In our prior posts in this market manipulation mini-series, we caught up on the Second Circuit’s vacatur of this action’s third motion to dismiss and Plaintiffs’ subsequent filing of their Fourth Amended Complaint (take a look here), followed by a post summarizing the opening and opposition briefing on Defendants’ latest motion to dismiss (you’ll find that post here). Today, we’ll take a quick look at Defendants’ replies, along with Plaintiffs’ motion for a sur-reply and the resulting brief, and, finally, Defendants’ subsequent sur-sur-reply.
Joint Defendants’ Reply
While Plaintiffs elected to file an omnibus brief in opposition to Defendants’ various motions to dismiss, Defendants’ replies were again filed separately. The first of these – the Joint Defendants’ brief – focuses on two issues: first, the lack of subject matter jurisdiction arising from an allegedly flawed assignment of claims from Sonterra to Fund Liquidation; and second, the Moon Funds’ alleged lack of antitrust standing.
Concerning the assignment, Defendants focus on the definition of “Securities” in the assignment agreement transferring claims from Sonterra to Front Point. That definition covers “any debt and/or equity securities of any kind, type or nature, including, without limitation, stock, bonds, options, puts, calls, swaps and similar instruments or rights.” Defendants argue that the FX forwards at issue in the litigation are not “any type or kind of ‘debt and/or equity securities,’” and thus were never assigned to Fund Litigation. Without a valid assignment, Defendants argue, “subject matter jurisdiction was lacking at the outset of this litigation,” as Fund Litigation could not have been substituted into the action at the commencement of litigation pursuant to FRCP 17. In doing so, Defendants reject—and encourage the Court to reject—Plaintiffs’ position, which relied on the “and similar instruments” language to argue that agreement was “intended to encompass the widest variety of financial products possible,” and thus should include FX forwards as being “derivatives similar to swaps.” Defendants concede that the definition “could be read to encompass securities-based financial products ‘of any kind, type or nature,’” (emphasis added), but that such a definition still would not reach FX forwards “because the ‘plain meaning’ of the term ‘securities’ simply ‘does not include FX derivatives.’”
Defendants also discuss the prior rulings made by the District and Circuit courts, arguing that Plaintiffs’ position—that the transfer of Sonterra’s claims had previously been determined—was “completely wrong.” The prior ruling—in SIBOR II, the order resolving the second motion to dismiss—did not decide the issue, Defendants argue; the Court merely “observed” that the agreements between Sonterra/Front Point and Fund Litigation “appear to show a fill assignment to rights,” without ruling on the scope or validity of those agreements. Consistent with that holding, Defendants note, Plaintiffs used the third amended complaint to plead facts about the assignment from FrontPoint to Fund Litigation (though not about the assignment from Sonterra)—and the assignment that was plead was subsequently rejected by the Court in SIBOR III. Because the assignment from Sonterra was not addressed in either the third amended complaint or in SIBOR III, the issue is, per Defendants, ripe for decision here.
With respect to the antitrust standing of the Moon Funds, Defendants first note that Plaintiffs offered no opposition to—and thus concedes—their arguments concerning the dismissal of claims arising from the SGD SIBOR benchmark. Because the Moon Funds only allege that their trades were impacted by SOR and USD SIBOR, there can be no antitrust injury arising from any alleged manipulation of SGD SIBOR.
Defendants then turn to their larger standing argument, namely, that the Moon Funds have thus far failed to plead the “actual injury” element required for an antitrust cause of action—that they have failed to “plausibly” suggest that the subject transactions “would have been impacted—let alone negatively—by any artificial prices.” In support of this argument, Defendants not that Plaintiffs “plead no facts” suggesting that SIBOR had been manipulated on the day that the Moon Funds entered into the subject transactions. They also argue, as they did in their opening brief, that the bidirectional nature of the alleged manipulation makes Plaintiffs’ claims even harder to substantiate. Relying on Total Gas, 889 F.3d 104 (2d Cir. 2018), Defendants insist that the “general allegations” that the Moon Funds traded within the class period are deficient because “they provide just as much support for the proposition that [the Moon Funds” were benefited by Defendants’ alleged conduct as for the proposition that they were harmed by it.”
Next, Defendants argue that the Moon Funds do not meet the efficient enforcer standard because they “do not allege that USD SIBOR or SOR were actually incorporated into the contractual terms of the FX forwards they traded.” Plaintiff’s contrary argument—that the industry standard formula incorporated SIBOR and SOR as a component of price—is insufficient, Defendants insist, because when the USD SIBOR and SOR prices from the date of Plaintiffs’ trades are plugged into that standard formula, the price that is generated is not the price that the Moon Funds allege to have paid. In further support of their argument, Defendants point to a new Second Circuit decision, Schwab Short-Term Bond Market Fund v. Lloyds Banking Group PLC, 2021 WL 6143556 (2d Cir. Dec. 30, 2021) (“Schwab II”), which they claim “forecloses” the Moon Funds claims. Schwab II rejected claims regarding the alleged manipulation of USD LIBOR where the bonds held by plaintiffs were “assessed in terms of their spread relative to” the benchmark, finding that the indirect link between benchmark and price took the plaintiffs out of the class of efficient enforcers.
Foreign Non-Counterparty Defendants’ Reply
In their separate brief, the Foreign Non-Counterparty Defendants again attack Plaintiffs’ theory of “conspiracy jurisdiction,” arguing—again based on the new Schwab II decision—that Plaintiffs have failed to establish the elements required for such jurisdiction. Conspiracy jurisdiction requires the Plaintiffs sufficiently allege (1) the existence of a conspiracy; (2) that the defendant(s) participated in the conspiracy; and (3) that an overt act of a co-conspirator in furtherance of the conspiracy had sufficient contacts with a state to give rise to jurisdiction over the co-conspirator in that state. The Foreign Defendants argue that Plaintiffs have reached none of these metrics, relying instead on impermissible group pleading allegations that are devoid of key details such as “the instruments the Foreign Non-Counterparty Defendants traded, when they made such transactions, the location of such transactions, and which benchmark each Defendant allegedly manipulated.” Without these details, and because the “group pleading allegations cannot plug these factual gaps,” the Foreign Defendants argue that Plaintiffs have failed to adequately allege a conspiracy to manipulate either SIBOR or SOR, and thus have not met the first necessary predicate for conspiracy jurisdiction. They also counter Plaintiffs’ argument that a finding of conspiracy is “law of the case” after SIBOR II, noting that the second MTD decision was issued long before the Moon Funds’ claims were added in the Fourth Amended Complaint, and that the Court has thus never considered the jurisdictional questions raised by these particular transactions.
The Foreign Defendants next argue that Plaintiffs failed to allege any facts supporting the participation of ANZ, CACIB, Commerzbank, and RBS plc in the conspiracy, as none of the entities were panel members at the time of the subject transactions (or, in the case of RBS, ever a member). Because the FAC contains no allegations as to how these late-arriving defendants “affirmatively embraced the unlawful objectives” of the alleged conspiracy, or held the required “intent to achieve that objective”, it cannot be said that these Defendants ratified the earlier actions of the panel. Again citing to Schwab II, the Foreign Defendants argue that “the conspiratorial contacts must be of the sort that a defendant should reasonably anticipate being haled into court in the forum as a result of them.” Because it was not reasonably foreseeable that joining the SIBOR panels placed them at risk of being dragged into court based on the prior panel members actions, “due process prohibits the exercise of personal jurisdiction.” Without more allegations supporting the link with the Foreign Defendants, they argue, minimum contacts have not been established, and the maintaining the claims against them would “offend traditional notions of fair play and substantial justice.”
The Foreign Defendants also argue that the “overt acts” which Plaintiffs allege to have been committed by UBS—i.e., carrying out the two FX forward transactions at issue here—because those transactions, not being directly priced by reference to USD SIBOR or SOR, could not have furthered the alleged conspiracy of manipulating those benchmarks for profit.
Plaintiffs’ Sur-Reply
Plaintiffs’ sought permission to file a sur-reply because of Defendants’ reliance, in their replies, on a new decision from the Second Circuit. As this new decision—Schwab Short-Term Bond Market Fund v. Lloyds Banking Group PLC, 2021 WL 6143556 (2d Cir. Dec. 30, 2021) (“Schwab II”) was issued after Plaintiffs had filed their opposition papers, they requested permission to file a sur-reply “for the limited purpose of responding to Defendants’ new arguments based on Schwab II.” Plaintiffs further requested permission to address a “mischaracterization of Plaintiffs’ position on timeliness.”
In addition to being mercifully short—a boon in the face of the copious briefing on this motion to dismiss—Plaintiffs’ sur-reply puts forwards an analysis of Schwab II that is diametrically opposed to the one posited by Defendants. Indeed, under Schwab II, Plaintiffs argue, Defendants are “unequivocally foreclosed” from attacking the efficient enforcer status of the Moon Funds. To come to this conclusion, Plaintiffs point to a critical difference between themselves and the plaintiffs in the Schwab case: the plaintiffs in Schwab only purchased a LIBOR-based instrument from a non-conspirator, and not—as Plaintiffs here—directly from a member of the cartel. The line drawn by the Second Circuit with respect to the directness of the injury was “between those whose injuries resulted from their direct transactions with the Banks and those whose injuries stemmed from their deals with third parties”—thus placing Plaintiffs, as direct counterparties, firmly on the “efficient enforcer” side of the split.
To address Defendants’ argument concerning the relationship between the benchmark and the transaction, Plaintiffs note that the Schwab II plaintiffs had conceded that their fixed-rate bonds did not use LIBOR as a component of price at all—a position which contrasts sharply with Plaintiffs own argument that the FX forwards they transacted “directly incorporate SIBOR and SOR as a component of price.” Missing here is further discussion of Plaintiffs’ pricing formula, which Defendants attacked in both their opening and reply briefs; while perhaps beyond the scope of their sur-reply papers, the issues with the calculations seem ripe for questioning at oral argument.
Moving on to address Defendants’ argument that Schwab II supports dismissal for lack of personal jurisdiction, Plaintiffs first note that the case reversed dismissal for lack of personal jurisdiction, “finding that the court had personal jurisdiction over all defendants under the same conspiracy theory of jurisdiction applied by this Court in SIBOR II.” The difference between the overt acts identified in Schwab II and those pled here are “irrelevant,” Plaintiffs argue, not only because the holding made no effort to limit the types of acts possible, but because of the differences in the conspiracy alleged. In Schwab II, the conspiracy was narrower, involving the suppression of LIBOR to “project financial soundness”, while theconspiracy in SIBOR included the collective profit of the individual group members—meaning that the individual transactions of the defendants of “price-fixed SIBOR- and SOR-based financial instruments…are acts in furtherance of the plausible alleged profit-motivated conspiracy,” therefore giving rise to personal jurisdiction.
Finally, Plaintiffs seeks to clarify the record concerning their timeliness arguments. Specifically, Defendants characterized Plaintiffs as “conceding” that a deficiency in the Sonterra assignment would render that party’s claims untimely. This is untrue: Plaintiffs state that their brief only argued that the Second Circuit had rejected Defendants’ arguments that the Moon Funds’ claims were time-barred under China Agritech, and a decision to the contrary would negatively impact class members who had “legitimately relied” on the pending class action.
Defendants’ Sur-Sur-Reply
Shortly after Plaintiffs filed their sur-reply, Defendants filed a motion requesting leave to file a response to the new filing. The grounds for their request were twofold: first, to address Plaintiffs’ “mischaracterization” of Schwab II, and, second, to respond to Plaintiffs’ arguments regarding the timeliness of the Moon Funds’ claims. Defendants’ request was granted, and Defendants’ sur-sur-reply was filed on February 10, 2022.
Addressing the Schwab II holding, Defendants argue that the case stands for the proposition that “an antitrust case involving the alleged manipulation of a benchmark, transacting directly with a defendant is necessary but not sufficient to establish antitrust standing” (emphasis added.) The question of sufficiency is key, Defendants insist, and the Court must assess the financial products actually traded. Because the FX forwards contracts did not directly reference USD SIBOR or SOR, the Moon Funds are not efficient enforcers. Defendants also attack Plaintffs’ characterization of the differences between the allegations in the two cases: they are not dissimilar, Defendants argue, and the allegation that the FX forwards are priced using a formula that involves USD SIBOR and SOR “is just an obtuse way of alleging that FX forward prices moved in relation to” those benchmarks.
Defendants next address Plaintiffs’ personal jurisdiction arguments, arguing that the differences between the in-forum manipulative acts accepted in Schwab II and those at issue in this action are substantial—not irrelevant, as Plaintiffs had posited—and that this Court, in evaluating the nature of the contacts, must find them to be inferior to those set forth in Schwab II, and “insufficient to confer personal jurisdiction here.” With respect to the differing allegations in conspiracy motivation, Defendants argued that the distinction is not relevant to the jurisdictional analysis carried out by the Schwab II court, which focused on overt acts taken.
Finally, with respect to timeliness, Defendants characterize Plaintiffs’ argument as “procedurally improper,” having “nothing to do with Schwab II.” They appear to have missed the sentence in Plaintiffs’ motion for a sur-reply specifically requesting an opportunity to “correct[] a mischaracterization of Plaintiffs’ position on timeliness.” Setting aside this oversight, Defendants reiterate their reliance on Second Circuit precedent barring joinder of the Moon Funds if subject matter jurisdiction was lacking at the initiation of the action, and argue that Plaintiffs’ procedural arguments (i.e., that the Second Circuit decision bars reconsideration of the assignment) are “flawed.”
Luckily, no sur-sur-sur-reply has been requested, and, with that, this mini-series draws to a close. A February 23, 2022, scheduling order reset the date of oral argument, so it is unlikely that we will see any further updates before March 23, 2022. Arguments will be held telephonically, so interested parties may want to plan to listen in. We’ll be sure to update this series when a decision has been issued.
This post was written by Alexandra M.C. Douglas.