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From Antitrust Law Daily, June 29, 2016

Market manipulation claims against JPMorgan tossed

By Jeffrey May, J.D.

Monopolization claims against JPMorgan Chase & Company for allegedly manipulating the "‘long-dated’ silver futures spread market" have been dismissed with prejudice by the federal district court in New York City. The addition of limited new factual allegations to the second amended complaint by complaining commodities traders was not sufficient to state an antitrust claim (Shak v. JPMorgan Chase & Co., June 29, 2016, Engelmayer, P.).

Silver futures contracts are agreements to buy or sell fixed amounts of silver on a set future date. The complaining traders brought suit, alleging that JPMorgan—one of only two or three market makers in the silver futures markets—manipulated the prices of silver futures spreads to its advantage by: (1) placing artificial, unrealistic bids on the trading floor; and (2) making misrepresentations, tracking its own artificial bids, to the Commodity Exchange, Inc. (COMEX) settlement committee, which sets settlement prices in the market.

As a result of the alleged market manipulation, the complaining traders contended that they suffered huge losses. The plaintiffs brought monopolization claims under Section 2 of the Sherman Act, among others. In January, the court dismissed the complaints filed by three traders in their entirety, the traders were granted leave to replead Sherman Act, Section 2 and New York Donnelly Act claims as long as they were within the four-year statute of limitations period and the plaintiffs added facts to "rehabilitate" these claims. The court has now decided that new allegations did not remedy the pleading deficiencies in the initial complaint.

Anticompetitive conduct. The court decided in January that the complaint adequately alleged that JPMorgan possessed monopoly power in the silver futures spreads market. However, it did not adequately plead "anticompetitive conduct" to support the Section 2 claim.

To strengthen their allegations of anticompetitive conduct, the plaintiffs reframed their antitrust claim as involving "predatory bidding." In addition, they attempted to elaborate on JPMorgan’s alleged manipulation of the COMEX settlement committee. By using artificial bidding and manipulating the COMEX settlement committee to prevent a reversion to the "historical norm of contango," JPMorgan forced the plaintiffs to "capitulate" and exit the market, according to the plaintiffs.

Predatory bidding theory. Under the predatory bidding theory, the plaintiffs alleged that JPMorgan "bid up the cost of silver futures calendar spreads far beyond the legitimate price of its economic outputs, widely recognized to be the sum of the expected value of the underlying silver bullion plus carrying expenses and interest of the near and far leg of the spread." The court explained that a claim of predatory bidding typically arises where a defendant that manufactures an "output" bids up the price of an "input," so as to drive other buyers of the input out of business. The defendant eventually recoups its losses through overbidding on inputs by reaping monopoly profits in the output market.

The court questioned the plaintiffs’ definition of the relevant inputs and outputs in its predatory bidding claim. The plaintiffs alleged that the outputs of the silver futures spreads were "the expected value of the underlying silver bullion plus carrying expenses and interest of the near and far leg of the spread." Simply naming an alleged "output" did not make the definition plausible, the court noted.

Moreover, the court expressed skepticism about the applicability of the framework developed by the U.S. Supreme Court in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312 (2007), in the context of cases involving manufacturing industries, in the context of a futures market. InWeyerhaeuser, logs were the input, and finished hardwood lumber was the output, the court noted. However, defining inputs and outputs was more difficult, if not impossible, in the context of a futures market.

Ultimately, the court decided that it did not need to reach the issue of whether the Weyerhaeuser framework applied. The plaintiffs did not provide sufficient allegations to cure the deficiencies in the original complaint.

Sufficiency of allegations. The court held that the SAC’s allegations about the COMEX settlement committee were self-contradictory and conclusory. Moreover, the added allegations did not cure the problem identified with the initial complaint—that JPMorgan’s price representations were uneconomic and that there was "no legitimate justification" for this allegedly contradictory behavior. Additional background on JPMorgan’s motive also did not assist in curing the deficiencies, in the court’s view.

The plaintiffs had alleged that the manipulation was demonstrated by the divergence between the silver futures spreads market and the over-the-counter (OTC) silver market and that the Silver Indicative Forward Mid Rates (SIFO) was, during the relevant time period, a "reliable benchmark" for the OTC silver market. However, the court suggested that there were strong reasons to doubt that SIFO is the proper benchmark for long-dated silver futures spreads.

"Given the SAC’s failure both to explain why SIFO should track silver futures spreads, and to concretely plead that it did so consistently, a mere general correlation between these two is not sufficient to make SIFO a reliable benchmark such that deviations from it support a claim of irrational pricing animated by anticompetitive aims," the court concluded. Without a more substantial benchmark-type relationship, the allegations were implausible.

This is Case No. 1:15-cv-00992-PAE.

Attorneys: David A. Bishop (Kirby McInerney LLP) for Mark Grumet. Amanda Flug Davidoff (Sullivan & Cromwell LLP) for JPMorgan Chase & Co.

Companies: JPMorgan Chase & Co.; Commodity Exchange, Inc.

MainStory: TopStory Antitrust NewYorkNews

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