Litovich v. Bank of Am. Corp.

• Decision Date: 25 October 2021
• Docket Number: 20-cv-3154 (LJL)
• Citation: 568 F.Supp.3d 398
• Parties: Isabel LITOVICH, et al., Plaintiffs, v. BANK OF AMERICA CORPORATION, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

568 F.Supp.3d 398

Isabel LITOVICH, et al., Plaintiffs,

v.BANK OF AMERICA CORPORATION, et al., Defendants.

20-cv-3154 (LJL)

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

Signed October 25, 2021

Carol Lee O'Keefe, Michael E. Klenov, Stephen M. Tillery, Steven Michael Berezney, Korein Tillery, LLC, Robert L. King, The Law Office of Robert L. King, St. Louis, MO, Chad Emerson Bell, Ryan Zachary Cortazar, George A. Zelcs, Randall P. Ewing, Jr., Korein Tillery, LLC, Chicago, IL, Joshua H. Grabar, Grabar Law Office, Philadelphia, PA, Kate Lv, Scott and Scott Attorneys at Law LLP, New York, NY, Kevin Bruce Love, Lindsey Caryn Grossman, Michael Criden, Criden & Love, P.A., South Miami, FL, Marc Edelson, Edelson Lechtzin LLP, Newtown, PA, Walter W. Noss, Christopher M. Burke, Scott+Scott Attorneys at Law LLP, San Diego, CA, for Plaintiff Isabel Litovich.

Glen E. Summers, Karma M. Giulianelli, Bartlit Beck Herman Palenchar & Scott, Denver, CO, Christopher M. Burke, Scott+Scott Attorneys at Law LLP, San Diego, CA, for Plaintiff United Food and Commercial Workers Union and Participating Food Industry Employers Tri-state Pension Fund.

Christopher M. Burke, Scott+Scott Attorneys at Law LLP, San Diego, CA, for Plaintiffs Holdcraft Marital Trust, Michael V. Cottrell.

Douglas A. Millen, Freed Kanner London & Millen LLC, Bannockburn, IL, Christopher M. Burke, Scott+Scott Attorneys at Law LLP, San Diego, CA, for Plaintiff Frank Hirsch.

Adam Selim Hakki, Richard Franklin Schwed, Shearman & Sterling LLP, New York, NY, for Defendants Bank of America Corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc., BofA Securities, Inc.

Anthony Antonelli, Barry G. Sher, Paul Hastings LLP, New York, NY, for Defendant Barclays Capital Inc. Jay B. Kasner, Karen Hoffman Lent, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants Citigroup Inc., Citigroup Global Markets Inc.

Herbert Scott Washer, Sheila Chithran Ramesh, Tara Halsch Curtin, Cahill Gordon & Reindel LLP, New York, NY, for Defendant Credit Suisse Securities (USA) LLC.

Brian John Roe, Susannah Sidney Geltman, Simpson Thacher & Bartlett LLP, New York, NY, John Terzaken, Adrienne Vollmer Baxley, Lani Lear, Simpson Thacher & Bartlett LLP, Washington, DC, for Defendant Deutsche Bank Securities Inc.

Jonathan Sloan Carter, Matthew Joseph Porpora, Richard C. Pepperman, II, Sullivan & Cromwell LLP, New York, NY, for Defendants The Goldman Sachs Group, Inc., Goldman Sachs & Co., LLC.

Andrew W. Chang, Holwell Shuster & Goldberg LLP, New York, NY, John S. Playforth, Covington & Burling LLP, Washington, DC, Robert D. Wick, Covington & Burling, LLP, Washington DC, DC, for Defendants JPMorgan Chase & Co., J.P. Morgan Securities LLC.

Brad Scott Karp, Richard A. Rosen, Susanna Michele Buergel, Paul Weiss, New York, NY, Jane Baek O'Brien, Paul, Weiss, Rifkind, Wharton & Garrison, LLP, Washington, DC, for Defendants Morgan Stanley, Morgan Stanley & Co., LLC, Morgan Stanley Smith Barney LLC.

Paul Steel Mishkin, Adam Gabor Mehes, John Michael Briggs, Davis Polk & Wardwell LLP, New York, NY, for Defendant Natwest Markets Securities Inc.

Amanda Leigh Dollinger, Jayant W. Tambe, Laura W. Sawyer, Shan Jiang, Stephen Jay Obie, Jones Day, New York, NY, for Defendants Wells Fargo & Co., Wells Fargo Securities LLC, Wells Fargo Clearing Services, LLC.

OPINION AND ORDER

LEWIS J. LIMAN, United States District Judge:

Defendants, a group of investment banks and their affiliates¹ (collectively, "Defendants"), jointly move, pursuant to Federal Rule of Civil Procedure 12(b)(6), to dismiss Plaintiffs’ amended consolidated class action complaint at Dkt. No. 128 (the "Complaint" or "SAC") for failure to state a claim.

For the following reasons, the motion to dismiss is granted.

BACKGROUND

The Court assumes the truth of the well-pled allegations of the Complaint and the documents incorporated therein for purposes of the motion to dismiss.

I. The Relevant Market

The Complaint relates to an alleged conspiracy in the secondary market for odd lots of corporate bonds (the "Relevant Market"). SAC ¶ 246.

Corporate bonds are debt instruments issued by corporations to raise funds for their operations; they are issued through individual offerings to one or more registered securities firms in the primary market. Id. ¶¶ 3, 59. The securities firms—the dealers—then trade these bonds with other dealers and investors in the secondary market. Id. ¶ 4. Corporate bonds are not traded on anonymous exchanges, but rather are generally traded individually with dealers in the secondary over-the-counter market. Id. ¶¶ 5, 65.

Within this market, corporate bonds are broken down into two categories based on the number of bonds included in the trade. "Round lots" consist of bond trades involving increments of 1,000 bonds, or that are greater than and divisible by $1 million in par value, while "odd lots" generally consist of bond trades involving fewer than 1,000 bonds, or that are less than $1 million in par value. Id. Because bonds from the same issue are fungible, odd lots of that issue can be combined into a round lot, and a round lot of that issue can be broken into odd lots. Id. Round-lot trades almost always involve institutional investors, whereas odd-lot trades are more likely to involve retail investors. Id. ¶¶ 81–85. Round-lot trades make up approximately 82% of total trading volume of corporate bonds in the United States. Id. ¶¶ 93, 116, 257 n.56.

In the secondary market, dealers trade in both round lots and odd lots, providing a bid price at which they are willing to purchase lots of a specific bond or an offer price at which they are willing to sell lots of a specific bond. Id. ¶ 6. Bid prices and offer prices are expressed as percentages of the bond's par value. Id. ¶ 59. The difference between bid price and offer price—the bid-offer spread—becomes the profit dealers make on their trades. Id. ¶ 7. For example, a bid-offer spread of 99/101 means that the dealer is willing to buy a bond at 99% of the bond's par value, and is willing to sell the bond at 101% of the bond's par value; the difference would be the dealer's profit. Id. ¶ 59.

Defendants are a group of ten investment banks—and their affiliates—who are dealers in the secondary corporate bond market, both in round lots and odd lots; Plaintiffs are three individuals, a trust, and a pension fund who traded in the Relevant Market.

II. The Alleged Conspiracy

Plaintiffs’ claim revolves around the allegation of "a conspiracy by Defendants from at least August 1, 2006 to the present ... to restrain electronic advances in the marketplace that would have reduced transactional costs for investors in odd-lots of corporate bonds to the detriment of Defendants’ trading profits." SAC ¶ 2; see also id. ¶ 279 ("Defendants have conspired and agreed with each other to engage in a group boycott as alleged above of certain odd-lot focused electronic trading platforms ... that sought to increase pre-trade pricing transparency, allow all-to-all direct trading and/or anonymous trading, and/or otherwise promote pricing competition for odd-lot investors.").

Although Plaintiffs do not bring a claim of price-fixing in the Complaint, see Dkt. No. 133 at 3, their anticompetitive theory is predicated on an allegation that Defendants trade odd lots at significantly higher bid-offer spreads than they do round lots: "Defendants display remarkable parallel pricing in terms of odd-lots versus round lots. Despite the high number of odd-lot trades executed by dealers and the fact that such trades are qualitatively identical to round lot trades, Defendants demand odd-lot investors, such as Plaintiffs ..., pay spreads that are 25% to 300% higher than [those paid by] investors trading in round lots of the same issue." SAC ¶ 10. Plaintiffs allege that "[n]o reasonable economic justification explains the magnitude of the pricing disparity between odd-lot and round lot trades of the same issue," and that "[i]n a truly competitive market, multiple factors, such as advances in technology that improve pre-trade price transparency and dealers’ competitive desire to secure a greater share of the growing odd-lot market, suggest that Defendants should be narrowing their spreads on odd-lots toward parity with the already profitable round lot trades." Id. ¶ 11. This central theory—that there is a huge discrepancy between the bid-offer spread for round-lot trades and odd-lot trades, and that this discrepancy has no reasonable economic justification and can only be explained by anticompetitive behavior—underlies Plaintiffs’ allegations of a conspiracy among Defendants.

A. The Group Boycott

Plaintiffs’ central claim is that Defendants "engaged in a joint scheme to boycott electronic trading platforms with increased pricing transparency, refusing to participate in them and provide them liquidity, even though gaining market share in the growing odd-lot market through such participation would be in each Defendants’ unilateral interest if they were not conspiring with one another." Dkt. No. 133 at 2. Plaintiffs allege that "E-platforms have the ability to allow Plaintiffs and the Class to trade corporate bonds with greater transparency and significantly less cost, i.e. , with narrower bid-offer spreads. Therefore, in order to maintain wider spreads on odd-lot trades of corporate bonds, Defendants have engaged in a pattern of parallel conduct and anticompetitive collusion to restrict competition from those electronic platforms seeking to improve odd-lot pricing for bond investors and seeking to compete with Defendants in this market." SAC ¶ 131. They allege that this collusive conduct included:

punishing those participants in the bond odd-lot markets that were engaging in trading activity that had the potential to narrow the bid ask spreads; investing in and acquiring control of various electronic platforms to ensure they did not improve pricing for old-lot investors (including one platform, TradeWeb, that was co-owned by all Defendants and used

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