Stock Loan Lowdown: Class NOT Dismissed

Counsel for Iowa Public must have gone home happy on September 27th, as the long-awaited motion to dismiss decision could hardly have played out more favorably for them. With the caveat that “it remains to be seen whether Plaintiffs’ factual allegations will be born out in discovery,” Judge Failla rejected each of Defendants five bases for dismissal and denied their 12(b)(6) motion.

For an overview of the briefing on this motion, I invite you to explore past posts in this series by following the links below:
Stock Loan Lowdown
Stock Loan Lowdown, Part Two: To Dismiss or Not to Dismiss?
Stock Loan Lowdown: Third Time Through the Order
Stock Loan Lowdown: Fourth Time’s (still not quite) Final

Judge Failla’s 93-page decision began with an overview of the stock loan market and its key players, including a detailed explanation of the role and functions of each of the three new market entrants central to the dispute: QuadriServ, AQS, and Data Explorers. One small bright point for defendants may be Judge Failla’s footnoted comment, in which she “pause[d] to observe that the briefing on all sides was excellent.”

The decision first addressed Defendants’ main argument—that Plaintiffs failed to plead a plausible antitrust conspiracy—before moving on to cover whether or not the alleged concerted action was an unreasonable restraint on trade, the Plaintiffs’ antitrust standing, the timeliness of Plaintiffs’ claims, Plaintiffs’ claim for unjust enrichment, and, finally, EquiLend’s supplemental motion to dismiss.

A High Hurdle, Unscaled

Facial Plausibility
First observing that a well-pleaded complaint may proceed even if “actual proof of those facts is improbable,” the court here found that Plaintiffs did allege facts sufficient to support the inference that a conspiracy actually existed. On the question of facial plausibility, the court agreed with Plaintiffs that the timely of the alleged conspiracy was plausible; it may have stretched over nine years, but, as the court observed, it merely continued until it achieved its alleged objectives. The Court further adopted Plaintiffs’ assertion that a small subset of prime brokers could bring about an actionable conspiracy, on the strength of the observation that the six named Prime Broker Defendants controlled between 76% and 80% of market share, and would have the power to carry out an effective group boycott. With respect to Defendants’ objections to the plausibility of the planning of the conspiracy at EquiLend board meetings, the court found that the debate turned on “a battle of competing inferences” about who has the agent lenders’—the other EquiLend board members—greatest loyalty, and that, on a motion to dismiss, such all reasonable inferences has to be drawn in Plaintiff’s favor.

Defendants also attached the plausibility of the allegations on the grounds that the OCC prevented lenders and borrowers from transacting directly on its platform. The Court found that the Defendant misconstrued the Amended Complaint on this point: the allegation was not of a conspiracy to prevent borrowers and lenders from transacting directly without a broker intermediary, and thus whether not not such transactions were permissible was of no moment. Specially, the court found that, when inferences were drawn in Plaintiffs’ favor, “the necessary infrastructure existed for services such as those promised by AQS and SL-x, and it was Defendants’ conduct, not structural impediments, that caused these companies to fail. Defendants’ final argument on facial plausibility concerned the demand for and feasibility of anonymous exchange trading; to these points, the Court agrees with plaintiff’s submissions that such assertions are “fact-laden arguments that cannot be credited on a motion to dismiss.”
Group Pleading
The motion to dismiss argued that Plaintiffs’ allegations relied on impermissible generalizations about the Defendants as a group. To this, the court observed that the Amended Complaint did specifically allege that each Defendant agreed to participate in the conspiracy. With this base established, it was held that referring to the “Prime Broker Defendants” by that generalized moniker when discussing their collective actions in furtherance of the conspiracy did not constitute impermissible group pleading. The Court also noted that the Amended Complaint identified specific employees by name, thus providing each Defendant with sufficient notice of the claims against them.
Direct Evidence & Parallel Conduct
At the pleading stage, Plaintiffs had two methods by which they could allege enough facts to support the inference of the existence of a conspiracy: direct evidence, and circumstantial facts supporting the inference of a conspiracy. Of the four allegations identified by Plaintiffs as direct evidence, the Court found two to qualify as direct evidence: first, a statement by John Shellard of J.P. Morgan that there was a “general agreement among [the] directors [of EquiLend]” that “industry advances should be achieved from within EquiLend,” and, second, a statement by Thomas Wipf of Morgan Stanley that Morgan Stanley and Goldman Sachs agreed that they needed to “get a hold of this thing,” in reference to AQS. Both are statements that, according to the court, “expressly describe agreements among the defendants,” and are thus direct evidence of concerted action. On the other hand, the Court agreed with Defendants that statements referring to EquiLend as “the mafia run by five crime families,” and instructions not to “break rank,” required “far too many layers of inference” to qualify them “as direct evidence of anything much, except perhaps of [the speaker’s] affinity for colorful speech.”

Circumstantial evidence of a conspiracy may be pled through examples of parallel conduct that would probably not result absent advance understanding among the parties. In this case, Plaintiffs argued, and the Court agreed, that the Amended Complaint adequately pled several instances of parallel conduct by Defendants. For example, the communication of identical positions to AQS by Credit Suisse, J.P. Morgan, Morgan Stanley, and UBS that they would each support AQS only if it because a broker-only platform could not be explained by Defendants’ shared commitment to OCC by-laws: while the OCC did require end-users to clear their trades through clearing brokers, that is not the same as a requirement that the platform be restricted to brokers only. While the Court agrees with Defendants that the Amended complaint does contain some allegations of divergency conduct, those instances do not negate the allegations of other, parallel, conduct. With respect to allegations of inaction, the Court noted that it “appreciates the challenges” of drawing such inferences, but, nevertheless, on a motion to dismiss all reasonable inferences—including those arising from allegations of inaction—must be drawn in favor of Plaintiffs.
Plus Factors
To sufficiently plead circumstantial evidence of a conspiracy, allegations that a defendant engaged in parallel conduct must generally be accompanied by certain “plus factors” supporting the inference that the parallel conduct flowed from a preceding agreement. One such plus factor is “interfirm communications,” which need not necessarily be conspiratorial. The Court found that the Amended Complaint pled multiple instances of interfirm meetings at conference, private dinners, and EquiLend board meetings, and that such allegations were sufficient to support an inference of opportunity to conspire. The Court also identified a common motive to conspire in Plaintiff’s allegations that changes to the stock loan market processes would reveal the excess fees being charged under the cover of price opacity. Similarly, the Court found Plaintiff’s allegations that support for the emerging platforms would have been, absent a conspiracy, in Defendants’ self interest to be a reasonable inference. The Court did agree with Defendants that allegations of collusion in other markets was irrelevant for the purpose of evaluating the sufficiency of this complain.
Bank of America, J.P. Morgan, UBS, and Credit Suisse
Defendants sought dismissal of the claim against Bank of American on the grounds that its early support of, and investment in, AQS renders its membership in the conspiracy implausible. While recognizing that Defendants have hit on a weakness in the Amended Complaint, the Court still finds that Bank of America’s presence of EquiLend’s board, together with allegations of parallel conduct supported by plus factors, is sufficient to sustain the allegations against it at stage of the litigation.

With respect to J.P. Morgan, UBS, and Credit Suisse, the Court similarly upholds the claims, noting that the Amended Complaint does allege participation of these defendants in conspiratorial meetings, and, further, that “not every member of a conspiracy needs to issue the same threats for the conspiracy to exist.”

Unreasonable Restraint is a Reasonable Allegation

In parsing Defendants’ attack on the sufficiency of Plaintiffs pleadings on the second element of a Sherman Act claim—whether or not the alleged action was a unreasonable restrain on trade—the Court was bound to apply one of two rules: that the conduct was per se illegal, or that the conduct violated the “rule of reason.”

While observing that only “manifestly anticompetitive” conduct is “appropriately designated as per se illegal,” the Court ultimately found that the allegations in the Amended Complaint reached such a level. The dispute here primarily concerned conduct in the context of a joint venture—EquiLend—which Defendants argued should be evaluated under a rule of reason standard, rather than the per se standard. Plaintiffs alleged that EquiLend’s joint venture status was “a smokescreen behind which the Prime Broker Defendants could operate,” and that the conduct was undertaken by and on behalf of each of the Prime Broker Defendants, and not in furtherance of any legitimate joint venture. The Court finds that “mere consistency” with an alternate inference of the conduct posited by Defendants was not sufficient at this stage of the litigation, and thus the alleged conduct was “not immunized from the per se rule by virtue of EquiLend’s presence in the fact pattern.”

Having found that the pleadings alleged conduct that qualified as a per se unlawful restraint of trade, the Court noted that a rule of reason analysis was thus unnecessary, but undertook such review for the purpose of completeness. Anticompetitive conduct, as defined by the Second Circuit, is “conduct without a legitimate business purpose that make[s] sense only because it eliminates the competition.” Under this standard, the Court found that Plaintiffs’ arguments concerning EquiLend’s purchase of the intellectual property of both AQS and SL-x—namely, that it was purchased solely to “bury” the technology—were, for the purpose of a motion to dismiss, convincingly evidenced by Plaintiffs’ allegations of underuse of the products after purchase. Similarly, when asserting that EquiLend’s creation of DataLend was an instance of anti-competitive behavior, Plaintiffs argue that the purpose of the creation was to kill, not to compete with, DataExplorers, and that Defendants achieved that goal by providing a subpar, but aggressively underpriced, product designed to undermine DataExplorers. Again, the Court found that the possibility that Defendant’s conduct could conceivably be characterized as improving competition is insufficient to overcome the deference due to a reasonable inference that can be drawn in Plaintiffs’ favor.

Still Standing Strong

Defendants further contested Plaintiffs’ standing to challenge violations of antitrust law. Standing in these circumstances requires that an alleged injury be “of the type the antitrust laws were intended to prevent,” and that Plaintiffs be “efficient enforcers” of those laws. Plaintiffs alleged that the lack of a central market place creates bottlenecks, wasted resources, and caused volatile, opaque, and artificially inflated prices—all of which could have been avoided by the implementation of centralized electronic trading for stock loan transactions that Defendants blocked. With respect to DataExplorers and SL-x, Plaintiffs allege that their presence in the market would have increased efficiency, price competition, and transparency in the market. Defendants did not challenge the assertion that the alleged injury is of the type the antitrust laws intended to prevent, but did contest one element of “efficient enforcer” standing: the speculative nature of the injury. On this point, the court notes that Defendants’ arguments are “thought-provoking,” but ultimately holds that, because efficient enforce standing is a balancing test, a challenge to just one factor would not eliminate Plaintiffs standing. And in assessing speculativeness—and adding insult to injury—the Court further concluded that Plaintiffs’ allegations that the new market entrants were met with market demand and would have provided benefits to be plausible.

All in Good Time

The Court rejected Defendants’ challenge to the timeliness of Plaintiffs’ claims on the grounds of fraudulent concealment. To successfully plead fraudulent concealment, a plaintiff is required to allege (i) that the defendant concealed the existence of the cause of action; (ii) that the plaintiff remained in ignorance of the cause of action until some point within the limitations period; and (iii) that plaintiffs continuing ignorance was not attributable to lack of due diligence on plaintiff’s part.
The Court held that Plaintiffs successfully pled both inherent self-concealment and affirmative concealment by Defendants. With respect to self-concealment, the Court agreed that, because the alleged conspiracy depended on numerous participants and was designed to ensure, it depended on concealment for its success. The Court further observed that the Amended Complaint alleged that Defendants communicated threats directly to individual executives at hedge funds, and that the threats were to withhold bespoke services—such threats, the Court infers, were likely provided “quietly, in the context of personal relationships,” and thus do not undermine a finding that the conspiracy was inherently self-concealing.

The finding of a inherent self-concealing nature means that the Court did not need to consider the question of affirmative acts of concealment. The Court again chose to do so for completeness, and again found that some—though not all—of the behavior alleged in the Amended Complaint did support such a finding. For example, the Amended Complaint contained pleadings of secret meetings and communications, which the Court agreed with Defendants in finding that such allegations were too general and conclusory to support affirmative concealment. The allegations concerning the use of the phrase “Project Gateway,” on the other hand, did allow the Court to infer that the moniker may have been designed as a code name rather than as mere shorthand.
Ignorance & Diligence
Plaintiffs argued that they had no prior knowledge of the collusion, and that the facts upon which they based their complaint were only brought to light by counsel’s recent investigation, which revealed “critical, non-public facts.” While Defendants pointed to a 2009 industry publication refereeing to EquiLend as a “cartel,” the Court held that “a single instance of unverified media speculation” was not sufficient to put Plaintiffs on inquiry notice. Similarly, the investment made in support of the “victim platforms” showed that it was not obvious that a conspiracy was out to pull them down.

On diligence, the Court agreed that Plaintiffs allegations of regular monitoring of their investments, and of news reports concerning the financial industry and stock lending market, were sufficient: drawing all inferences in their favor, a reasonable person would not have thought to investigate beyond the activities that Plaintiff engaged in.

Unjust Enrichment

In what might be the shortest section of my blog posts to date: the Court here concluded, equally briefly, that, as “Plaintiffs state a viable anti-trust claim, their unjust enrichment claim stands as well.”

A Supplemental Dismissal

EquiLend filed a supplemental motion to dismiss to advance four points. First, EquiLend argued that it’s conduct was consistent with rational business strategy; as with similar arguments discussed herein, the Court found that, on a motion to dismiss, the fact that conduct may also be consistent with an innocuous explanation does not permit the Court to ignore inculpatory inferences that may reasonable be drawn from the same allegations. EquiLend’s second argument, that the use of its board meetings to plan the conspiracy is insufficient to support a claim against it, was similarly rejected. The Court noted that the Amended Complaint does not merely alleged that Defendants used EquiLend meetings, but that EquiLend engaged in conduct in furtherance of the conspiracy—such as purchasing SL-x’s intellectual property and launching DataLend. For the same reason, the Court rejects EquiLend’s third argument, that the allegations do not pass muster under a rule of reason analysis: the Amended Complaint pleads sufficient facts to support an inference that EquiLend was a member of the conspiracy, and thus allegations concerning the Prime Broker Defendants market power and anticompetitive conduct also implicate EquiLend. Finally, EquiLend argued that there was no specific jurisdiction over EquiLend Euope; the Court found that jurisdiction exists because the overt acts of its co-conspirators may be imputed to it.

And with that, we put most stock loan-related anticipation to sleep for the time being—at least until it’s time to review the Prime Broker Defendants’ answer. Or should we be on the lookout for an appeal brief? Whichever it is, watch this space.

This post was written by Alexandra M.C. Douglas.

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