The missing finance plaintiffs in aluminum antitrust case vs. Goldman

March 27, 2015

Hey, antitrust plaintiffs’ lawyers! Have I got a case for you.

It’s against Goldman Sachs, JPMorgan Chase, the multinational mining and commodities trading company Glencore and their subsidiary warehouse operations, which supposedly conspired to manipulate the price of aluminum.

I know what you’re thinking: Aluminum purchasers are already way into that case. And you’re right. U.S. District Judge Katherine Forrest of Manhattan has already winnowed out extraneous defendants and forced both a class of direct purchasers and three big companies suing outside of the class action to sharpen their allegations. On Thursday, Judge Forrest ruled that the class and the three companies – Eastman Kodak, Mag Instrument and Agfa Corporation – can move ahead with their claims that Goldman and the other defendants engaged in an illegal antitrust conspiracy.

Though the judge tossed monopoly claims by the class and expressed some exasperation about how long it has taken plaintiffs to come up with a viable theory of the case, her ruling is great news for class counsel at Lovell Stewart Halebian Jacobson, Grant & Eisenhofer, Robbins Geller Rudman & Dowd, and (especially) for Scott + Scott and Steyer Lowenthal Boodrookas Alvarez & Smith, which represent Kodak, Mag and Agfa and impressed Judge Forrest with the cogency of their joint complaint.

So where’s the opportunity for other plaintiffs’ lawyers? Representing counterparties to aluminum options trades by Goldman, JPMorgan and Glencore. That’s because in Judge Forrest’s reading of the alleged antitrust conspiracy, financial counterparties – and not direct purchasers of aluminum – were the true target of the supposed price manipulation scheme. Unwarranted prices for actual aluminum was just the “collateral damage” from the alleged scheme, according to Forrest, though the supposed overcharges were enough of an injury to confer antitrust standing on the metal purchasers.

The plaintiffs’ antitrust theory that Judge Forrest found plausible enough to permit the suit to move forward is not their original conception of the suit, which followed a 2013 story in the New York Times about aluminum warehouses owned by Goldman Sachs and other banks shuffling aluminum around their lots rather than releasing it to purchasers. (Reuters actually had the same story back in 2011. Pro tip to plaintiffs’ lawyers: Read Reuters.) Those stories suggested a fairly simple supply-and-demand relationship between the banks’ and warehouses’ activities and the price of aluminum in consumer products.

Judge Forrest, who was deputy assistant attorney general of the U.S. Department of Justice’s Antitrust Division before she was appointed to the bench, found too many holes in that original price-fixing theory, which, in her description, “focused on the creation and maintenance of warehouse queues as the core of the allegedly unlawful conduct, but failed to adequately explain how and why the defendant financial institutions participated in or benefited from the conduct.” Last fall, she dismissed the purchasers’ case but permitted the class and individual purchasers to amend their complaints.

This time around, she said, plaintiffs have come up with a theory that makes more sense. The aluminum purchasers have alleged not just traditional price-fixing by market competitors but rather complicated interactions – both horizontal and vertical, in the parlance of antitrust litigation – between the banks and the warehouses with the primary purpose of reaping profits for the banks from trading activity. In the alleged scheme Forrest found adequately plausible, the banks supposedly manipulated a component of the stated price in aluminum purchase agreements through their “ability to obtain, retain and strategically settle aluminum warrants along with their affiliated warehouses’ ability to store or agreeing to accommodate storage requests for aluminum.”

Forrest said that the aluminum purchasers have not yet shown just how the banks obtained benefits from their supposed manipulation of aluminum warrants trading, though she laid out some possibilities: “Was it through, as plaintiffs allege, the exploitation of a contango? An ability to exploit differences between spreads or short and long positions? An ability to use warrants to advantage other trading opportunities such as equities or derivative positions?” The aluminum purchasers, she warned, are going to have to offer evidence that the defendants received tangible benefits from the alleged scheme or “the case may well be narrowed.”

If the purchasers’ lawyers can show how the banks profited from trades based on manipulated aluminum storage, it seems to me that counterparties on the other side of those supposedly rigged options deals should have a pretty good case for damages.

I left phone messages for partners at Sullivan & Cromwell, which represents Goldman, and Covington & Burling, which is counsel to JPMorgan, but didn’t hear back. Skadden Arps Slate Meagher & Flom, which represents the Glencore warehousing operation Pacorini Metals, declined to comment through a representative. Glencore has counsel from Curtis Mallet-Prevost Colt & Mosle.

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