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From Antitrust Law Daily, February 2, 2017

Claims that JPMorgan Chase monopolized silver futures spread market revived

By Jeffrey May, J.D.

Commodities traders adequately alleged the element of "willful acquisition or maintenance of monopoly power" or "anticompetitive conduct" to support their claims against JPMorgan Chase & Company for allegedly manipulating the "‘long-dated’ silver futures spread market," the U.S. Court of Appeals in New York City has decided. The appellate court ruled that the lower court imposed an improper pleading standard on the plaintiffs and engaged in impermissible fact-finding in dismissing the claims. A June 29, 2016 decision of the federal district court in New York City was reversed, and the case was remanded for further proceedings (Wacker v. JP Morgan Chase & Co., February 1, 2017, per curiam).

In order to pursue a monopolization claim, the complaining traders of silver futures contracts—agreements to buy or sell fixed amounts of silver on a certain future date traded on Commodity Exchange, Inc. (COMEX)—had to allege that JPMorgan possessed monopoly power and the willful acquisition or maintenance of that power. In January 2016, the district court ruled that the plaintiffs failed to allege monopoly power based on conventional means—JPMorgan’s market share of an alleged silver futures spread market. However, the court was satisfied that the plaintiffs could use an alternative method for demonstrating monopoly power through direct evidence of anticompetitive effects.

According to the district court, the plaintiffs stumbled on the other element. At that time, the monopoly claims were dismissed because the plaintiffs failed to adequately plead willful acquisition of monopoly power. The court was not swayed by the three examples of allegedly exclusionary conduct put forth by the plaintiffs: (1) JPMorgan placed large, uneconomic orders just before the close of trading for the purpose of influencing settlement prices; (2) JPMorgan "caused" certain floor brokers and clerks to "harangue" COMEX employees to set JPMorgan’s desired settlement prices, in part by pointing to JPMorgan’s own "uneconomic, artificially tight bids and offers for calendar spreads"; and (3) JPMorgan "refus[ed] to provide spread quotes that would allow Plaintiffs to exit" the market. However, the traders were granted leave to replead their Sherman Act, Section 2 and New York Donnelly Act claims. A second amended complaint was considered in June 2016, and the district court was not satisfied by the addition of "limited factual allegations." Judgment was entered in favor of JPMorgan. The plaintiffs appealed.

Pleading standard. The plaintiffs were held to a level of detail not required to withstand a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), according to the appellate court. The lower court improperly held that the plaintiffs’ allegations with respect to the defendants’ alleged uneconomic bids lacked specificity.

The plaintiffs sufficiently alleged exclusionary conduct on a motion to dismiss by pointing to 14 days on which the defendants allegedly submitted bid/asks that exceeded the alleged value of the silver futures’ economic outputs, in the appellate court’s view. Moreover, the plaintiffs’ allegation that the defendants attempted to influence the COMEX price settlement committee by placing uneconomic bids satisfied the element of anticompetitive intent.

Impermissible fact-finding. The district court also erred in rejecting the plaintiffs’ use of the twelve-month Silver Indicative Forward Mid Rates or SIFO as a benchmark for determining proper levels for the bid/ask spreads for the long-dated silver futures market, the appellate court held. While the lower court might eventually be proven correct, it engaged in impermissible fact-finding by assessing the choice of a benchmark at the pleading stage. This process involved an inherently fact-intensive inquiry into the relationship between the benchmark and the market it allegedly tracks, the court explained.

Monopoly power. The appellate court suggested that the district court was premature in making its monopoly power determination. In its January 2016 decision, the district court had concluded that the plaintiffs adequately alleged monopoly power by pleading direct evidence of JP Morgan’s ability to control silver futures prices "with reference to a particular market." While the district court did not err in concluding on a motion to dismiss that the plaintiffs plausibly alleged a relevant market for long-dated silver futures contracts, the court would likely need to reassess the monopoly power issue at a later stage of litigation based on information gained during discovery.

The case is No. 16-2482-cv(L).

Attorneys: David E. Kovel and Andrew M. McNeela (Kirby McInerney LLP) for Thomas Wacker, Mark Grumet, and SHK Diversified, LLC. Amanda Flug Davidoff, Daryl A. Libow, Nicholas M. DiCarlo, and Akash M. Toprani (Sullivan & Cromwell LLP) for JPMorgan Chase & Co., J.P. Morgan Clearing Corp. and J.P. Morgan Securities, LLC.

Companies: SHK Diversified, LLC; JPMorgan Chase & Co.; J.P. Morgan Clearing Corp.; J.P. Morgan Securities, LLC

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