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March 5, 2013

Financial Firm's Alleged Scheme to Boycott Auction Rate Securities Market Did Not Violate Sherman Act

By E. Darius Sturmer, J.D.

A group containing many of the world's largest and best-known financial institutions would not have violated federal antitrust law by agreeing to simultaneously stop buying auction rate securities for their own proprietary accounts in early 2008, the U.S. Court of Appeals in New York City has ruled (Mayor and City Council of Baltimore v. Citigroup, Inc., March 5, 2013, Hall, P.). Separate complaining classes of buyers and issuers of the securities, who claimed that the conduct amounted to an illegal refusal to deal or boycott, failed to allege a plausible conspiracy to violate Sec. 1 of the Sherman Act, the court said. Therefore, dismissal of both complaints was affirmed, though on a different ground than the implied immunity basis upon which the lower court relied.

Auction rate securities (ARS) are usually long-term bonds with flexible interest rates that reset periodically through "Dutch" auctions, the court explained. They were issued in increasing numbers throughout and 1990s and 2000s, popular among investors because of their perceived cash-like liquidity and relatively high rates of return. However, the alleged agreement among the defendants—which included Citigroup, UBS, Merrill Lynch, Morgan Stanley, Lehman Brothers, Bank of America, Wachovia, Goldman Sachs, JP Morgan Chase, Royal Bank of Canada, and Deutsche Bank—led to a collapse in February 2008 from which the ARS market has never recovered, the court said.

There was no need for the district court to determine whether the plaintiffs' claim was precluded by the securities laws because there was no actionable antitrust claim to be impliedly precluded, the appellate court decided.

A discussion of the standards for pleading antitrust conspiracy that were established in Bell Atlantic Corp. v. Twombly, 2007-1 Trade Cases ¶75,709, 550 U.S. 544 (2007) provided two clear guidelines, the court remarked. First, it made clear that "a bare allegation of parallel conduct is not enough to survive a motion to dismiss." Second, plaintiffs relying on parallel conduct must allege additional facts or circumstances—often termed "plus factors"—that, when viewed in combination with the parallel acts, can serve to allow a fact-finder to infer a conspiracy.

In the instant case, however, the plaintiffs "essentially pleaded only parallel conduct, with little more," in the court's view. Although at one time they asserted a broader set of violations, including price fixing that propped up the market in the first place, the plaintiffs had narrowed their claims, now asserting that the defendants "had violated the antitrust laws only by withdrawing from the ARS market 'in a virtually simultaneous manner' on February 13, 2008."

The few additional facts they asserted failed plausibly to suggest that this parallel conduct flowed from a preceding agreement than from their own business priorities. "Indeed," the court stated, "the [d]efendants' alleged actions—their en masse flight from a collapsing market in which they had significant downside exposure—made perfect business sense." Whereas the plaintiffs seemed to be suggesting in their brief on appeal that the ARS market had been healthy until that February 13 and imploded unexpectedly, the allegations in their complaints revealed otherwise.

ARS auctions had started failing as early as the summer of 2007, the court observed, and the failure of more auctions during the fall and winter put the defendants on notice that the market for ARS was in danger of failing. Thus, by early 2008, each defendant was faced with the same dilemma: continuing to prop up the auctions with support bids generated commissions for successful auctions, but if enough failed, ARS would no longer be seen as safe investments, and those support purchases would turn into major liabilities as the markets dried up. "In such an environment it is unsurprising, and expected, that once failures reached a critical mass, defendants would exit the market very quickly," according to the appellate court.

Similarly, the plaintiffs' factual allegations did not plausibly suggest a "common motive to conspire," the court added. The plaintiffs' motive allegations related almost exclusively to the defending financial firms' joint motivation to conspire to support the market. This had no bearing on their motivation to exit the market, which was the alleged antitrust violation, the court explained. "[T]o the extent [the] complaints can be read to assert a common motive to exit, perhaps in order to cut losses, such facts are insufficient to support the inference of conspiracy."

Even reading the complaints in the light most favorable to the plaintiffs, the court stated, the asserted facts led to only one plausible inference: that these were "actions taken by market actors who are aware of and anticipate similar actions taken by competitors, but which fall short of a tacit agreement." The only allegations that tended to assert something more than mere conscious parallelism were two vague references to isolated discussions among only three defendants. "Those simply are not enough plausibly to allege a ‘high level' of interfirm communications," the court concluded.

The case is Docket Nos. 10-0722-cv (L) and 10-0867-cv (CON).

Attorneys: Allan Steyer (Steyer Lowenthal Boodrookas Alvarez & Smith LLP) for the plaintiffs. Jonathan K. Youngwood (Simpson Thacher & Bartlett LLP) for Citigroup Inc.

Companies: Citigroup, Inc.; Citigroup Global Markets, Inc.; UBS AG UBS Securities LLC; UBS Financial Services, Inc.; Merrill Lynch & Co., Inc.; Morgan Stanley; Lehman Brothers Holdings, Inc.; Bank of America Corp.; Wachovia Corp.; Wachovia Securities, LLC; Wachovia Capital Markets, LLC; The Goldman Sachs Group, Inc.; JP Morgan Chase& Co.; Royal Bank of Canada; Deutsche Bank, AG.

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