Bank defendants and forex: Not all rate-rigging class actions are alike

January 6, 2015

On Monday, JPMorgan Chase filed a letter with U.S. District Judge Lorna Schofield of Manhattan, reporting an agreement to settle a big antitrust class action alleging that the bank colluded with 11 other global financial institutions to manipulate benchmark trading prices in the foreign exchange market. My colleague Jon Stempel reported that JPMorgan – which was one of six banks in a $4.3 billion forex deal with U.S. and British regulators in November – will pay about $100 million to private plaintiffs who claim to have lost money as a result of the alleged price-fixing conspiracy.

My big question, when I read about the settlement, was why JPMorgan and its lawyers at Skadden Arps Slate Meagher & Flom settled the 2013 class action now instead of waiting for a ruling on the banks’ motion to dismiss, which has been fully briefed and was argued before Judge Schofield on Nov. 20. After all, banks have recently managed to slough off class action claims that they violated antitrust laws when they conspired to manipulate other benchmark rates, specifically the London Interbank Offered Rate and the Euroyen Tokyo Interbank Offered Rate. In both of those cases, Manhattan federal judges found that plaintiffs couldn’t show they’d been harmed by anticompetitive conduct even though some of the bank defendants had admitted to tampering with Libor rates. Because the banks didn’t compete for business in the rate-setting process, the Libor rulings said, their alleged price-fixing couldn’t constitute an antitrust violation.

The banks in the forex antitrust class action argued precisely the same thing. The alleged rate-tampering in the case involves the “fix,” a daily price average (calculated separately for more than 150 currencies) based on trades within a specific one-minute time frame. The fix is used in forex futures contracts and by foreign exchange customers who want to trade at an averaged price rather than engaging in the bid-and-ask process. Forex plaintiffs claim that banks traded collusively in the critical one-minute time frame to rig the fix and maximize their profits. The banks, pointing to the recent Libor rulings, said that there’s no competition among them when customers opt to trade at the fix rate. “The customer is choosing to take the price competition out of the equation,” JPMorgan lawyer Boris Bershteyn of Skadden told Judge Schofield at the hearing in November, arguing on behalf of all of the forex defendants. “The setting of the fix is not a competitive setting.”

George Cary of Cleary Gottlieb Steen & Hamilton, who represents Goldman Sachs in the forex case, added that the banks’ alleged tactic of flooding the market to drive down prices in the one-minute time frame that determines the fix is the opposite of a restraint on trade. “That is why this is not an antitrust case. That is why it is a case like Libor,” Cary told the judge.

Obviously, JPMorgan wasn’t convinced Judge Schofield agreed or it wouldn’t have decided to settle before she issues her ruling on the banks’ motion to dismiss. I don’t know exactly what JPMorgan was thinking; a bank representative declined Reuters’ request for comment and Skadden partners Bershteyn and Peter Greene didn’t respond to my phone messages. But the transcript of the hearing on the banks’ dismissal motion makes it clear both that Schofield has doubts about the Libor antitrust rulings and that she’s not convinced their reasoning applies in the forex case.

Schofield said flat out that she is “not certain that I agree” with the antitrust analysis in the Libor case, which, as she also said, doesn’t bind her in any event. Moreover, she asked defense lawyers about a “critical difference” between the forex and Libor allegations. “In some ways it sounds like we’re simply talking about a benchmark, and when you’re talking about a benchmark, it is hard to understand how you’re talking about harm to competition,” Schofield said. “But here the benchmark was set by market activity that was supposed to be competitive and allegedly was not.” (In response, Bershteyn said the defendants don’t believe there’s a “dispositive” difference between the alleged conduct in the Libor and forex cases.)

Schofield, to be fair, also had some hard questions at the dismissal hearing for class counsel Christopher Burke of Scott + Scott, who is lead in the forex case along with Michael Hausfeld of Hausfeld. How, she asked, can benchmark rate manipulation be an antitrust injury when the rate-setting process isn’t competitive? Burke said that because banks allegedly executed trades to tamper with the forex fix, they directly affected trade in the competitive foreign exchange market. “Nobody sells Libor, but people buy and sell foreign exchange,” Burke said at the hearing. “While the fix is a benchmark in a sense, it is also an actual rate at which people exchange pounds for dollars, euros to yen, dollars to yen and so on.”

So far, Burke and Hausfeld told me in interviews Tuesday, JPMorgan is the only forex defendant to have entered settlement talks with the class. Burke said their negotiations, which were mediated by Kenneth Feinberg, have been going on for months and intensified as government regulators took action. According to Burke, JPMorgan and the class were well on their way to an agreement when Judge Schofield heard arguments on the banks’ motion to dismiss in November.

I asked Burke and Hausfeld whether a denial of the banks’ dismissal motion would raise the price of settlement for the other defendants. “The way these things work,” Burke said, “early people get a discount,” especially when settling defendants agree to cooperate with the class, as he said JPMorgan has. Hausfeld said that as a rule, he doesn’t use dismissal rulings to drive settlement talks.

I may be reading too much between the lines of the transcript of the Nov. 20 forex hearing and JPMorgan’s decision to resolve the case, but it seems to me that the remaining defendants have some hard strategic decisions to make about their prospects of killing off this case at an early stage. The Libor card just may not play.

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