Antitrust Law Daily Claims go forward against investment banks accused of boycotting stock loan trading platforms
Friday, September 28, 2018

Claims go forward against investment banks accused of boycotting stock loan trading platforms

By Nicole D. Prysby, J.D.

The federal district court in New York City has refused to dismiss antitrust claims brought by borrowers and lenders in stock lending transactions against major investment banks alleged to have boycotted new trading platforms to protect their control over the stock loan market. Public employee retirement systems and others filed suit accusing the banks of conspiring to protect their control over the lucrative and antiquated stock loan market. The court rejected the defendants’ argument that the plaintiffs’ complaint was facially implausible and held that the complaint adequately alleged parallel conduct and an unreasonable restraint on trade under either the per se or rule of reason theory. The court also rejected standing and statute of limitations arguments from the defendants. The plaintiffs had standing as direct purchasers and consumers, and they plausibly alleged that the new platforms would have provided benefits leading to lower prices, had the conspiracy not occurred. The claims also were not time-barred, because the plaintiffs adequately alleged fraudulent concealment (Iowa Public Employees' Retirement System v. Merrill Lynch, Pierce, Fenner & Smith Inc., September 27, 2018, Failla, K.).

Background. According to the plaintiffs, the stock loan market remains an inefficient, antiquated, and opaque over-the-counter (OTC) trading market that is dominated by large dealer banks, principally the Prime Broker Defendants. These banks structured the market in such a way that they take a large cut of nearly every stock loan trade that is made. The stock loan market could have evolved into a market in which stock borrowers and lenders could execute stock loan trades on electronic platforms at lower costs and with better returns, it was alleged. But the Prime Broker Defendants conspired to keep stock loan trading frozen in the OTC market in order to preserve their privileged position as intermediaries on every trade, according to the plaintiffs. The Prime Broker Defendants preserved this antiquated system by taking collective action to boycott new trading platforms, which sought to enter the market and which threatened to increase transparency and competition.

Perceiving a threat from new trading platforms, the Prime Broker Defendants allegedly organized themselves into a working cartel. In 2001, several of them formed a company called EquiLend and made it clear to market participants that all new entrants into the market would need to go through EquiLend. They allegedly subsequently conspired and took concerted action to boycott and block new trading platforms from access to the stock loan market. The plaintiffs brought boycott claims against the Prime Broker Defendants and against EquiLend. The defendants moved to dismiss all claims.

Boycott claims. The defendants offered a number of reasons as to why the plaintiffs failed to allege concerted action between at least two legally distinct economic entities. The court rejected all of them. The complaint was facially plausible, despite the extended timeline for the alleged conspiracy and the fact that it only involved six brokers out of a much larger market. The six Prime Broker Defendants allegedly controlled between 76 and 80 percent of the market share in the stock loan market. With that market share, it was plausible that they could carry out an effective group boycott. The court also found that the infrastructure existed for new trading platforms and it was the Prime Brokers’ conduct, not the lack of alternative platforms that caused the new platforms to fail.

The court held that the plaintiffs had not relied on impermissible group pleading. The complaint did allege the participation of each defendant separately and it was acceptable to refer to the defendants collectively in some allegations. The complaint also adequately alleged direct evidence of a conspiracy, including the time, place, speaker, and content of statements made that the defendants needed to work together to shut down the new platforms. However, at some allegations were too vague to be considered direct evidence (e.g., a statement not to "break rank").

The plaintiffs adequately alleged parallel conduct to plead circumstantial evidence of a conspiracy. While not every action taken by the defendants demonstrated parallel conduct, a few divergent actions did not negate the allegations of other, parallel conduct. And the allegations included "plus factors" supporting an inference that the parallel conduct flowed from a preceding agreement rather than the defendants’ own business priorities. The allegations included multiple interfirm meetings, a common motive to preserve their supracompetitive profits, and lack of support for new market entrants. However, the plaintiffs also alleged that the defendants had colluded in other markets and the court found those allegations to be irrelevant. Allegations against some of the defendants did have weaknesses. For example, Bank of America pointed out that it was an early investor in one of the new platforms. But its presence on the EquiLend board and other parallel conduct was sufficient at this stage.

The court also found that the plaintiffs adequately alleged an unreasonable restraint on trade under either the per se or rule of reason theory. Even if EquiLend was a lawful joint venture, the alleged conduct took place outside of that joint venture; the EquiLend’s joint venture status was an alleged smokescreen behind which the Prime Broker Defendants could operate.

The claims would also survive under a rule of reason analysis because the complaint alleged that the defendants purchased intellectual property from the companies who developed the new trading platforms for anticompetitive purposes, as evidenced by the underuse of the products after purchase. It also alleged that the Prime Broker Defendants took actions outside the scope of their joint ventures, meaning it was their market power (not EquiLend’s) that was relevant.

The court also rejected a supplemental motion to dismiss from EquiLend. Although some of its actions may have been taken in furtherance of its legitimate business objectives, the complaint alleged that it took other actions against its self-interest and at the direction of the Prime Broker defendants.

Standing and statute of limitations issues. The court concluded that the plaintiffs had standing to bring the Sherman Act claims, because of their allegations that the lack of a central marketplace for stock loan transactions created bottlenecks, wasted resources, and caused volatile, opaque, and artificially-inflated prices. These harms, alleged the plaintiffs, could have been avoided through centralized electronic trading for stock loan transactions. The alternative platforms would have would have provided price transparency to the stock loan market and would have made more lender stocks visible to potential borrowers. And while the alternative platforms could have brought the claims, the plaintiffs had standing as direct purchasers and consumers, and they plausibly alleged that the new platforms were met with market demand, and would have provided benefits leading to lower prices, had the conspiracy not occurred.

The claims also were not time-barred, because the plaintiffs adequately alleged fraudulent concealment. They alleged that the conspiracy was inherently self-concealing, because the alleged conspiracy required numerous participants, was designed to endure, and depended on concealment for its success. Because the plaintiffs plausibly alleged a self-concealing conspiracy, they did not need to allege concealment, although the complaint did plead affirmative acts of concealment such as use of secret meetings and code words. Some of those allegations were insufficient for lack of detail but the court held that the allegations around the defendants’ use of the code phrase "Project Gateway" were sufficient to allege at least one affirmative act of concealment. The plaintiffs did not have notice of the conspiracy and their allegations that they were monitoring their investments and market news were sufficient to show reasonable diligence.

The case is No. 1:17-cv-06221-KPF.

Attorneys: Christopher James Bateman (Cohen Milstein Sellers & Toll PLLC) for Iowa Public Employees' Retirement System, Orange County Employees Retirement System and Sonoma County Employees' Retirement Association. Adam Selim Hakki (Shearman & Sterling LLP) for Merrill Lynch, Pierce, Fenner & Smith Inc. David George Januszewski (Cahill Gordon & Reindel LLP) for Credit Suisse AG. Robert Y. Sperling (Winston & Strawn LLP) for Goldman Sachs & Co. LLC. Henry Liu (Covington & Burling, LLP) for J.P. Morgan Securities LLC.

Companies: Iowa Public Employees' Retirement System; Merrill Lynch, Pierce, Fenner & Smith Inc.

MainStory: TopStory Antitrust NewYorkNews

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