The Increasing Application of Antitrust Claims to Securities Transactions
By Peter M. Saparoff, Robert G. Kidwell, Joel D. Rothman, and Kevin C. Mortimer – February 25, 2016
Plaintiff investors have recently filed a growing number of class action cases against financial institutions alleging violations of U.S. antitrust laws. Notable cases have been brought concerning alleged manipulation of London Interbank Offered Rates (LIBOR), the metals markets, the credit default swap market, the market for U.S. Treasuries, and the foreign currency exchange market. See Consolidated Amended Complaint, In re Libor-Based Fin. Instruments Antitrust Litig., No. 1:11-md-02262 (S.D.N.Y. Apr. 30, 2012); Amended Consolidated Class Action Complaint, In re London Silver Fixing, Ltd., Antitrust Litig., No. 1:14-md-02573-VEC (S.D.N.Y. Apr. 17, 2015); Second Consolidated Amended Class Action Complaint, In re Credit Default Swaps Antitrust Litig., Complaint, No. 1:2013-md-02476 (S.D.N.Y. Apr. 14, 2014); Second Consolidated Amended Class Action Complaint, In re Foreign Exch. Benchmark Rates Antitrust Litig., No. 1:13-cv-07789 (S.D.N.Y. July 31, 2015) [hereinafter Complaint, In re ForEx]. These complaints allege that financial institutions committed antitrust violations of the Sherman Act, 15 U.S.C. §§ 1–3, and illegally manipulated the market price of commodities in violation of the Commodity Exchange Act, 7 U.S.C. § 13b.
While the allegations in the antitrust cases generally involve the activity of financial institutions, rather than securities issuers, counsel involved in securities litigation should be aware of these cases because they may represent an expansion in investor class action litigation with the potential for high-value settlements and high-stakes litigation. For example, settlements to date in In re ForEx have totaled over $2.2 billion.
The Foreign Exchange Antitrust Litigation: A Case Study
The case involving the alleged manipulation of foreign currency exchange rates provides a good example of the types of allegations raised in these antitrust cases, as well as the interplay between private class action litigation and government enforcement of the antitrust laws.
The foreign currency exchange (FX) market is the largest and most actively traded financial market in the world. See Complaint ¶¶ 2, 77, In re ForEx. There are three types of FX instruments that account for 95 percent of the market’s transactions: spot trades, outright forwards, and FX swaps. These instruments are agreements to exchange sums of currency at an agreed-on exchange rate on a particular value date. WM/Reuters publishes benchmark rates and is the most widely used publisher.
When someone wishes to sell currency—for example, an investor who purchases securities listed on foreign markets—he or she contacts a dealer bank. The dealer provides the seller with the price it is willing to pay for the currency (the “bid”) and the price at which it is willing to sell the currency (the “ask”). The greater the difference between the bid and the ask, the greater the compensation for the dealer bank. This potential compensation could be an incentive for dealers to quote wider bid-ask spreads. But in a competitive market, competition among dealers counters this incentive. Thus, the plaintiffs allege that, rather than competing with one another, the financial institutions colluded to fix rates.
The plaintiffs in In re ForEx filed their complaint in 2013. The alleged conduct was the subject of several government investigations across the world. Investigating agencies of the United States included the Securities and Exchange Commission (SEC), the Federal Reserve, and the Department of Justice (DOJ) Criminal and Antitrust Divisions, which took “a leading role” in “the truly global investigation.” Id. ¶ 294. The UK Financial Conduct Authority also investigated.
Beginning in 2014, U.S. and UK regulators settled charges against several defendants, including many named as defendants in the private class action. The DOJ investigation, for example, claimed that traders partook in “Cartel” chatrooms to conspire “to gain unlawful profit by manipulating market participants.” Id. ¶ 302. The investigation resulted in guilty pleas from Citicorp, JPMorgan Chase & Co., Barclays PLC, and the Royal Bank of Scotland PLC. Fines totaled more than $2.5 billion after each pleaded guilty to conspiring to manipulate the price of and offers for the Euro/U.S. dollar currency pair exchanged in the FX market, thereby eliminating competition in currency transactions in violation of the Sherman Antitrust Act, 15 U.S.C. §1. Id. ¶ 298. UBS AG admitted to similar manipulation and pleaded guilty to breaching its 2012 Non-Prosecution Agreement, which resolved the LIBOR investigation, and paid a $230 million criminal penalty. The Federal Reserve joined the DOJ, imposing a $342 million fine on each of UBS AG, Barclays Bank PLC, Citigroup Inc., and JPMorgan Chase & Co.; a $274 million fine on the Royal Bank of Scotland PLC; and a $205 million fine on Bank of America Corporation. Cease-and-desist orders from the Federal Reserve also required the banks to improve policies and procedures for oversight of FX traders.
As is sometimes the case in private securities litigation, in the wake of the regulatory charges, the plaintiffs in In re ForEx filed an amended complaint. Like most cases alleging antitrust violations relating to the financial markets, the ForEx plaintiffs claimed that the defendants violated section 1 of the Sherman Act by entering into and engaging in “a conspiracy in unreasonable restraint of trade.” Complaint ¶ 401, In re ForEx (claiming also a violation of section 3 of the Sherman Act, which extends section 1 to U.S. territories and the District of Columbia). See Consolidated Amended Complaint ¶¶ 220–26, In re Libor-Based Fin. Instruments Antitrust Litig., No. 1:11-md-02262-NRB (S.D.N.Y. Apr. 30, 2012);Second Consolidated Amended Class Action Complaint ¶¶ 268–71, In re Credit Default Swaps Antitrust Litig., No. 1:14-md-02573-VEC (S.D.N.Y. Apr. 11, 2014); Amended Consolidated Class Action Complaint ¶¶ 206–10, In re Commodity Exch., Inc. Silver Futures & Options Trading Litig., No. 1:11-md-02213-RPP (S.D.N.Y. Jan. 22, 2013).
The plaintiffs based their antitrust claims on the defendants’ alleged collusion, which resulted in imposition of overcharges on FX customers “by artificially increasing the cost of buying currency and artificially decreasing the price received by currency sellers.” The plaintiffs also claimed that the defendants violated the Commodity Exchange Act, which makes it unlawful for “[a]ny person to . . . attempt to manipulate the price of any commodity in interstate commerce. . . .” The plaintiffs alleged that the defendants’ traders used chat rooms, instant messaging, and email in sharing confidential customer information and conspiring to predict and manipulate the market. Complaint ¶¶ 121, 123, In re ForEx. The manipulation allegedly materialized in concerted trading strategies designed to control market movements, thereby eliminating the dealers’ risk at the expense of customers. In this fashion, according to the allegations, the defendant-dealers eliminated competition among dealers by manipulating the rates published by WM/Reuters.
The proposed class was alleged to include all persons who, from January 1, 2003, to December 31, 2013, entered into FX spot transactions, outright forwards, and FX swaps (collectively referred to as FX instruments) “directly with a Defendant, where such persons were either domiciled in the United States . . . , or, if domiciled outside the United States . . . , transacted one or more FX instruments in the United States. . . .” Id. ¶ 67. In early 2015, the plaintiffs reached settlements with two defendants: JPMorgan, for $99.5 million, and UBS, for $135 million. On December 15, 2015, the court preliminarily approved another settlement of $2,009,075,000 with several, but not all, of the remaining defendants.
The Different Methodology for Proving Antitrust Injury and Damages
The usual methodologies for proving damages in an antitrust case differ from those used in typical securities litigation. Proving the existence and measure of damages in antitrust class actions is typically a more complex exercise than comparing pre- and post-event market prices in securities cases. And the outcome of that exercise—alleged damages—is subject to trebling if the plaintiff succeeds on its claims. Moreover, in an antitrust conspiracy case, each defendant may be held jointly and severally liable for all damages.
At the outset, the nature of the alleged securities violation will differ in an antitrust case. The question of liability will hinge on a conceptual analysis of factors such as market structure, pricing, customer behavior, or (in a case that involves a conspiracy, such as In re ForEx) direct or indirect evidence of collusion among defendants—and not on whether a particular material misstatement occurred. In a typical multi-defendant antitrust case such as In re ForEx, demonstrating common impact is extraordinarily complex in comparison with securities cases, in which there is typically only one “product” at issue (the relevant security), it is sold by one “seller” (the issuer), and the parties do not typically deny that the product is or should be the subject of the case (or that it even exists). In an antitrust class action, the “battle of the experts” will focus in large part on these very basic types of issues: What are the “products” that have been affected? Were the prices set by different sellers (in In re ForEx, the dealer banks) uniformly inflated by the alleged anticompetitive activity? Were different products affected differently?
In addition, the outcome of the liability analysis in an antitrust case can differ from class member to class member, unlike in a securities case, in which the alleged share-price decline is, by definition, the same for all class members who purchased shares during the relevant period. For example, small buyers may be affected to a greater or lesser extent than large buyers, and buyers who purchase under long-term contracts may be affected differently or not at all.
Because heterogeneity among class members (in terms of size, types of purchases, prices paid, and other similar factors) is the norm in antitrust cases, antitrust class plaintiffs attempt to construct a theory of aggregate damages across the class period that is provable by common evidence on a class-wide basis. See Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433 (2013); Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2550 (2011). Plaintiffs’ economic experts will attempt to construct a theory or model that can purportedly connect the alleged antitrust violation to a uniform or consistent impact on all or substantially all members of the proposed class. The goal, therefore, of a plaintiff’s expert is to identify a theory or methodology that unifies or “smooths over” the various differences in products, prices, transactions, defendants, and plaintiffs. See, e.g.,Hal J. Singer, “Economic Evidence of Common Impact for Class Certification in Antitrust Case: a Two-Step Analysis,” 25 Antitrust 34 (Summer 2011). This exercise, by its nature, mixes liability issues with damages issues, and it requires some degree of forecasting, if not outright speculation. The fact that there is rarely an agreed-on record of the relevant prices over time, such as a historical stock price chart, only further complicates matters. A very real danger exists, therefore, that the plaintiff’s methodology for proving damages may be classified as an improper “trial by formula.” Dukes, 131 S. Ct. at 2546.
Only after this complex “smoothing” analysis has been performed can a plaintiff’s expert articulate damages. Damages will typically be identified as the difference between the price actually charged and an alleged “but-for” price that would have existed absent the anticompetitive conduct. While in theory this stage of the analysis appears similar to an event study performed in a securities case, the complexity underlying it renders it a different beast.
The Different Statute of Limitations and Tolling in Antitrust Cases
Section 4B of the Clayton Act, 15 U.S.C. § 15b, establishes a four-year statute of limitations for private antitrust actions. This limitations period has the potential to be either shorter or longer than the limitations period for a securities suit under 28 U.S.C. § 1658(b), which sets the period at the earlier of two years after discovery of the facts constituting the violation or five years after the violation.
The limitations period in an antitrust case begins to run at the time that a plaintiff suffers an antitrust injury—for example, on the date that a purchaser pays a price inflated by an unlawful conspiracy. See, e.g., Zenith Radio Corp. v. Hazeltine Research, 401 U.S. 321, 338 (1971) (“Generally, a cause of action accrues and the statute begins to run when a defendant commits an act that injures a plaintiff’s business.”). In the context of an ongoing conspiracy, a new cause of action accrues each time the plaintiff is injured by the anticompetitive act or acts—for example, each time that a plaintiff engages in an additional transaction and pays an inflated price.
The statute of limitations is tolled in antitrust actions during periods of fraudulent concealment or periods in which the plaintiff’s damages are only speculative. See, e.g., Concord Boat Co. v. Brunswick Corp., 207 F.3d 1039, 1051 (8th Cir. 2000) (citing Zenith Radio Corp., 401 U.S. at 339–40 (discussing tolling during periods of fraudulent concealment or speculative damages)). It may also be tolled during periods when the government has filed suit against the defendants for the same acts (see 15 U.S.C. § 16(i)) and when a class action suit is pending against the same defendants for the same conduct. See, e.g., In re Processed Egg Prods. Antitrust Litig., No. 2002 08-md-2002 (E.D. Pa. 2013) (discussing tolling of statute of limitations during pendency of class action).
Notably, unlike securities law claims, antitrust claims are not subject to a statute of repose. See Securities Act of 1933 § 13, 15 U.S.C § 77m (2012) (stating that “[i]n no event shall any such action be brought” more than three years after the offering or sale of the securities in question); 28 U.S.C. § 1658(b) (providing that claims under Securities Exchange Act of 1934 must be brought not later than “5 years after such violation”). Thus, because the limitations period is tolled with the commencement of the class action, putative antitrust class members, should they choose to opt-out of the class, need not worry about the expiration of any repose period affecting their claims. Cf. Pub. Emps.’ Ret. Sys. v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013) (holding that filing of a class action does not toll statute of repose contained in section 13 of the Securities Act of 1933).
With antitrust allegations trending upward in investor class action litigation, counsel involved in securities litigation should closely monitor global government antitrust investigations and the potentially massive penalties and settlements that may accompany these regulatory actions, as well as the private litigation that relates to such actions. Counsel should also take note of the fundamental differences between antitrust and traditional securities litigation, such as differing standards and analysis of liability, methodologies for calculating and proving damages, and statutes of limitations and repose.
Keywords: litigation, securities, antitrust, class action
Peter M. Saparoff is a member, Joel D. Rothman is an associate, and Kevin C. Mortimer is an associate with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in the firm's Boston, Massachusetts office. Robert G. Kidwell is a member in the firm's Washington, D.C., office.