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Media Alerts - Mayor and City of Baltimore, Maryland et al, v. Citigroup Inc., et al. - Second Circuit
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March 5, 2013
  Mayor and City of Baltimore, Maryland et al, v. Citigroup Inc., et al. - Second Circuit
Headline: Second Circuit Upholds Dismissal of Antitrust Claims Asserted Against Financial Institutions Based on Collapse of Auction Rate Securities Market

Area of Law: Securities Law

Issue(s) Presented: Whether the Defendant financial institutions violated the Sherman Act when they simultaneosly stopped buying auction rate securities, which allegedly led to the collapse of the market for these securities in 2008?

Brief Summary:
The Plaintiffs, representatives of two consolidated classes consisting of purchasers and issuers of "auction rate securities," brought this action against several of the world's largest and most well-known financial institutions and broker-dealers including Citigroup, Inc., UBS Securities LLC, and several others (the "Defendants). In essence, Plaintiffs alleged that the Defendants effectively triggered the 2008 collapse of the auction rate securities market when they conspired to stop purchasing auction rate securities for their proprietary accounts. Plaintiffs' charged that the defendants conduct amounted to a "boycott" or "refusal to deal" in violation of the "restraint of trade" prohibitions of the Sherman Antitrust Act §1.

The United States District Court for the Southern District of New York dismissed the complaint, on the grounds that the alleged antitrust claims were precluded by federal securities laws. The Second Circuit affirmed the dismissal, but on entirely alternative grounds without reaching the issue of preclusion, holding that the Plaintiffs' failed to sufficient allege direct evidence supporting an agreement that would support a conspiracy theory under antitrust laws.

To read the full opinion, please go to: http://www.ca2.uscourts.gov/de...a17504567e0/1/hilite/


Extended Summary:
Most auction rate securities ("ARS"), popular in the1990s and early 2000s for their typically high rate of return but no longer in existence since their 2008 market collapse, were constructed as long-term bonds with flexible interest rates. ARS were sold at dedicated "auctions," rather than on securities exchanges. The ARS interest rate would "reset" during the depending upon demand at the auction, and would "clear" with an interest equal to the final (which was also the highest) interest rate at which it was sold. No secondary market for ARS ever developed, however, and by 2006 auctions began to "fail" as the ARS supply regularly exceeded demand at auction. Many companies that sold ARS were in trouble by this time and at least some were found by the Securities and Exchange Commission to have engaged in improper attempts to control the auction process to prevent auction failure by placing undisclosed "support bids" from their institutional proprietary accounts to absorb the excess demand. By February 2008, when an estimated $330 billion in unmatured ARS were outstanding, the vast majority of ARS auctions had nevertheless failed and the ARS market essentially ceased to exist.

Following the collapse, the Plaintiffs, now representatives in a single consolidated action of two classes consisting of purchasers and issuers of ARS, sued several of the world's largest and most well-known financial institutions and broker-dealers that sold ARS and/or managed ARS auctions, including Citigroup, Inc., UBS Securities LLC, among several others (the "Defendants), asserting that Defendants' conspired to "exit the ARS market" in violation of the Sherman Antitrust Act §1.

The United States District Court for the Southern District of New York dismissed the complaint, holding that the alleged antitrust claims were precluded by federal securities laws. The Second Circuit affirmed the dismissal, but did not address the issue of preclusion, holding instead that the allegations failed to "allege a plausible conspiracy to violated Section 1 of the Sherman Act." The Court reasoned that Plaintiffs' complaint failed to adequately present either "direct evidence" of an improper agreement - such as evidence of a recorded telephone call - or "facts supporting the inference that a conspiracy existed" - beyond mere parallel conduct - in violation of antitrust laws. Concluding that Plaintiffs' assertion that the Defendants exited the ARS market "in a virtually simultaneous manner'" constituted an allegation of mere "parallel conduct" that could be viewed as "the only rational business decision" in light of ARS market conditions at that time, the court found the complaint fell short of alleging a tacit agreement supporting a conspiracy in violation of the Sherman Act.

To read the full opinion, please go to: http://www.ca2.uscourts.gov/de...4c4413e8dbf/1/hilite/

Panel: Judges Leval, Katzman and Hall

Argument (if known): 04/13/2011

Date of Issued Opinion: 03/05/2013
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Docket Number: 10-0772-cv (L), 10-0876-cv (CON)

Decided: Affirmed

Case Alert Author: Joanna Karlitz

Counsel: ALLAN STEYER, Steyer Lowenthal Boodrookas Alvarez & Smith LLP, San Francisco, CA (Henry A. Cirillo, Lisa Marie Black, Steyer Lowenthal Boodrookas Alvarez & Smith LLP, San Francisco, CA; Michael D. Hausfeld, Steig D. Olson, Michael P. Lehmann, Jon T. King, Hausfeld LLP, New York, NY; and Arun S. Subramanian, Susman Godfrey LLP, New York, NY, for Plaintiffs-Appellants Mayor and City Council of 2Baltimore, Maryland, on behalf of themselves and all others similarly situated, on the brief), for Plaintiffs-Appellants Russell Mayfield, Paul Walton, and John Abbot, individually and on behalf of themselves and all others similarly situated. JONATHAN K.YOUNGWOOD, Simpson Thacher & Bartlett LLP, New York, NY (Thomas C. Rice and Hillary C. Mintz, Simpson Thacher & Bartlett LLP, New York, NY; Brad S. Karp, Charles E. Davidow, Kenneth A. Gallo and Andrew C. Finch, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendants-Appellees Citigroup Inc. and Citigroup Global Markets, Inc.; Donald W. Hawthorne, Benjamin Sirota and William Weeks, Debevoise & Plimpton LLP, New York, NY, for Defendants-Appellees UBS AG, UBS Securities LLC and UBS Financial Services, Inc.; Jay B. Kasner, Paul M. Eckles and Shepard Goldfein, Skadden, Arps, Slate, Meagher, & Flom LLP, New York, NY, for

Defendant-Appellee Merrill Lynch & Co., Inc.; Bradley J. Butwin, Jonathan Rosenberg and Andrew Frackman, O'Melveny & Myers LLP, New York, NY, for Defendant-Appellee Bank of America Corporation; Gregory A. Markel and Ronit Setton, Cadwalader, Wickersham & Taft LLP, New York, NY, for Defendant-Appellee Morgan Stanley; Arthur S. Greenspan and Jon Connolly, Richards Kibbe & Orbe LLP, New York, NY, for Defendants-Appellees Wachovia Corporation, Wachovia Securities, LLC and Wachovia Capital Markets, LLC; David H. Braff, David M.J. Rein and William H. Wagener, Sullivan & Cromwell LLP, for Defendant-Appellee The Goldman Sachs Group, Inc.; Sean M. Murphy, Milbank, Tweed, Hadley & McCloy LLP, New York, NY, for Royal Bank of Canada; and Stephen L. Saxl and Toby S. Soli, Greenberg Traurig, LLP, New York, NY, for Defendant-Appellee Deutsche Bank AG, on the brief) for Defendant-Appellee JP Morgan Chase & Co.

Author of Opinion: Judge Hall

Supervisor: Professor Elyse Diamond Moskowitz

    Posted By: Elyse Diamond @ 03/05/2013 01:38 PM     2nd Circuit  

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