Mayor & City Council of Balt. v. Citigroup, Inc.

• Decision Date: 05 March 2013
• Docket Number: Docket Nos. 10–0722–cv(L), 10–0867–cv(CON).
• Citation: 709 F.3d 129
• Court: U.S. Court of Appeals — Second Circuit
• Parties: MAYOR AND CITY COUNCIL OF BALTIMORE, MARYLAND, On Behalf of Themselves and All Others Similarly Situated, Russell Mayfield, Individually and on Behalf of Himself and of all Others Similarly Situated, Paul Walton, Individually and on Behalf of Himself and all Others Similarly Situated, John Abbott, Individually and on Behalf of Himself and all others Similarly Situated, Plaintiffs–Appellants, v. CITIGROUP, INC., Citigroup Global Markets, Inc., UBS AG, UBS Securities LLC, UBS Financial Services, Inc., Merrill Lynch & Company, Inc., Morgan Stanley, Lehman Brothers Holdings, Inc., Bank of America Corporation, Wachovia Corporation, Wachovia Securities, LLC, Wachovia Capital Markets, LLC, The Goldman Sachs Group, Inc., JP Morgan Chase & Company, Royal Bank of Canada, Deutsche Bank, AG, Defendants–Appellees.

709 F.3d 129

MAYOR AND CITY COUNCIL OF BALTIMORE, MARYLAND, On Behalf of Themselves and All Others Similarly Situated, Russell Mayfield, Individually and on Behalf of Himself and of all Others Similarly Situated, Paul Walton, Individually and on Behalf of Himself and all Others Similarly Situated, John Abbott, Individually and on Behalf of Himself and all others Similarly Situated, Plaintiffs–Appellants,

v.CITIGROUP, INC., Citigroup Global Markets, Inc., UBS AG, UBS Securities LLC, UBS Financial Services, Inc., Merrill Lynch & Company, Inc., Morgan Stanley, Lehman Brothers Holdings, Inc., Bank of America Corporation, Wachovia Corporation, Wachovia Securities, LLC, Wachovia Capital Markets, LLC, The Goldman Sachs Group, Inc., JP Morgan Chase & Company, Royal Bank of Canada, Deutsche Bank, AG, Defendants–Appellees. ^*

Docket Nos. 10–0722–cv(L), 10–0867–cv(CON).

United States Court of Appeals,

Second Circuit.

Argued: April 13, 2011.

Decided: March 5, 2013.

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 Baltimore, MD, 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, N.Y. (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 Defendant–Appellee 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.

Before: LEVAL, KATZMANN, and HALL, Circuit Judges.

HALL, Circuit Judge:

This case is one of many arising out of the collapse of the market for auction rate securities in early 2008. Plaintiffs in this consolidated action seek relief on behalf of two large putative classes—one whose members bought auction rate securities and one whose members issued them. Defendants, who rank among the world's largest and best-known financial institutions, are alleged to have triggered the market's collapse by conspiring with each other to simultaneously stop buying auction rate securities for their own proprietary accounts. According to Plaintiffs, the effect of this agreement was a “boycott” or “refusal to deal” in violation Section 1 of the Sherman Act, 15 U.S.C. § 1 (2006). The United States District Court for the Southern District of New York (Jones, J.) held that the conduct alleged by Plaintiffs was impliedly immunized from antitrust scrutiny by the securities laws and dismissed Plaintiffs' complaints pursuant to Federal Rule of Civil Procedure 12(b)(6). Mayor of Balt. v. Citigroup, Inc., No: 08–cv.–7746–47 (BSJ), 2010 WL 430771, 2010 U.S. Dist. LEXIS 13193 (S.D.N.Y. Jan. 26, 2010). Plaintiffs appeal.

Construed liberally and with all factual assertions accepted as true, Plaintiffs' complaints do not successfully allege a violation of Section 1 of the Sherman Act. Although we do not reach the district court's implied-repeal analysis under Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264, 127 S.Ct. 2383, 168 L.Ed.2d 145 (2007), the court was ultimately correct that the complaints fail to state a claim upon which relief can be granted. The judgment of the district court is therefore AFFIRMED.

Background

Auction rate securities (“ARS”) were ¹ usually long-term bonds with flexible interest rates that reset periodically through “Dutch” auctions. ² Popular among investors because of their perceived cash-like liquidity and relatively high rates of return, ARS were issued in increasing numbers throughout the 1990s and 2000s. By February 2008, there was an estimated $330 billion (par value) in unmatured ARS outstanding.

Unlike traditional stocks and bonds, which can be sold for cash at any time on one of numerous exchanges, ARS were typically traded at dedicated auctions. During the time they were viable, these auctions were held regularly pursuant to a given issuance's offering documents, usually every seven, twenty-eight, or thirty-five days. The ARS would be auctioned for par value, but their interest rates would reset depending on demand at the auction. The process worked roughly as follows. Investors would submit one of four types of orders. Those who wanted to buy ARS would make a “bid” order, stating how many securities they would like to buy and at what minimum interest rate. Generally, no bids of less than $25,000 were allowed. Those who already owned ARS could submit a “sell” order, instructing that their shares be sold regardless of the level at which the interest rate would reset; they could enter a “hold” order (the default order) and keep their shares; or they could make a “hold-at-rate” order, directing that their shares be sold only if the ARS would otherwise reset below a certain interest rate—a sign of high demand. The auction manager, usually the same broker-dealer that had originally underwritten a particular offering, would start filling orders from the bid with the lowest minimum interest rate and work up, bringing more and more bids into play. Eventually, assuming demand for the ARS exceeded supply, every sell order would be filled and the auction would “clear.” The interest rates of all ARS subject to that auction would then reset to that rate at which the last order was filled, known as the “clearingrate.” Obviously, the higher the demand at a particular auction, the more the ARS interest rate would be pushed down.

ARS, however, had a problem—a strong secondary market for ARS apparently never developed. Without auctions, ARS were relatively illiquid assets which usually could not be sold for par value. Auctions would clear only if demand for ARS (the bid orders and applicable hold-at-rate orders) matched or exceeded the supply of ARS being sold. If, at a given auction, more people wanted to sell an auction rate security than wanted to buy it, the auction was said to have “failed.” Following an auction failure, no ARS would change hands, and would-be sellers were forced to retain ownership of their securities. At the same time, an auction failure automatically triggered a rate default and the interest rate would rise to a “penalty” or “maximum” rate set out in the ARS offering documents.

For many years, the auction process appeared to work smoothly, rarely resulting in failure. ARS earned a reputation as safe liquid instruments and as an attractive alternative to normally low-risk, low-return money market funds.

The market, however, was less stable than it seemed. In 2006, the SEC issued a cease-and-desist order to fifteen broker-dealers, finding that some of them had, without properly disclosing their activities, intervened in the auction process to prevent auction failures and set clearing rates. In re Bear, Stearns & Co. Inc., Securities Act Release No. 8684, Exchange Act Release No. 53888, 88 SEC Docket 259 (May 31, 2006). As the auctions' managers, these broker-dealers could learn ahead of time if failure was imminent. Id. They then used proprietary trading accounts to place “support bids,” thereby absorbing the auctions' excess supply into their own inventory and preventing auction failure. Id. The respondents in the SEC's administrative proceeding—some of whom are defendants in this action—agreed to pay civil fines to the Commission and to disclose to their customers their “material auction practices and procedures.” Id. They did not agree (nor were they ordered) to stop placing support bids in auctions that they managed.

These support bids appear to have become increasingly important to the auctions' success as financial market conditions deteriorated throughout 2007 and early 2008. Some ARS offerings directly financed subprime mortgage lending and many others were insured by entities that were linked to such lending. As the housing market slipped into crisis, investors sought to extricate themselves from related positions. Yet, with the exception of a few isolated failures in late 2007, the auctions continued to clear as normal.

All of this changed when many of the auctions held on February 12, 2008, failed. The next day, 87 percent of scheduled auctions failed. By Valentine's Day, the ARS market had essentially ceased functioning, and has never recovered.

In September 2008, Plaintiffs filed two nearly identical class-action complaints, asserting...