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From Antitrust Law Daily, October 5, 2016

Silver market manipulation by three benchmark participants sufficiently stated

By E. Darius Sturmer, J.D.

Deutsche Bank, HSBC, and The Bank of Nova Scotia could have conspired in violation of federal antitrust and commodities law to suppress the silver benchmark price in order to gain an unfair trading advantage over other market participants, the federal district court in New York City has ruled (In re London Silver Fixing, Ltd. Antitrust Litigation, October 3, 2016, Caproni, V.).

The three banks’ motion to dismiss price fixing and conspiracy in restraint of trade claims asserted against them by entities and individuals that bought silver or certain silver futures contracts was denied with respect to a 7-year period of alleged market manipulation. However, the motion was granted with respect to the balance of the class period and to the plaintiffs’ conclusory bid rigging claim. Claims that the three defendants violated the Commodity Exchange Act (CEA) through the alleged market manipulation were also permitted to advance. Alleged fourth conspirator UBS was dismissed from the suit outright.

The plaintiffs claimed that the defendants executed a comprehensive strategy of market manipulation involving several distinct but related components. According to the plaintiffs, the three defendants that participated in the benchmark-setting London Silver Market Fixing call (all but UBS) abused their control over the Silver Fixing to suppress the Fix Price on certain days, and all of the defendants improperly shared and traded on confidential order information to gain unfair advantage over less-knowledgeable market participants. In addition, they allegedly conspired to maintain fixed bid-ask spreads, thereby gaining a pricing advantage and restraining competition in the silver spot market.

Plaintiffs’ standing. The plaintiffs had standing to assert antitrust claims against the defendants, the court held as an initial matter. Because they alleged a concrete injury as a result of the defendants’ manipulation, they had constitutional standing. The allegations that they were harmed by being forced to sell silver and silver derivatives at artificially suppressed prices as a result of the manipulation sufficed to state an antitrust injury, and at least some of the plaintiffs suffered a sufficiently direct injury, in the court’s view. While the court "harbor[ed] grave doubts regarding the scope of [the] proposed class," it found that the plaintiffs plausibly alleged that they constituted efficient enforcers of the antitrust laws for purposes of standing.

Antitrust conspiracy. The plaintiffs adequately alleged—"albeit barely"—a per se unlawful agreement to fix prices and restrain trade over a 7-year period, the court determined. Although the defendants were correct in arguing that their allegedly below-market spot quotes leading up to the Silver Fixing amounted by themselves only to non-actionable parallel conduct, conspiracy could be inferred from other circumstantial evidence and "plus factors" that advanced the claims "from the realm of the possible to the realm of the plausible."

This evidence included economic analyses showing not only the existence of unusual or dysfunctional pricing behavior but demonstrating that the Fixing Members had a common motive collectively to manipulate the Fix Price. Implicit in the allegations was the notion that the Fixing Members at times acted against their own interests by quoting below-market prices leading up to the Fixing, the court noted. The plaintiffs’ allegations that the defendants’ bid-ask spread did not respond to the Fix Price, remaining artificially wide so that the defendants were able to buy low and sell high, was another factor, however slight, tending to show that the outcome of the fixing auction was not news to the defendants, the court remarked.

The court was not swayed by the defendants’ argument that the allegations as to motive were implausible because they lacked any claim that the defendants held "net short" futures positions throughout the class period. The plaintiffs did not need to allege that the defendants were consistently short, the court explained.

CEA claims. The plaintiffs adequately alleged each requisite element for price manipulation under the CEA, the court also held. The Fixing Members obviously possessed an ability to influence the market prices, and the plaintiffs pleaded the existence of artificial prices around the Silver Fixing. In addition, they sufficiently asserted that the defendants specifically intended to manipulate prices and proximately caused the artificial prices, by claiming a 7-year pattern of dysfunction in the silver market was reflected in sharp downward price swings accompanied by a spike in highly predictive futures trading and price volatility occurring frequently around the Fixing.

In addition, the plaintiffs satisfied their pleading burden for a CEA manipulative device claim based on conduct occurring on or after the law’s August 15, 2011, effective date, according to the court. The plaintiffs alleged both misrepresentations (regarding their supply and demand for silver in the context of the Fixing) and manipulation (in quoting and trading practices leading up to the Fixing, as well as other opportunistic futures trading) as part of a single scheme. Further, they pleaded the nature, purpose, and effect of the fraudulent conduct and defendants’ roles with the particularity required by Federal Rule of Civil Procedure 9(b) for cases sounding in fraud.

The purchasers also pleaded viable claims against the three Fixing Members for aiding and abetting and principal-agent liability, the court said. Their conspiracy allegations, particularly with respect to the reversionary price quotes leading up to the Fixing, non-reactive bid-ask spreads, and patterns of downward price swings coinciding with volume spikes in silver trading, were sufficient to state an aiding and abetting claim. Moreover, as the allegations necessarily implied the involvement of as-yet unnamed traders and employees, with no indication that they acted in any way outside the scope of their employment, principal-agent liability was plausible.

UBS liability. Because UBS was neither a Fixing Member nor a participant in the Fixing—the conduct surrounding which formed the premise of the suit—and because the plaintiffs failed to allege that UBS caused their injuries, no cognizable antitrust or commodities claim existed against UBS. At best, the plaintiffs alleged that UBS engaged in parallel conduct by offering below-market quotes around the Fixing that coincided with downward reversions in the price of silver. In the absence of any other circumstantial evidence or plus factors, however, this charge was simply inadequate to create a plausible inference of unlawful activity, the court concluded.

The case is No. 14-MD-2573 (VEC).

Attorneys: Barbara J. Hart (Lowey Dannenberg Cohen & Hart, PC) for J. Scott Nicholson. Peter Joseph Isajiw (King & Spalding LLP) for Deutsche Bank AG. Leah Friedman (Freshfields Bruckhaus Deringer US LLP) for HSBC Bank PLC and HSBC Bank USA NA. Stephen Ehrenberg (Sullivan and Cromwell, LLP) for The Bank of Nova Scotia.

Companies: Deutsche Bank AG; HSBC Bank PLC; HSBC Bank USA NA; The Bank of Nova Scotia; The London Silver Market Fixing, Ltd.

MainStory: TopStory Antitrust NewYorkNews

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