Alaska Electrical Pension Fund v. Bank of America Corp.
Docket: 14-CV-7126 (JMF)
Court: District Court, S.D. New York; March 28, 2016; Federal District Court
Consolidated putative class actions allege a conspiracy among major banks to manipulate benchmark interest rates, specifically targeting the U.S. Dollar ISDAfix, which is essential for various financial derivatives. Defendants include fourteen leading banks and ICAP Capital Markets LLC, the former administrator of ISDAfix. Plaintiffs, consisting of institutional investors, claim that the defendants exploited their roles in the rate-setting process to manipulate ISDAfix for increased profits from interest rate swaps and swaptions. The plaintiffs assert antitrust violations under the Sherman Act and various state-law claims. Defendants moved to dismiss all claims under Rule 12(b) of the Federal Rules of Civil Procedure. A key issue is whether such manipulation constitutes 'antitrust injury,' a matter currently debated in the Second Circuit. The Court concludes that collusion in manipulating a benchmark rate can indeed result in antitrust injury. Consequently, the motion to dismiss the Sherman Act claim is denied, while the motion to dismiss state-law claims is partially granted and partially denied.
Key facts from the Amended Complaint and related documents indicate that derivatives are financial instruments whose value is tied to underlying assets, enabling market participants to manage risk, particularly in the interest rate derivatives market, the largest of its kind. The primary instrument is the interest rate swap, where two parties exchange interest payments—one paying a fixed rate and the other a variable rate linked to a benchmark like LIBOR. This mechanism allows those with floating-rate debt to hedge risks by receiving a variable payment in exchange for a fixed one.
Another related instrument is the swaption, which gives the buyer the right to enter into a swap agreement at a specified rate in the future, in exchange for a premium. Swaptions can be either physically or cash settled, with ISDAfix typically determining the cash settlement value. The profitability of the swaption for the buyer depends on whether the fixed rate is more favorable than the ISDAfix rate at the time of exercise. The accuracy of ISDAfix calculations is crucial, as even minor fluctuations can significantly impact the value of cash-settled swaptions.
The market for interest rate derivatives, particularly swaps, has expanded dramatically, with outstanding nominal amounts growing from approximately $2.3 trillion in 1990 to about $342 trillion by mid-2012, including $164 trillion in U.S. dollar swaps. As of July 2013, the value of outstanding swaptions was around $29.5 trillion. The Defendant Banks dominate this market, collectively holding over ninety percent of the interest rate derivatives reported by U.S. dealers during the relevant class period from January 1, 2006, to June 30, 2013.
The ISDAfix Benchmark Interest Rate is the primary benchmark for valuing cash-settled interest rate swaptions, representing the average fixed rate that market dealers would bid or offer for a swap against a specified floating LIBOR rate. Daily calculations of ISDAfix rates vary by tenor and currency. During the specified class period, ICAP compiled these rates by circulating reference points to Defendant Banks at 11:02 a.m., based on rates from completed inter-dealer trades and US Treasury security information from ICAP’s trading platform. Each Defendant Bank was requested to submit the midpoint of its bid and offer for swaps for specified maturities, with the option to accept, modify, or disregard the reference rate. Thomson Reuters compiled the final ISDAfix rates by discarding a predetermined number of the highest and lowest submitted values and averaging the remaining rates.
Plaintiffs allege that the Defendant Banks exploited their roles in the ISDAfix rate-setting process to manipulate daily benchmarks for financial gain, with ICAP facilitating this manipulation for brokerage commissions. Specific practices cited include agreeing to approve ICAP's reference rates contrary to submission rules, executing trades to artificially influence the reference rate—termed "banging the close"—and sharing information to coordinate trading strategies. When "banging the close" failed to achieve the desired rate, ICAP allegedly set the rate to a predetermined level, disregarding market conditions. This manipulation reportedly occurred on almost every trading day during the relevant period and ceased only when investigations into ISDAfix began in light of revelations regarding LIBOR manipulation. The Commodity Futures Trading Commission (CFTC) issued subpoenas in November 2012 and later found evidence of criminal behavior related to ISDAfix manipulation. Plaintiffs, comprising institutions that traded interest rate derivatives linked to ISDAfix, claim damages due to reduced profitability from their transactions. They assert antitrust violations under the Sherman Act and various state-law claims, including breach of contract and unjust enrichment.
Defendants' motion to dismiss is based on Rules 12(b)(1) and 12(b)(6). A Rule 12(b)(1) motion addresses the court's subject matter jurisdiction, which can lead to dismissal if the court lacks the authority to hear the case. In evaluating such motions, courts accept the facts in the complaint as true and must affirmatively demonstrate jurisdiction, which cannot rely solely on favorable inferences. Courts may also consider external materials but cannot depend on conclusory or hearsay evidence. The burden of proof for subject matter jurisdiction lies with the plaintiff.
Conversely, a Rule 12(b)(6) motion evaluates the legal sufficiency of the claims in the complaint. The court must accept the complaint's factual allegations as true but requires the plaintiff to present enough detail to establish a plausible claim for relief. A claim is considered plausible when it provides enough factual content allowing a reasonable inference of the defendant’s liability.
Defendants argue for dismissal on several grounds: (1) lack of standing under Article III, (2) insufficient allegations of conspiracy in antitrust claims and lack of antitrust standing, (3) failure of state-law claims as a matter of law, and (4) that several claims are time-barred. The court will first address the issue of constitutional standing, which is a threshold concern in federal cases, before considering the other arguments.
Plaintiffs have established constitutional standing under Article III, as they have shown a plausible injury-in-fact related to a conspiracy to manipulate ISDAfix rates. The requirement for injury-in-fact is low, and plaintiffs need not prove a valid cause of action at this stage. They allege that they engaged in transactions tied to ISDAfix and were economically harmed due to the manipulation, specifically asserting that they paid more or received less than they should have. The court emphasizes that potential benefits received by plaintiffs do not negate standing, as the focus is on whether the alleged manipulation caused any economic loss.
In terms of antitrust claims, plaintiffs primarily invoke Section One of the Sherman Act, which outlaws contracts or conspiracies that restrain trade. The Clayton Act allows for private actions with treble damages for those injured by antitrust violations. To survive a motion to dismiss, plaintiffs must define the relevant geographic market, demonstrate an antitrust injury, and show conduct violating antitrust laws. Defendants argue for dismissal based on an alleged failure to allege a conspiracy to restrain trade and claim that plaintiffs lack antitrust standing, with the court set to consider these arguments.
Section One of the Sherman Act specifically targets trade restraints caused by a "contract, combination, or conspiracy." To establish a claim, plaintiffs must assert that defendants engaged in an agreement—either tacit or express. Direct evidence of such a conspiracy is not necessary; circumstantial evidence is sufficient to support an inference of conspiracy, as proving an illegal conspiracy often relies on inferences drawn from the behavior of the alleged conspirators rather than concrete proof. A horizontal conspiracy can be inferred from "conscious parallelism" when accompanied by circumstantial evidence and "plus factors," which might include a shared motive to conspire, actions counter to individual self-interest, and significant interfirm communications. The identification of these factors is not exhaustive but serves as a guide for circumstances that could lead a jury to infer an agreement. Ultimately, the critical issue is whether the allegations of parallel conduct suggest a prior agreement rather than mere independent actions. The Court finds that the Amended Complaint adequately alleges the existence of a conspiracy among the defendants based on these standards and reasonable inferences drawn in favor of the plaintiffs.
The Amended Complaint presents extensive allegations of parallel conduct among the Defendant Banks, who reportedly maintained identical bid/ask spreads for nearly every day over several years and coordinated trades to manipulate market closings. It identifies several "plus factors" suggesting illegal agreement, including a common motive to conspire for profit maximization through manipulation of ISDAfix benchmark rates, supported by the assertion that unilateral control over ISDAfix would be risky and ineffective. The defendants argue that a conspiracy lacks economic logic unless their positions were consistently aligned; however, the Amended Complaint contends that the long-term profits from manipulation outweighed any short-term losses from divergent interests.
Additionally, it alleges that defendants acted against their economic self-interest by sharing sensitive information and violating ISDA rules, which exposed them to penalties. The complaint also notes ongoing government investigations into ISDAfix manipulation, suggesting that the existence of these investigations, combined with the parallel behavior, might lead a jury to infer an agreement. Furthermore, it highlights that evidence of criminal behavior has been uncovered, and that the defendants abruptly stopped their parallel conduct upon receiving subpoenas, reinforcing the inference of conspiracy.
Defendants present plausible non-collusive explanations for many allegations in the Amended Complaint; however, the court's role in a Rule 12(b)(6) motion is not to choose between plausible inferences but to determine if plaintiffs have provided sufficient facts to suggest discovery may uncover evidence of an illegal agreement. The court must evaluate all allegations collectively and draw reasonable inferences in favor of the plaintiffs, concluding that they have met this standard.
In addressing antitrust standing, defendants argue that the plaintiffs’ Sherman Act claim should be dismissed on the grounds of lacking ‘antitrust standing,’ which differs from Article III standing. To establish antitrust standing, plaintiffs must demonstrate (1) that they suffered a 'special kind of antitrust injury' and (2) that they are suitable plaintiffs to enforce antitrust laws, qualifying as 'efficient enforcers.' The injury must not only be causally linked to the alleged violation but also be the type intended to be prevented by antitrust laws, ensuring that the harm claimed aligns with the rationale for finding a violation. Congress did not intend for antitrust laws to provide remedies for all injuries linked to violations, limiting recovery to those directly harmed by unlawful acts.
Defendants argue that plaintiffs cannot prove antitrust injury since the ISDAfix setting process is cooperative rather than competitive. Citing LIBOR I, defendants claim that the manipulation of benchmark rates by banks does not constitute antitrust injury, as any harm arises from misrepresentation rather than competition harm. However, the court distinguishes this case from LIBOR I based on the allegation that defendants not only manipulated ISDAfix but also conspired to influence swap prices in the inter-dealer market. Unlike LIBOR, which was purely a cooperative rate-setting process, ISDAfix was influenced by actual market transactions, where the banks were expected to compete. The defendants assert that their actions, described as "banging the close," do not reduce competition since they allegedly increased transaction volume. The court rejects this argument, stating that coordinated actions in a competitive market intended to manipulate ISDAfix represent the very anti-competitive behavior that antitrust laws aim to prevent, notwithstanding that the defendants did not restrict supply.
The Court disagrees with the LIBOR I Court's conclusion that a 'cooperative endeavor' to manipulate prices protects competing entities from antitrust liability for harm caused by that manipulation. The Supreme Court has established that the methods used for price-fixing are irrelevant to antitrust laws, as seen in United States v. Socony-Vacuum Oil Co. Additionally, the Court warns against the potential for anti-competitive behavior in cooperative organizations, highlighting that such arrangements often lead to price-fixing. The Court has previously enforced antitrust laws against trade associations and rate bureaus for sharing pricing information, which can facilitate collusive pricing practices, as illustrated in Arizona v. Maricopa Cty. Med. Soc.
Private standard-setting by associations of firms with horizontal and vertical business relationships is allowed under antitrust laws only if it is impartial and yields pro-competitive benefits. Safeguards must exist to prevent bias from members with economic interests that could restrain competition. The collaboration of competing entities warrants increased scrutiny, not immunity from antitrust liability. The defendants’ assertion overlooks the essence of the plaintiffs’ antitrust claim, which argues that the defendants did not truly engage in a meaningful cooperative endeavor. While the Defendant Banks provided rate information to ICAP for calculating a benchmark, this benchmark was supposed to reflect a fully competitive market. The banks were required to submit their personal bid/offer spreads based on real transactions. Hence, their cooperation served merely as a mechanism for competition rather than legitimate collaboration. The plaintiffs assert that the defendants' cooperation exceeded permissible limits, constituting actual collusion to manipulate the rate, leading to supra-competitive profits at the plaintiffs' expense. They claim that this situation forced them to pay inflated prices due to a horizontal price-fixing conspiracy related to financial instruments in a competitive market, which constitutes a classic antitrust injury.
Collusion in setting benchmark rates, which influences pricing, has been recognized by this Court and the FX Court as resulting in antitrust injury. Numerous cases, including LIBOR I and others such as 7 West 57th Street Realty Co. v. Citigroup, Inc. and Laydon v. Mizuho Bank, have supported this view, confirming that such collusion can give rise to Sherman Act claims for affected purchasers. Historical precedents demonstrate that conspiracies to manipulate pricing benchmarks, like those for cheese and aluminum, have caused antitrust injuries to buyers. Moreover, the per se rule applies not only to explicit price-fixing but also to agreements that fix price elements. Contrary to defendants' assertions, the involvement of misrepresentations regarding the ISDAfix rate-setting process does not reclassify the plaintiffs’ injuries as tort rather than antitrust. Antitrust conspiracies typically involve misrepresentations, and the failure to disclose illegal conduct should not exempt wrongdoers from liability. The example of cheese makers conspiring to report fictitious prices illustrates that such actions clearly cause direct injury to affected parties, reinforcing the principle that anticompetitive conduct should not escape scrutiny simply because it was concealed through deceitful practices.
The Amended Complaint alleges that Plaintiffs, as purchasers of Defendants’ products, were compelled to pay excessively high prices due to Defendants' anticompetitive behavior, which is a recognized injury under antitrust laws. Establishing standing requires Plaintiffs to demonstrate they are "efficient enforcers" of these laws, a determination influenced by four factors: the directness of the injury, the existence of a motivated class of plaintiffs, the speculativeness of the injury, and the difficulty in identifying damages. Defendants contend that non-defendant banks participating in the inter-dealer market would be more efficient enforcers. However, the Court finds no evidence that these banks suffered financial injury from Defendants' actions, thus concluding they are not more efficient enforcers than the Plaintiffs. The Court supports its conclusion by noting that Plaintiffs have directly experienced harm with clear, non-speculative damages linked to specific transactions, which minimizes the risk of duplicative recovery. Consequently, Plaintiffs are deemed "efficient enforcers" with standing to pursue their Sherman Act claims. Additionally, Plaintiffs assert state-law claims—breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and tortious interference—against all Defendants except ICAP, with specific attention given to the claims against Nomura Securities.
Claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment against Nomura Securities International, Inc. are to be dismissed due to the plaintiffs' failure to establish any transaction or relationship with Nomura. The court emphasizes that a necessary element for all contractual and quasi-contractual claims is the existence of a relationship between the plaintiff and defendant. While privity isn't required for unjust enrichment, some relationship must still be alleged. Despite identifying nearly 2,000 transactions in their amended complaint, none involve Nomura. The plaintiffs failed to provide legal support or arguments to sustain their claims against Nomura despite this absence of a relationship. In class actions, Article III standing requires at least one named plaintiff to have a direct claim against each defendant, and the plaintiffs did not demonstrate such standing in this case. The court notes the lack of relevant case law in the Second Circuit supporting the "juridical link" doctrine to remedy the standing issue, as the Circuit has disavowed certain applications of this doctrine. Consequently, the court concludes that the plaintiffs' claims against Nomura must be dismissed. Furthermore, to prove breach of contract, a plaintiff must show an agreement, breach by the defendant, and damages. Defendants challenge all three elements of the plaintiffs' claim, arguing that the plaintiffs did not provide adequate information regarding the nearly 2,000 contracts listed, making it impossible to identify which contracts are the basis for their claims.
Defendants argue that the plaintiffs' breach-of-contract claims should be dismissed for lack of specificity, referencing cases where claims were dismissed due to ambiguity regarding the nature of alleged contracts. However, the Amended Complaint clarifies that the claims are based solely on contracts with Defendant Banks linked to USD ISDAfix, governed by ISDA Master Agreements, which required the Banks to act in good faith. These details provide sufficient information for Defendants to understand the claims against them.
Defendants also contend that the Amended Complaint fails to demonstrate a breach of contract or harm to the plaintiffs. In contrast, the plaintiffs allege that Defendants engaged in a conspiracy to artificially manipulate ISDAfix, violating antitrust laws and misrepresenting its nature as market-driven. This manipulation allegedly harmed the plaintiffs by making their swaptions and interest rate derivatives less profitable. The Amended Complaint asserts that while some plaintiffs may have benefitted on certain occasions, the overall manipulation favored the Banks, harming the plaintiffs.
Additionally, the plaintiffs claim a breach of the implied covenant of good faith and fair dealing, which can survive a motion to dismiss only if it is based on different allegations from the breach of contract claim and if the sought relief is not solely linked to damages from the breach.
Plaintiffs in Eisenhofer, P.A. v. Bernstein Liebhard LLP assert an implied-covenant claim similar to their breach-of-contract claim, rooted in ISDA Master Agreements that mandated the Defendant Banks to act in good faith. The Banks allegedly breached this duty by manipulating the ISDAfix rate used to calculate cash settlements. The court determined that an implied-covenant claim cannot serve as an alternative recovery theory when it is based on the same allegations as a breach-of-contract claim, leading to the dismissal of the implied-covenant claim.
Regarding the unjust enrichment claim, the court notes that while plaintiffs in Connecticut, Pennsylvania, and Michigan can plead unjust enrichment alongside breach of contract, New York law requires a bona fide dispute over the existence of an express contract for such alternative claims. The court refrains from deciding the choice of law issue since the parties did not address it, allowing the unjust enrichment claims to potentially survive under the more lenient laws of the plaintiffs' domiciles. The motion to dismiss this claim is denied without prejudice.
For the tortious interference claim, the court outlines the necessary elements, which include the defendants' knowledge of the contract, intentional and improper procurement of a breach, and damages caused by the defendants' actions.
Plaintiffs' tortious interference claim is dismissed due to their failure to plead actual intent to interfere with known contracts. Although Plaintiffs argue that impacting ISDAfix contracts was the Defendants’ primary focus, the Amended Complaint reveals that Defendants aimed to affect contracts of which they were parties, lacking specific intent to harm a known contractual relationship with others. Legal precedents from various jurisdictions emphasize the necessity for Plaintiffs to demonstrate that Defendants knew of the contract and intended to induce a breach, such as in RAN Corp. v. Hudesman (Alaska), Smith v. Brown (Connecticut), CMI Int’l, Inc. v. Intermet Int’l Corp. (Michigan), Ullmannglass v. Oneida, Ltd. (New York), and Walnut St. Assocs. Inc. v. Brokerage Concepts, Inc. (Pennsylvania).
Additionally, Defendants argue that many claims in Plaintiffs’ Amended Complaint are time-barred, referencing that the original complaint was filed on September 4, 2014. The Sherman Act claim has a four-year statute of limitations, while the breach-of-contract and unjust enrichment claims require an application of New York’s choice-of-law rules. Under these rules, for nonresident plaintiffs suing on causes of action that arose outside New York, the shorter limitations period from either New York or the state where the action accrued must be applied.
Breach-of-contract and unjust enrichment claims in New York are governed by a six-year statute of limitations, as per N.Y. C.P.L.R. 202 and 213(2). However, the statutes of limitations in the states where the Plaintiffs’ claims originated are shorter: three years in Alaska, four years in Pennsylvania and Connecticut, and six years in Michigan. The Court does not need to determine which statute applies at this stage because Plaintiffs have sufficiently alleged that Defendants engaged in fraudulent concealment of their conspiracy. In all relevant jurisdictions, the statute of limitations can be tolled if a plaintiff demonstrates that a defendant's fraudulent acts concealed misconduct and that the plaintiff's ignorance was not due to a lack of reasonable diligence.
Plaintiffs assert that the conspiracy was inherently secretive, necessitating concealment from the market. They claim Defendants made affirmative misrepresentations about ISDAfix, such as falsely portraying it as an accurate, market-based rate. Defendants argue that Plaintiffs did not exercise reasonable diligence in investigating their claims; however, the Court finds that requiring such a showing at the motion to dismiss stage is premature. Ultimately, Plaintiffs have plausibly alleged that the statute of limitations was tolled at least until September 4, 2011, which allows their remaining claims to survive Defendants’ motion to dismiss.
Plaintiffs assert that they were unaware of Defendants' alleged misconduct until after September 4, 2011, and that their inability to discover the conspiracy earlier was not due to a lack of diligence. The trends cited in the Amended Complaint are subtle and required analyzing large amounts of data. Notably, the Defendant Banks' submissions to ICAP were not publicly available, which supports Plaintiffs' claims. A 2010 article that raised suspicions about the ISDAfix rate-setting process does not suffice to demonstrate that Plaintiffs were negligent in investigating the issue, as it did not indicate that the Defendant Banks were making false submissions or colluding with ICAP. The article emphasizes the opacity of the rate-setting process, which requires significant resources to evaluate. Consequently, the court finds Plaintiffs have plausibly alleged fraudulent concealment by Defendants, allowing their claims to proceed regardless of the statute of limitations. The court partially grants and denies Defendants' motion to dismiss, dismissing Plaintiffs' tortious interference and breach-of-implied-faith claims entirely, as well as their breach-of-contract and unjust enrichment claims against Nomura. However, Plaintiffs' antitrust claims against all Defendants and certain remaining claims survive. Plaintiffs also request leave to amend their complaint again if any part of the motion to dismiss is granted, which the court may allow unless there are reasons such as undue delay or prejudice to the opposing party.
Leave to amend the complaint has been denied by the Court based on the determination that further amendment would be futile. The Court referenced precedents establishing that amendment may be denied if it would not rectify substantive issues in the claims presented. Specifically, the implied-covenant and tortious interference claims were deemed irreparable through better pleading, and the plaintiffs failed to demonstrate that they possessed facts to address the identified deficiencies in their contract claims against Nomura. The plaintiffs had previously amended their complaint without remedying these issues, and warnings had been given that no further opportunities for amendment would be provided. The denial of leave to amend was supported by the plaintiffs’ earlier attempts to address similar arguments raised in previous motions. Additionally, the Court noted that existing Supreme Court precedents regarding antitrust claims did not affect the outcome. The ruling emphasized that the cited cases pertained to competition among rivals and did not support the plaintiffs' claims of antitrust injury in this context. The Clerk of Court has been instructed to terminate the related docket entry. An appeal in the LIBOR I case is pending in the Second Circuit.
An argument was rejected stating that a defendant's potential lawful actions could negate the existence of an antitrust injury, even if the antitrust violation caused the actual injury. The court referenced Irvin Indus. Inc. v. Goodyear Aerospace Corp., affirming that potential lawful actions do not eliminate causation. Under New York choice-of-law rules, the applicable law may stem from New York, Alaska, Pennsylvania, Connecticut, or Michigan, but the parties agreed that choice-of-law issues need not be resolved at this stage since the outcome would remain unchanged under any jurisdiction's law, as established in Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin. Inc.
The court emphasized the necessity for plaintiffs to demonstrate "adequate performance," a point not contested in this case. It noted that all relevant state laws do not recognize breach of the implied covenant of good faith and fair dealing as a separate cause of action. While the covenant is acknowledged as a principle of contract construction, it is often misapplied as an independent claim that effectively reiterates breach of contract. Michigan law explicitly does not recognize this cause of action, and Pennsylvania courts similarly would not entertain such claims if they are based on identical allegations as breach of contract. In contrast, Alaska’s stance on this issue is ambiguous, but it seems to allow alternative claims for unjust enrichment alongside breach of contract, as illustrated in Reeves v. Alyeska Pipeline Serv. Co.
