In re London Silver Fixing, Ltd., Antitrust Litig.

• Citation: 213 F.Supp.3d 530
• Decision Date: 03 October 2016
• Docket Number: 14-MD-2573 (VEC)
• Parties: IN RE: LONDON SILVER FIXING, LTD., ANTITRUST LITIGATION. This Document Relates to All Actions.
• Court: U.S. District Court — Southern District of New York

213 F.Supp.3d 530

IN RE: LONDON SILVER FIXING, LTD., ANTITRUST LITIGATION. This Document Relates to All Actions.

14-MD-2573 (VEC)

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

Signed October 3, 2016

OPINION & ORDER

VALERIE CAPRONI, United States District Judge:

These consolidated cases involve the alleged manipulation and suppression of silver prices during the period from January 1, 1999 "through the date on which the effects of Defendants' unlawful conduct cease" (the "Class Period"). The Defendants are: Deutsche Bank,¹ HSBC,² The Bank of Nova Scotia³ (collectively the "Fixing Members") and UBS AG ("UBS" and together with the Fixing Members, the "Defendants").

Plaintiffs are individuals and entities that bought or sold physical silver or silver futures, "mini" silver futures or options contracts through the Chicago Board of Trade ("CBOT"), NYSE LIFFE or Commodity Exchange, Inc. ("COMEX") during the Class Period.⁴ Seeking to recover losses suffered as a result of Defendants' alleged manipulation and suppression of silver prices through the silver "fixing" process, Plaintiffs bring putative class action claims for (1) price fixing, bid rigging and conspiracy in restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 et seq. ; (2) manipulation in violation of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 1 et seq. ; (3) principal-agent liability in violation of the CEA, 7 U.S.C. § 1 et seq. ; (4) aiding and abetting manipulation in violation of the CEA, 7 U.S.C. § 1 et seq. ; (5) manipulation by false reporting, fraud and deceit in violation of the CEA, 7 U.S.C. § 1 et seq. , and CFTC Rule 180.1(a); and (6) unjust enrichment.

On October 9, 2014, the United States Judicial Panel on Multidistrict Litigation transferred one related case from the Eastern District of New York to this Court for "coordinated or consolidated pretrial proceedings" with another case that had been filed in this District. In re London Silver Fixing, Ltd., Antitrust Litig. , 52 F.Supp.3d 1381, 1381–2 (J.P.M.L. 2014) ; see also 28 U.S.C. § 1407. With the filing of eight additional "tag-along" actions, there are now ten cases comprising this consolidated multidistrict litigation. Pursuant to the Court's Order dated October 14, 2014, formal discovery has been stayed. See Order No. 1, In re London Silver Fixing, Ltd., Antitrust Litig. , 14–md–2573 (S.D.N.Y. Oct. 14, 2015) (VEC), Dkt. 4.⁵ On November 25, 2014, the Court appointed Lowey Dannenberg Cohen & Hart, P.C. and Grant & Eisenhofer P.A. as interim class co-counsel. Dkt. 17. On January 26, 2015, Plaintiffs filed a first Consolidated Amended Class Action Complaint (the "FAC"), Dkt. 34, which Defendants moved to dismiss on March 27, 2015, Dkts. 56-61. On April 17, 2015, Plaintiffs filed a Second Consolidated Amended Class Action Complaint (the "SAC"). Dkt. 63. Defendants have moved to dismiss the SAC through two separate motions, the first filed by UBS, Dkt. 73, and the second filed by the Fixing Members, Dkt. 75. For the following reasons, UBS's Motion to Dismiss is GRANTED, and the Fixing Members' Motion to Dismiss is GRANTED IN PART and DENIED IN PART.

BACKGROUND⁶

I. The Silver Fixing

Since 1897, a small group of silver bullion dealers, including the Fixing Members and their predecessors, have met in London (initially in-person and later via teleconference) to set the daily benchmark price of silver. SAC ¶ 95. Throughout the Class Period until August 14, 2014, the Fixing Members, acting through London Silver Market Fixing, Ltd., met over a secure conference call line at 12:00 P.M. London time each business day to "fix" the price of physical silver (the "Silver Fixing" or the "Fixing"). Id. ¶ 96. The Silver Fixing, which usually took less than ten minutes, was conducted through a private "Walrasian" auction. Id. At the outset, the "Chairman" of the auction (a position that rotated among the Fixing Members) would announce the opening price, reflecting the current "spot price" of silver. Id. ¶¶ 96-97. Each of the Fixing Members would then declare how many bars of silver they wished to buy or sell at the opening price based on the net supply or demand for spot silver on their order books (reflecting both client orders and proprietary trading orders). Id. ¶ 97.

After each Fixing Member announced its net order, the banks' orders would be netted against one another. Id. ¶ 98. If buying and selling interest were roughly equivalent, the Silver Fixing would be declared complete and the price would be declared fixed (the "Fix Price"). Id. Otherwise, the Chairman would adjust the price upward or downward until buying and selling interest reached rough equilibrium, within 300 bars. Id. If the Chairman was unable to set a price that brought the discrepancy between buying and selling interest within 300 bars, the Chairman could unilaterally fix the price and then the Fixing Members would "divide the excess supply or demand pro-rata among themselves." Id. ¶ 99. Once finalized, the Fix Price was published to the market. Id. No other market participants or third parties played a role in influencing the Fix Price; the Fixing Members had sole control over the auction. Id. ¶¶ 100.

On April 29, 2014, Deutsche Bank left its position as a Fixing Member due to regulatory concerns, ultimately leading to the demise of the Silver Fixing and the creation of the "London Silver Price." Id. ¶¶ 244-53. The new pricing system uses an electronic trading mechanism, instead of a private telephone call, but otherwise retains an "auction-style process" to determine the Fix Price. Id. ¶ 15. Two of the former Fixing Members, HSBC and Bank of Nova Scotia, are members of the London Silver Fixing panel; UBS is accredited to participate in the London Silver Price but has never been a member of the Fixing Panel. Id. ¶¶ 80, 253.

II. The Impact of the Fix Price on the Silver Investments

Plaintiffs describe the Fix Price as the global benchmark "used to price, benchmark, and/or settle billions of dollars in physical silver and silver financial instruments" on a daily basis. Id. ¶ 102. According to the London Bullion Market Association: "The guiding principal behind the [precious metal fixings] is that all business ... is conducted solely on the basis of a single published Fixing price." Id. ¶ 3 (quoting A Guide to the London Precious Metals Markets , LONDON BULLION MARKET ASSOCIATION , at 14, http://www.lbma.org.uk/assets/market/OTCguide20081117.pdf).

Thus, while there is no single forum or exchange for trading silver and silver-related investments, silver producers, consumers, investors, and central banks rely on the Fix Price in trading approximately $30 billion in silver and silver-related financial instruments each year. Id. ¶ 102. For example, physical silver (including silver bars and coins) is often traded over-the-counter ("OTC") with reference to the Fix Price. Id. ¶¶ 103-04. The Fix Price also has an impact on the prices of exchange-traded silver futures and options contracts, as well as silver swaps and forward agreements that are traded on an OTC basis. Id. ¶¶ 106-18. Because those instruments reflect a future obligation to buy or sell physical silver, silver "futures" contracts increase or decrease in value in direct relationship to the price of physical silver, such that "99.85% of the variation in the price of COMEX silver futures contracts between January 1, 2004 and December 31, 2013 is explained by the results of the Silver Fix." Id. ¶¶ 108, 113-14 & Fig. 1.

Most market participants do not settle their futures contracts at maturation; rather they offset their positions before expiry by purchasing contracts for an equal opposite position. Id. ¶ 110. As a result, the holders of "long" positions (who are obligated to purchase silver at an agreed-upon price in the future) profit when the price goes up because they are able to sell their offsetting contracts at a higher price. Id. ¶ 111. In contrast, the holders of "short" positions (who are obligated to sell silver at an agreed-upon price in the future) profit when the price goes down because they are able to buy an offsetting contract for a lower price. Id. Silver forwards work in the same way, the key difference being that they are traded OTC as opposed to via an exchange. Id. ¶ 117. Silver swaps—cash-settled agreements pursuant to which one party pays a fixed price for a certain amount of silver, while the other pays a variable rate subject to the Fix Price—are also Fix-dependent instruments. Id. ¶ 116. Because the Fix Price has a direct impact on the price of physical silver and silver-related financial instruments, such as futures contracts, Plaintiffs allege that the Fixing Members controlled a key factor in the pricing of Plaintiffs' investments in physical silver, silver futures, "mini" silver futures, and options contracts throughout the Class Period. Id. ¶ 4.

III. Allegations of Manipulation

Plaintiffs claim that Defendants executed a "comprehensive strategy" of manipulation involving several distinct but related components. SAC ¶ 118. First, the Fixing Members allegedly abused their control over the Silver Fixing artificially to suppress the Fix Price on selected days throughout the Class Period. Id. Second, the Defendants are alleged to have improperly shared confidential order information and traded on that information in order to gain an unfair advantage over less-knowledgeable market participants. Id. Third, Defendants allegedly coordinated to maintain fixed bid-ask spreads, thereby gaining a pricing advantage and restraining competition in the silver spot market. Id. ¶ 118.

A. Defendants Caused Price Distortions Around the Silver Fixing

In support of their claim that Defendants manipulated the Fix Price, Plaintiffs present data analyses demonstrating that pricing behaved in distinctive or "anomalous" ways around the Silver Fixing. SAC ¶¶ 119-76. First, Plaintiffs show that, in every year during the Class Period except for 2010, the Fix Price moved...