Benchmark rate-rigging divides N.Y. trial courts in big-money antitrust cases

March 29, 2016

It’s a good thing the 2nd U.S. Circuit Court of Appeals has already heard arguments about whether collusion among banks attempting to manipulate key benchmark rates constitutes an antitrust injury – because the lower courts in Manhattan, where these big rate-rigging cases are being litigated, can’t seem to agree on that issue.

On Monday, U.S. District Judge Jesse Furman denied a motion by 14 banks to dismiss a consolidated class action accusing them of colluding to manipulate the ISDAfix, a benchmark rate that affects trades in the multi-trillion dollar market for “swaptions,” or options on interest-rate swaps. (If you need to know more about the derivatives impacted by the alleged ISDAfix manipulation, Judge Furman has a quite lucid explanation.)
Like his Manhattan federal-court colleague Judge Lorna Schofield, who is overseeing litigation involving alleged foreign currency rate (or forex) manipulation, Judge Furman concluded that counterparties whose trades were impacted by the rate-rigging had suffered an antitrust injury. Judge Furman, in fact, said the plaintiffs’ allegations of overpaying (in this case, for financial instruments) because of a horizontal conspiracy among ostensible competitors are “the quintessential antitrust injury.”
But another judge on the same bench, U.S. District Judge Naomi Buchwald, reached precisely the opposite conclusion in the consolidated litigation over alleged manipulation of the London Interbank Offered Rate. In an extremely controversial ruling in 2013, Judge Buchwald dismissed antitrust claims against the banks involved in Libor rate-setting, holding that because the rate-setting process was cooperative, rather than competitive, plaintiffs hadn’t suffered an antitrust injury. After Judge Buchwald’s decision, two other Manhattan federal judges in Libor cases followed her reasoning and tossed Sherman Act claims for lack of antitrust standing.
Judge Buchwald’s holding is now before the 2nd Circuit (after a trip to the U.S. Supreme Court), where Judges Dennis Jacobs, Gerard Lynch and Reena Raggi heard oral arguments last November. As we wait for a ruling, it’s worth reading Judge Furman’s characteristically cogent discussion about why, in his view, Judge Buchwald was wrong.
One caveat: There is a key difference (as I’ve reported) between the Libor rate-rigging allegations and those in the ISDAfix and forex cases. In the litigation before Judges Schofield and Furman, plaintiffs claim bank defendants engaged in actual trades to manipulate benchmarks that were based, at least in part, on market prices at a particular moment in time. Traders who wanted to drive the forex or ISDAfix benchmark up or down would supposedly “bang the close,” by block trading right before the key moment. Such coordinated trading by supposed competitors, according to both Schofield and Furman, is classic market manipulation.
There was no actual market trading in the alleged Libor conspiracy, in which banks supposedly lied to the rate-setting authority about what interest rates they were charging one another. That distinction could turn out to be important in the 2nd Circuit’s reasoning on antitrust injury.
Judge Furman, however, specifically said he “more broadly” (albeit respectfully) disagreed with Judge Buchwald about collusion, cooperation and antitrust injury. He said his analysis begins with U.S. Supreme Court precedent, which says the mechanism for price-fixing doesn’t determine whether antitrust laws are violated. “Far from viewing cooperative endeavors with favor, the (Supreme) Court has expressly cautioned that cooperative organization is ‘rife with opportunities for anticompetitive activity,’” Furman wrote. “If anything, therefore, the fact that ‘otherwise-competing’ entities acted together as part of a ‘cooperative endeavor’ is reason for more scrutiny, not less — and certainly not a basis for immunity from antitrust liability altogether.”
The judge also took issue with Judge Buchwald’s conclusion that the Libor claims are at heart fraud allegations, rather than antitrust causes of action. “It would be perverse to grant such wrongdoers immunity from liability under the antitrust laws to those harmed by their anticompetitive conduct merely because, in addition to engaging in that misconduct, they took steps to conceal it through misrepresentations,” Furman wrote. “It is the rare price fixer indeed who truthfully discloses his or her illegal conduct to consumers. Instead, it should go without saying that most antitrust conspiracies involve misrepresentations, if not outright falsehoods.”
In these rate-rigging cases, early dismissal rulings have been quite significant. After years of expensive litigation, Libor plaintiffs have reached exactly one settlement, with Barclays for $20 million. The forex plaintiffs, by contrast, have reaped more than $2 billion from at least nine defendants. So Furman’s ruling is great news for co-lead counsel in the ISDAfix case, Quinn Emanuel Urquhart & Sullivan, Robbins Geller Rudman & Dowd and Scott + Scott. And I’m sure it makes defendants in the Libor case a little more anxious.
My Reuters colleague Jon Stempel reached out to all 14 banks in the ISDAfix case for his report yesterday on the ruling. None provided comment.

(Corrects Judge Gerard Lynch’s first name)

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