Merced Irrigation Dist. v. Barclays Bank PLC
| Decision Date | 29 February 2016 |
| Docket Number | 15–cv–4878 (VM) |
| Citation | 165 F.Supp.3d 122 |
| Parties | Merced Irrigation District, Plaintiff, v. Barclays Bank PLC, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Alexandra Michalowicz, Sullivan & Kehoe, LLP, Kings Park, NY, for Plaintiff.
John E. Gura, Jr., New York, NY, for Defendant.
VICTOR MARRERO
, United States District Judge.
Plaintiff Merced Irrigation District (“Merced”) is a state-recognized irrigation district located in Merced, California. On behalf of itself and others similarly situated (the “Proposed Class”), Merced alleges federal antitrust violations against defendant Barclays Bank PLC (“Barclays”), a financial services corporation headquartered in the United Kingdom. Merced's claims arise out of an alleged unlawful conspiracy to manipulate daily index prices for electricity between November 1, 2006 and December 31, 2008 (the “Class Period”) in violation of Sections 1 and 2 of the Sherman Antitrust Act (“Sherman Act”), 15 U.S.C. Sections 1
, 2 (“Section 1 ” and “Section 2 ”), and the California Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Section 17200. Merced also alleges claims of unjust enrichment in its complaint. (“Complaint”, Dkt. No. 1.)
Barclays filed a motion to dismiss the Complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure
(“Rule 12(b)(6) ”), asserting that Merced fails to state a claim upon which relief may be granted. (“Motion”, Dkt. No. 12.) Merced filed opposition papers (“Opposition”, Dkt. No. 14) and Barclays replied. (“Reply”, Dkt. No. 17.) For the reasons stated below, Barclays' motion is GRANTED in part and DENIED in part.
As an irrigation district engaged in the business of generating, distributing, purchasing, and selling electricity to customers, Merced purchased peak electricity2 from another California irrigation district during the Class Period. Those contracts settled according to the Dow Jones Daily Index price for peak power at the northern California trading hub known as North Path 15, which is set by averaging market prices for electricity-related contracts at North Path 15. North Path 15 was also one of four western electricity trading hubs (the “Trading Hubs”)3 in which Barclays bought and sold electricity-related contracts through its West Power Desk in New York City.
Two types of electricity-related contracts are relevant to this case: contracts for next-day delivery of physical electricity, or “dailies”, and financial “swap” contracts by which parties agree to exchange payments depending on the daily index price on a specified settlement date at a specified location. The prices at which dailies and swap contracts settle are based on the index price published by certain exchanges. Those exchanges calculate index prices based on transactions for electricity at specific trading locations. One of these exchanges is the Intercontinental Exchange (“ICE”), which calculates a Daily Index price based on the weighted average price of all day-ahead fixed-price physical electricity transactions at the relevant location. Dow Jones also calculates prices based on the same dates and trading hub locations, which Merced alleges move in lockstep with the ICE Daily Index price (collectively with the ICE Daily Index price, the “Daily Index Prices”). Market participants trading in physical positions have the obligation to deliver or receive electricity at the Daily Index Prices, while those trading in purely financial positions, including swap contracts, have no obligation to deliver or receive physical electricity.
Although Barclays did not have the capability to provide or accept physical electricity, during the Class Period it traded both short-term contracts for physical electricity—which it then “flattened”, or offset, by purchasing or selling physical contracts for an equal volume of electricity in the opposite direction prior to delivery—and longer-term swap contracts that settled at prices set by the ICE Daily Index. Merced bought peak electricity under contracts settled according to the Dow Jones index price for North Path 15 during the Class Period, including between April and June 2007. The Proposed Class is defined as “any individual or entity that held any contract which settled against the ICE or Dow Jones published daily index prices for peak or non-peak power” at any of the Trading Hubs during the Class Period, and was damaged by movements in index prices caused by Barclays' manipulation. (Dkt. No. 1 at ¶ 119.)
Merced asserts that Barclays, seeking greater revenues on its financial swap contracts, engaged in trading at noncompetitive prices that purposely inflated or depressed ICE Daily Index prices in the direction that benefited Barclays' swap contracts.
The alleged manipulation had three steps. First, Barclays' traders entered into a swap contract that would settle on a particular date based on the ICE Daily Index price. Then the traders purchased physical electricity contracts in the opposite direction from the swap (i.e. contracts to buy if Barclays was a seller in the swap, or vice versa). Finally, Barclays' traders bought or sold large quantities of underlying daily contracts at artificial money-losing prices, ostensibly for the purpose of flattening the contracts for physical electricity, but also enabling Barclays to trade large volumes of daily contracts that would impact the ICE Daily Index price at which Barclays' swap contract then settled. Although Barclays would lose money on the daily transactions,4 those losses were more than offset by the profit it accrued by settling the swap contracts at artificial ICE Daily Index prices. Those prices would be either artificially high, if Barclays held a “long” swap contract as a buyer and bought a high volume of daily contracts at inflated prices to raise the index price, or artificially low, if Barclays held a “short” swap contract as a seller and sold daily contracts at less-than-market prices to drive down the index price on the settlement date.
As an illustration, if Barclays held a long swap contract to be settled on a particular day at the North Path 15 trading hub, it would create a large short physical position in the daily markets at that hub by entering into contracts to sell electricity. Then, to avoid having to deliver the physical electricity provided for in the daily contracts while simultaneously inflating the Daily Index Prices to generate maximum revenue for its swap contract, Barclays would “flatten” its entire short physical position prior to the contract's settlement date by buying large quantities of next-day physical contracts at higher than market prices, driving up the weighted average price of electricity and, consequently, the Daily Index Prices. When the swap contract settled, Barclays would have made a sizeable profit even after losing money overpaying for the next-day physical contracts.
Merced alleges that Barclays' large position in swap contracts and significant trading in daily contracts at anticompetitive prices caused increases or decreases in the ICE Daily Index price as well as the Dow Jones Daily Index, which moved in lockstep with the ICE Daily Index rate. Barclays accumulated a net loss of more than $4 million in dailies contract trading but gained $34.9 million on its swap contracts.
After commencing an investigation in 2007, the United States Federal Energy Regulatory Commission (“FERC”) Office of Enforcement issued an order to show cause in October 2012 directing Barclays and four individual Barclays traders5 to show cause why they should not be found to have violated FERC's Anti–Manipulation Rule, 18 C.F.R. Section 1c.2
, promulgated under Section 222 of the Federal Power Act (“FPA”), 16 U.S.C. Section 824v(a), by manipulating California electricity markets from November 2006 to December 2008. See Order to Show Cause and Notice of Proposed Penalty, FERC Docket No. 08–0800, 14 FERC ¶ 61, 084 (Oct. 31, 2012) (“FERC Report”). Subsequently, FERC issued an order concluding that Barclays and the individual traders violated the Anti–Manipulation Rule through the use of a “coordinated, fraudulent scheme” to manipulate wholesale power markets on 655 product days over 35 product months6 at the Trading Hubs named in Merced's Complaint.
Order Assessing Civil Penalties, FERC Docket No. 08–0800, 144 FERC ¶ 61, 041 (July 16, 2013) (“FERC Order”) at 3. The FERC Order estimated that Merced's manipulations resulted in net profits of $34.9 million while causing at least $139.3 million in losses to other market participants who either paid higher than competitive prices for electricity or sold electricity at lower than competitive prices during the Class Period. Although Barclays disputed that its trading had a material effect on prices, the FERC Order found that it had, in fact, “distorted market outcomes.” The FERC Order assessed Barclays a civil penalty of $435 million and disgorgement of $34.9 million in profits.
Merced alleges that it did not learn of Barclays' price manipulation until April 5, 2012, when FERC released a public notice of Barclays' alleged violations of the FPA. Because Barclays' unlawful conduct was not revealed until that time, and because Barclays' traders concealed their price manipulation during the Class Period and afterward, Merced argues that the statute of limitations applicable to its claims should not begin to run until April 5, 2012.
E. MOTION TO DISMISS
Merced brought the instant case against Barclays, claiming that, through its manipulation of the Daily Index Prices, Barclays unreasonably restrained trade and monopolized prices in violation of federal antitrust law. Barclays filed the instant Motion seeking to dismiss the Complaint pursuant to Rule 12(b)(6)
. Barclays argues that Merced failed to allege an adequate claim for federal antitrust violations in the...
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