In re Commodity Exch., Inc., Gold Futures & Options Trading Litig.

• Decision Date: 03 October 2016
• Docket Number: 14-MD-2548 (VEC)
• Citation: 213 F.Supp.3d 631
• Parties: IN RE: COMMODITY EXCHANGE, INC., Gold Futures and Options Trading Litigation. This Document Relates to All Actions.
• Court: U.S. District Court — Southern District of New York

213 F.Supp.3d 631

IN RE: COMMODITY EXCHANGE, INC., Gold Futures and Options Trading Litigation. This Document Relates to All Actions.

14-MD-2548 (VEC)

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

Signed October 3, 2016

OPINION AND ORDER

VALERIE CAPRONI, United States District Judge

The Complaint in these consolidated cases, which involve the alleged manipulation and suppression of gold prices during the period from January 1, 2004 to June 30, 2013 (the "Class Period"), suggests that in the era of supercomputers, big data, and sophisticated statistical analyses, it may be very difficult to hide illegal conduct that might otherwise have escaped detection. On the other hand, it also brings to mind a quip attributed to Benjamin Disraeli—there are three kinds of lies: lies, damn lies and statistics. Whether the detailed statistical analyses contained in the Complaint reveal ground truth about the activities of the Defendant banks who participated in the Gold Fix or are on the "lies, damn lies and statistics" side of the dichotomy remains to be seen.

The Defendants in this case are UBS AG and UBS Securities LLC (together, "UBS"); The London Gold Market Fixing Ltd. ("LGMF"); and the five LGMF fixing banks during the Class Period: The Bank of Nova Scotia ("BNS"),¹ Barclays,² Deutsche Bank,³ HSBC,⁴ and Société Générale⁵ (collectively, the "Fixing Banks"). Plaintiffs are individuals and entities that sold physical gold, gold futures traded on the Commodity Exchange, Inc. ("COMEX") market, shares in gold exchange-traded funds ("ETFs"),⁶ or options on gold ETFs during the Class Period.

Seeking to recover losses suffered as a result of Defendants' alleged manipulation and suppression of the price of gold through the gold "fixing" process, Plaintiffs bring putative class action claims for (1) unlawful restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 et seq. ; (2) market manipulation in violation of the Commodity Exchange Act ("CEA"), 7 U.S.C. §§ 1 et seq. and CFTC Rule 180.2; (3) employment of a manipulative or deceptive device and false reporting in violation of the CEA, 7 U.S.C. §§ 1 et seq. and CFTC Rule 180.1; (4) principal-agent liability in violation of the CEA, 7 U.S.C. §§ 1 et seq. ; (5) aiding and abetting manipulation in violation of the CEA, 7 U.S.C. §§ 1 et seq. , and (6) unjust enrichment.

On July 22, 2014, the Court appointed Quinn Emanuel Urquhart & Sullivan, LLP and Berger & Montague P.C. as interim class co-counsel. See Maher v. Bank of Nova Scotia et al. , 14-cv-1459 (S.D.N.Y.) (VEC), Dkt. 29. On August 13, 2014, the United States Judicial Panel on Multidistrict Litigation transferred one case from the Northern District of California to this Court for "coordinated or consolidated pretrial proceedings" along with other cases that had been filed in this District. In re Commodity Exch., Inc., Gold Futures & Options Trading Litig. , 38 F.Supp.3d 1394, 1395 (J.P.M.L. 2014) ; see also 28 U.S.C. § 1407. Discovery was stayed by the Court in these consolidated actions on October 20, 2014. Dkt. 22.⁷ On March 16, 2015, Plaintiffs filed a Second Consolidated Amended Class Action Complaint (the "SAC"), Dkt. 44. Defendants have moved to dismiss the SAC through three separate motions, the first filed by UBS, Dkt. 71, the second filed by the Fixing Banks, Dkt. 73, and the third filed by LGMF, Dkt. 75. For the following reasons, the Fixing Banks' Motion to Dismiss is GRANTED IN PART and DENIED IN PART, UBS's Motion to Dismiss is GRANTED, and LGMF's Motion to Dismiss is GRANTED IN PART and DENIED IN PART.

BACKGROUND⁸

I. The LGMF Gold Fixing

London's gold market (now known as the "London Bullion Market") has been the center of the global market for gold since the late 1800s. SAC ¶ 93. Trading within the London Bullion Market, which operates on an over-the-counter basis, 24-hours a day, is the "indisputable international standard for gold and silver dealing and settlement." Id. ¶¶ 94-95.

The London gold fixing process (the "Fixing" or the "Gold Fixing") has been integral to price-setting and trading on the London Bullion Market and the various gold markets around the world since 1919. Id. ¶¶ 77, 96. Historically, the purpose of the Fixing was to determine a daily benchmark price for one troy ounce of "Good Delivery"⁹ gold at a specified time during the London trading day. Id. ¶ 76. Because there is no single forum for trading gold and gold-related investments, the price determined through the Gold Fixing (the "Fix Price") is intended to provide an objective price point for gold producers, consumers, investors, derivatives traders, and central banks, and has thus become "the dominant price benchmark for the world's gold trading." Id. ¶ 77. Unlike many alleged price-fixing conspiracies, the fact that the Fixing Banks met daily to fix the price of gold was known to all market participants.

At all times during the Class Period, the Gold Fixing took place each business day at 10:30 A.M. (the "AM Fixing") and 3:00 P.M. (the "PM Fixing") London time. Id. ¶¶ 1 n.1. During the Class Period, the Fixing was administered by the Fixing Banks, operating collectively through LGMF. Id. ¶¶ 79, 84. Founded in 1994, LGMF is a private company organized and based in the United Kingdom. Id. ¶¶ 72-73. Throughout the Class Period, LGMF was owned and controlled by the Fixing Banks.¹⁰ Id. ¶ 72.

Throughout the Class Period, the Gold Fixing was conducted through a "Walrasian" auction. Id. ¶ 81. Leading up to the Fixing, the Fixing Banks would receive buy and sell orders from clients and then combine those orders with orders from their own proprietary trading desks to come up with an aggregate buy or sell position at a particular spot price.

Id. ¶ 316. At the outset of the auction, which took place via private teleconference, the chair (a position that rotated among the Fixing Banks) would provide an opening price, which constituted the current prevailing spot price for gold at the start of the call. Id. ¶¶ 81-82, 315. Each of the Fixing Banks would then announce how many bars of gold they wished to buy or sell at that price based on the net supply or demand for spot gold from their order books. Id. ¶¶ 82, 316. If there was no buying or selling interest, or if buying and selling interest were roughly equivalent, the chair could announce the price of gold as "fixed." Id. ¶ 82. Otherwise, the chair would adjust the price upward or downward until buying and selling interest reached a rough equilibration, within 50-bars. Id. Once the chair declared the price as "fixed," the Fix Price would then be sent to the London Bullion Market Association for publication. Id. ¶ 82. During the Class Period, no third-party administrator supervised the call; the call was unrecorded and no records of the Fixing Banks' communications were kept. Id. ¶ 236.

II. The London Bullion Market Association

The London Bullion Market Association ("LBMA") is a trade association that coordinates activities on behalf of its members, market-making members, and other participants in the London Bullion Market. Id. ¶¶ 86-90. The LBMA's members include major "bullion banks," such as the Fixing Banks and UBS, which function as suppliers and holders of physical gold. Id. ¶ 89. The LBMA's market-making members are responsible for quoting bid and offer prices in gold spot, future, and options during the London trading day. Id. ¶ 90. UBS and each of the Fixing Banks are LBMA market-makers responsible for offering quotes in one or more of spot gold, futures, and options, and each bank also holds a reserved seat on the LBMA management committee. Id. ¶¶ 90, 92. Defendants Barclays, BNS, Deutsche Bank, HSBC and UBS are also clearing members for the LBMA. Id. ¶¶ 91, 94 & n.15, 95.

In November 2014, after Deutsche Bank's resignation of its LGMF membership, id. ¶¶ 22, 279, and the LBMA's review of the Fixing process, a third-party entity, ICE Benchmark Administration ("IBA"), was selected to provide independent administration and governance for the Fixing. Id. ¶¶ 22, 85. Since 2013, the LGMF has also adopted a conflict of interest policy and decided to appoint a "Supervisory Committee" to implement and enforce a code of conduct. Id. ¶ 274.

III. The Gold Market During the Class Period

Physical gold is sold on numerous over-the-counter venues and is the underlying asset in a variety of derivative and security investments, such as gold futures, forwards, options, and gold ETFs (collectively, along with physical gold bullion and gold bullion coins, "Gold Investments"). Id. ¶ 23 & n.13; Defs.' Mem. at 5 (citing Declaration of Stephen Ehrenberg, dated April 30, 2015, Ex. 2 (SPDR Gold Trust Prospectus, Apr. 26, 2012), at 15). While liquidity in gold trading fora varies throughout the day, the periods of greatest liquidity are typically after the trading venues in the United States open, when "trading in the European time zones overlaps with trading in the United States." Defs.' Mem. at 4 (citing Ex. 2 (SPDR Gold Trust Prospectus, Apr. 26, 2012), at 15). Between 2004 and 2012, a bull market prevailed for gold, with the price of gold steadily increasing from approximately $400 per troy ounce to around $1800 per troy ounce. SAC ¶ 110.

IV. The Impact of the Fix Price on Gold Investments

Plaintiffs allege that, although there is no centralized market for gold, the gold market operates efficiently in the sense that the Fix Price is immediately reflected in the price of "physical" gold as well as in the price of various other Gold Investments. Id. ¶¶ 76, 309-10. The Fix Price strongly correlates with the price of gold futures and options on futures contracts traded on the COMEX, and, according to Plaintiffs, there was a 99.9% correlation between gold spot prices and futures prices during the Class Period. Id. ¶¶ 108-09, 309. Similarly, pricing for gold ETF shares, which correlates closely with the spot price of gold, moved in tandem with the Fix Price during the Class Period, with a correlation...