benjamin R. Nagin (Sidley Austin LLP) for Citigroup Inc., Citibank, N.A., and Citigroup Global Markets Inc. J. Robert Robertson (Hogan Lovells US LLP) for Credit Suisse AG. Richard C. Pepperman II (Sullivan & Cromwell LLP) and Robert Y. Sperling (Winston & Strawn LLP) for Goldman, Sachs & Co. Richard A. Spehr (Mayer Brown LLP) for HSBC Bank PLC and HSBC Bank USA, N.A. Peter E. Greene (Skadden, Arps, Slate, Meagher & Flom LLP) for JPMorgan Chase & Co. and JPMorgan Chase Bank, N.A. Evan R. Chesler (Cravath, Swaine & Moore LLP) for Morgan Stanley & Co. LLC. David C. Bohan (Katten Muchin Rosenman, LLP) for UBS AG and UBS Securities LLC. Charles F. Rule (Cadwalader, Wickersham & Taft LLP) for Royal Bank of Scotland PL and Royal Bank of Scotland N.V. Matthew J. Reilly (Simpson Thacher & Bartlett LLP) for International Swaps and Derivatives Association. Colin R. Kass (Proskauer Rose LLP) for Markit Group Ltd. and Markit Group Holdings Ltd.

Companies: Bank of America Corporation; Bank of America N.A.; Barclays Bank PLC; BNP Paribas; Citigroup Inc.; Citibank, N.A.; Citigroup Global Markets Inc.; Credit Suisse AG; Goldman, Sachs & Co.; HSBC Bank PLC; HSBC Bank USA, N.A.; JPMorgan Chase & Co.; JPMorgan Chase Bank, N.A.; Morgan Stanley & Co. LLC; UBS AG; UBS Securities LLC; Royal Bank of Scotland PL; Royal Bank of Scotland N.V.; International Swaps and Derivatives Association; Markit Group Ltd.; Markit Group Holdings Ltd.

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