Alaska Elec. Pension Fund v. Bank of Am. Corp.

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Citation175 F.Supp.3d 44
Docket Number14-CV-7126 (JMF)
Parties Alaska Electrical Pension Fund, et al., Plaintiffs, v. Bank of America Corporation, et al., Defendants.
Decision Date28 March 2016

175 F.Supp.3d 44

Alaska Electrical Pension Fund, et al., Plaintiffs,
v.
Bank of America Corporation, et al., Defendants.

14-CV-7126 (JMF)

United States District Court, S.D. New York.

Signed March 28, 2016


175 F.Supp.3d 48

Christopher M. Burke, Sylvia Sokol, Thomas Kay Boardman, Scott Scott, L.L.P. (NYC), Daniel Lawrence Brockett, Daniel Paul Cunningham, Steig Olson, Marc Laurence Greenwald, Quinn Emanuel Urquhart & Sullivan LLP, Ronald Judah Aranoff, Stanley D. Bernstein, Bernstein Liebhard, LLP, Charles Thomas Caliendo, Peter Anthony Barile, III, Grant & Eisenhofer P.A., Hugh Daniel Sandler, Crowell & Moring LLP (NYC), New York, NY, David W. Mitchell, Brian O. O'Mara, Patrick Joseph Coughlin, Robbins Geller Rudman & Dowd LLP, Christopher M. Burke, Scott Scott, LLP, San Diego, CA, Jeremy Daniel Andersen, Quinn, Emanuel, Urquhart, Oliver & Hedges, LLP, Randi Dawn Bandman, Robbins Geller Rudman & Dowd LLP, Los Angeles, CA, Stuart Halkett McCluer, McCulley McCluer PLLC, Oxford, MS, Michael Dell'Angelo, Berger & Montague, P.C., Philadelphia, PA, R. Bryant McCulley, McCulley McCluer PLLC, Sullivans Island, SC, Robert Gerard Eisler, Grant & Eisenhofer, PA, Wilmington, DE, for Plaintiffs.

Adam Selim Hakki, Richard Franklin Schwed, Joseph John Frank, Brian Howard Polovoy, Etienne Barg-Townsend, Shearman & Sterling LLP, Alexander John Willscher, Benjamin Robert Walker, David Harold Braff, Jeffrey T. Scott, Matthew Joseph Porpora, Matthew Alexander Schwartz, Sullivan & Cromwell, LLP (NYC), Andrew Zenner Michaelson, Jonathan David Schiller, Boies, Schiller & Flexner, LLP (NYC), Alejandro Hari Cruz, Deirdre Ann McEvoy, Joshua Aaron Goldberg, Amy Neda Vegari, William Francis Cavanaugh, Jr., Patterson, Belknap, Webb & Tyler LLP, Andrew Arthur Ruffino, Covington & Burling LLP (NYC), James L. Brochin, Moses Silverman, Aaron Sean Delaney, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Edwin R. DeYoung, Andrew L. Fish, Gregory Thomas Casamento, Locke Lord Bissell & Liddell LLP (NYC), Jay B. Kasner, Paul Madison Eckles, Shepard Goldfein, Thomas McAuley Leineweber,

175 F.Supp.3d 49

Skadden, Arps, Slate, Meagher & Flom LLP (NYC), Peter Sullivan, Jefferson Eliot Bell, Lawrence Jay Zweifach, Gibson, Dunn & Crutcher, LLP, Arthur J. Burke, Davis Polk & Wardwell, Eric Jonathan Seiler, Andrew W. Goldwater, Andrew Christopher Kostic, Anne Elizabeth Beaumont, Friedman, Kaplan, Seiler & Adelman, LLP, David George Januszewski, Herbert Scott Washer, Landis C. Best, Cahill Gordon & Reindel LLP, Elizabeth Vicens, Thomas J. Moloney, Cleary Gottlieb, Brian S. Fraser, H. Rowan Gaither, IV, Shari A. Brandt, Richards Kibbe & Orbe LLP (NYC), New York, NY, Alan M. Wiseman, Andrew D. Lazerow, Covington & Burling, L.L.P., Anthony R. Van Vuren, Jon Randall Roellke, Morgan, Lewis & Bockius, George S. Cary, Leah Brannon, Cleary Gottlieb Steen & Hamilton LLP, Washington, DC, Roger Brian Cowie, Locke, Liddell & Sapp, L.L.P., Dallas, TX, Joel Steven Sanders, Gibson, Dunn & Crutcher, LLP, San Francisco, CA, James Matthew Goodin, Julia C. Webb, Locke Lord LLP, Chicago, IL, for Defendants.

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge:

These consolidated putative class actions are the latest in a series of cases in recent years to allege a longstanding conspiracy by some of the world's largest banks to manipulate a benchmark interest rate. In the other cases, plaintiffs allege efforts to fix the London InterBank Offered Rate (“LIBOR”), see, e.g., In re LIBOR Based Fin. Instr. Antitrust Litig. , 935 F.Supp.2d 666 (S.D.N.Y.2013) (“LIBOR I ”), and the leading benchmark interest rate for the foreign exchange market, see In re Foreign Ex. Benchmark Rates Antitrust Litig. , 74 F.Supp.3d 581 (S.D.N.Y.2015) (“FX ”). In these cases, Plaintiffs allege a scheme to manipulate U.S. Dollar ISDAfix (“ISDAfix”), which is a benchmark interest rate incorporated into a broad range of financial derivatives. Defendants are (1) fourteen banks that dominate the market for interest rate derivatives and set ISDAfix (collectively, “the Banks” or “Defendant Banks”); and (2) ICAP Capital Markets LLC (“ICAP”), an inter-dealer broker that served as the administrator in charge of setting the ISDAfix rates until January 26, 2014. Plaintiffs, several institutional investors, allege that Defendants abused their respective roles in the rate-setting process to manipulate ISDAfix in order to extract higher profits from outstanding interest rate swaps and “swaptions” (essentially, options on interest rate swaps). Plaintiffs' Amended Complaint raises an antitrust claim under the Sherman Act as well as various state-law claims.

Defendants now move, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, to dismiss all of Plaintiffs' claims. Defendants' motion raises several questions, one of which—whether manipulation of a benchmark interest rate by defendants who are supposed to cooperate (albeit at arms' length) in setting that rate causes “antitrust injury” to those harmed by investments tied to the benchmark—has divided courts in this District and is currently under consideration by the Second Circuit. For the reasons stated below, the Court holds that such collusion in manipulating a benchmark rate that is then incorporated into the price of financial instruments can indeed result in antitrust injury. For that reason and others discussed below, Defendants' motion to dismiss Plaintiffs' Sherman Act claim is DENIED; their motion to dismiss Plaintiffs' state-law claims is GRANTED in part and DENIED in part.

BACKGROUND

The following facts—taken from the Amended Complaint, documents referenced

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therein, and matters of which the Court can take judicial notice—are assumed to be true for purposes of this motion and viewed in the light most favorable to Plaintiffs as the non-moving parties. See, e.g., Kleinman v. Elan Corp. , 706 F.3d 145, 152 (2d Cir.2013) ; Chambers v. Time Warner, Inc. , 282 F.3d 147, 153 (2d Cir.2002).

A. Interest Rate Derivatives

Derivatives are financial instruments, “the value of which depends on the value of another underlying asset.” (Consolidated Am. Class Action Compl. (Docket No. 164) (“AC”) ¶ 47). Derivatives “permit market participants to manage and transfer risk by allowing parties to separate out and trade individual risk components, such as interest rate risk.” (Id. ). The largest derivatives market is the interest rate derivatives market; the most common type of interest rate derivative is the interest rate “swap.” (Id. ¶ 48). An interest rate swap is an agreement between two counterparties to exchange interest rate payments on an agreed notional amount over a set period of time. (Id. ). “Typically, one party will pay based on a 'fixed' interest rate on the notional amount that does not vary from one payment to the next, while the other party will pay based on a variable 'floating' interest rate that is tied to an independent benchmark such as LIBOR.” (Id. ). Such a “fixed-for-floating rate swap allows parties with floating rate debt to hedge their interest rate exposure by receiving a variable rate on the notional amount in exchange for paying a fixed rate on that same notional amount.” (Id. ¶ 49).

Another (related) interest rate derivative instrument is a “swaption,” which is a contract pursuant to which a buyer pays a seller a premium for the option to enter into an interest rate swap at a specified rate on some set future date. (Id. ¶¶ 55-56). When entering a swaption, “the parties may choose whether the swaption is to be physically settled ,” which means the parties actually enter into the swap if exercised, “or cash settled ,” which means the seller pays the buyer the value of the swap on the exercise date. (Id. ¶¶ 56-57). In most cases, ISDAfix is used to determine the settlement value of a cash-settled swaption on its exercise date. (Id. ¶¶ 58-59, 61). If the fixed rate specified in the swaption is more favorable than the ISDAfix rate, the option is “in the money,” meaning the swaption has value and the buyer can claim a cash payment from the seller. (Id. ¶¶ 57, 61). If the ISDAfix rate is less favorable than the fixed swaption rate, the option is “out of the money” and will simply expire without being exercised. (Id. ). In that instance, the seller of the swaption profits by retaining the premium paid up front when the buyer purchased the swaption. (See id. ¶¶ 55, 57). “[A]ccurate calculation and reporting of the ISDAfix rate is critical to the fair settlement of swaptions, and even the smallest movement of ISDAfix can drastically affect the value of a cash-settled swaption.” (Id. ¶ 61).

Over the past thirty years, the market for interest rate derivatives in general (and interest rate swaps in particular) has grown dramatically. (Id. ¶ 51). According sources cited in the Amended Complaint, the collective nominal amounts on outstanding interest rate swaps has grown from about $2.3 trillion in 1990 to about $342 trillion as of June 2012, including $164 trillion of U.S. dollar swaps alone. (Id. ). The value of swaption contracts outstanding as of July 2013 was $29.5 trillion as measured by notional amount. (Id. ¶ 55). The Defendant Banks collectively dominate the market for interest rate derivatives. (Id. ¶ 53). Indeed, over the course of the putative class period—from January 1, 2006, to June 30,...

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