Stock Loan Lowdown: Fourth Time’s (still not quite) the Final . . . and Time Will Tell if it’s the Charm

Hello again, fair followers. Presented today for your pleasurable perusal is this pithy pandect of the penultimate paper in the Prime Broker Defendant’s Motion to Dismiss procedure. If perhaps you are pondering the precise past of Defendant’s process in pushing back, I present the proximate program over which I propose you pore:
Stock Loan Lowdown
Stock Loan Lowdown, Part Two: To Dismiss or Not to Dismiss?
Stock Loan Lowdown: Third Time Through the Order

And now to the meat of the matter: does the Defendant’s robust reply result in any real issues to plague the Plaintiffs?

Play It Again, Sam – Plaintiffs Fail To Allege A Plausible Antitrust Conspiracy

The bulk of Defendant’s reply brief is focused on the plausibility of the conspiracy laid out by the Plaintiffs. Nothing in Plaintiff’s opposition, they argue, successfully counters the key defects in the conspiracy: the marketplace lacked clearing brokers necessary to support anonymous trading; the industry was not suited to such trading because loaned securities could be recalled at any time; and the presence of agent-lenders at EquiLend board meetings—individuals whose interests would not have supported such a conspiracy.

First, Defendants point out, there is no clearing mandate for stock loans—no OCC bylaws requiring lenders and borrowers to rely on OCC clearing members to clear their trades—and as of yet none of the OCC members have entered the business of clearing stock loans for third parties. Without clearing arrangements, Defendants argue, such trades cannot be sustained. Moreover, Plaintiff’s argument that clearing would be possible if any of the OCC members did so enter the business is insufficient, according to Defendants, where plaintiffs fail to explain why Defendants (and other OCC members) would have chosen to do so, absent a regulatory mandate.

Second, Defendants argue that Plaintiffs have offered no explanation for the Defendant’s apparent ability to perpetrate a conspiracy in full view of the other members of Equilend’s other board members—namely, the large agent-lenders, such as BlackRock, Northern Trust, and State Street, all of whom represent many of the conspiracy’s alleged victims. The Plaintiffs argued, in their opposition, that the agent lenders may have had “their own incentives to preserve the status quo.” Defendants point out that such justifications are not only unpled, but directly contradicted by statements in the Plaintiff’s complaint. In support of this contention, Defendants point to statements such as “numerous agent lenders supported AQS,” and insist that, if agent lenders were in fact part of the alleged conspiracy, Plaintiffs should have pled as much.

Third, with respect to Plaintiff’s arguments concerning the recall of stocks—namely, that such issues could be overcome by the use of variances in risk premiums—Defendants simply point to their lack of citation or explanation for such a process. They further argue that the industry support Plaintiffs claim that the AQS project had amounts to little: those investors and supporters “would not have been the first to anticipate incorrectly market or regulatory evolution on central clearing.”

Defendants next shift to Plaintiff’s claims of direct evidence, and find that they “fall[] flat.” To be direct, Defendants note, such evidence must be both explicit and requiring no inference to establish the proposition asserted. The conversations Plaintiffs offer are, at best, inferences based on circumstantial evidence, and a far cry from an admission of an explicit agreement to boycott. What’s more, all direct evidence cited by the Plaintiffs pertains to the joint venture—not to the alleged agreement among Defendants as to what they would do outside of that venture.

Defendants next attack Plaintiff’s apparent reliance on group pleading. While the courts may allow pleadings that do not make defendant-by-defendant allegations, the “dispositive issue” is whether it is adequately pled that they “in their individual capacities, consciously committed themselves to [a] common scheme designed to achieve an unlawful objective” (a proposition for which defendants cite the SDNY IRS case). Plaintiffs, according to this reply, do not even attempt to satisfy that standard.
Next up are allegations of parallel conduct—as one might expect, Defendants again found these to be inadequate. First, they argue, the conduct described by Plaintiffs was more divergent than parallel: for example, multiple Defendants joined, used, or invested in AQS, which clearly diverges from a boycott. By the same token, it can hardly be said that Defendants all boycotted all three platforms. Moreover, any parallel behavior that can be said to exist is, as per Defendants, “mere inaction.” For example, Defendants point to the fact that there are no allegations that that the Defendants had anything to do with OCC clearing rules—so how could they have “imposed unnecessary conditions on their clearing connections?”.

Defendants next turn to the Plaintiffs’ proffered “plus factors,” arguing that the purported high-level of inter-Defendant communications cannot possibly create an inference of conspiracy in an industry in which inter-broker communications are commonplace. The communications cited by Plaintiffs are “routine,” defendants insist, and cannot on their own plausibly allege a high level of communications. Defendants also pooh-pooh Plaintiff’s claim of a “common motive to preserve their supracompetitive profits”: all industry participants seek high profits, and allegations of a profit motive utterly fail to supply a plus factor.

Hit It Again, Harry* – Plaintiffs Fail To Salvage Their Claim Based On The EquiLend Conspiracy

Defendants in this section latch on to Plaintiff’s contention that the Complaint primarily concerns an agreement among the Defendants as to their actions outside the joint venture—not the actions taken within EquiLend. To the contrary, Defendants argue: the antitrust claim described by Plaintiffs in fact rests largely, if not primarily, on allegations regarding EquiLend that are, in fact, entirely consistent with lawful joint-venture conduct.

First, Defendants argue that the allegations concerning participation in EquiLend are subject to the rule of reason. Because Plaintiffs concede that EquiLend’s platform offered some operational efficiencies, and do not attempt to argue that EquiLend was “an illegitimate shell,” the conduct described—such as EquiLend’s creation and pricing of DataLend, and purchases of both AQS and SL-x’s intellectual property—it should be subject to the rule of reason as the internal decisions of a legitimate joint venture. To counter Plaintiff’s insistence that the allegations involving EquiLend must properly be considered as a whole, Defendants point out that, in order to examine a claim as a whole, one must first analyze its individual allegations.

Having established to their satisfaction that Plaintiffs cannot avoid the application of the rule of reason, Defendants then shift to arguing why Plaintiffs fail to allege a rule-of-reason claim. Under that analysis, Plaintiffs would be required to show that the alleged agreement produced an adverse, anti-competitive effect within the relevant market. Defendants first attack whether the Plaintiffs have adequately alleged that the stock loan market is a relevant antitrust market, insisting that, while the individual Defendants may compete in the stock loan market, Plaintiffs have not alleged that the joint venture, EquiLend competes with them there, or, in fact, that it has any presence in any market. Without any participation in a market, EquiLend cannot, and does not, have the ability to adversely affect competition. Defendants further invite the court to decline Plaintiff’s invitation to truncate the rule of reason analysis, insisting that the alleged conduct was not, as Plaintiffs claim, “obviously anti-competitive.” As an example here, Defendants cite EquiLend’s creation and pricing of DataLend: how can the creation of a new service, with superior data and lower prices, created specifically to compete with a market incumbent, possibly be an example of anticompetitive behavior, they ask?

Pay It Forward, Paul – Plaintiffs Injuries Are Too Speculative To Confer Antitrust Standing

Defendants continue to argue that Plaintiffs injuries, based on “vague allegations” that SL-x and Data Explorers would have increased efficiency, price competition, and transparency, simply do not identify damages that the borrowers and lenders in any sufficient detail. Moreover, while the Complaint argues that the imposition of an electronic, all-to-all trading platform, like that of AQS, would have resulted in better prices, that contention simply does not apply to Data Explorers – a pricing service – and SL-x, a platform non-operational in the US.

Furthermore, Defendants argue, AQS could not have succeeded without clearing brokers to provide access to central clearing. While more than sixty brokerage firms have stock lending clearing privileges, Plaintiffs do not dispute that none of those firms have entered the business of clearing loans for other entities. Their presence, Defendants argue, is a precondition to the success of AQS—and thus to any improvements in pricing—and their absence cannot be attributed to the alleged scheme.

Time’s Up, Tony – Plaintiffs Have No Answer To The Statute Of Limitations

Finally, Defendants insist that Plaintiffs claims are time-bared insofar as it seeks damages for conduct that allegedly first caused injury before August 16, 2013. Plaintiffs arguments to the contrary fail first, because they misstate the law of accrual, and, second, because they do not successfully defend the sufficiency of their fraudulent concealment claim.

Plaintiff’s opposition asserted that the limitations period runs not from when Defendants acted, but from when the injury occurred. Defendants point out that, to the contrary, a Section 1 claim accrues when “the defendant commits an act that injures the plaintiff.” Much of the supposedly wrongful conduct—including the boycott of DataExplorers, and many of the SL-x allegations—occurred outside of the four-year limitations period, and, according to the allegations, caused contemporaneous injury. Because the conduct and initial injury occurred more than four years prior to the original complaint, the statute of limitations bars any recovery of damages caused by that conduct.

Plaintiffs argued that, notwithstanding the early date of Defendants actions, their claims were timely because the stratified the pleading standard for tolling. Defendants argue that, to the contrary, Plaintiffs allegations fall short on all three elements: concealment, ignorance, and diligence. First, the alleged conspiracy was not self-concealing, as the EquiLend platform and its ownership was public knowledge, and Plaintiffs did not adequately allege affirmative acts of concealment by defendants; to the extent that they cite any acts, they fail to identify which occurred prior to August 2013. Against claims of ignorance, Defendants point again to the 2009 Global Custodian article quoted in Plaintiff’s own complaint, stating that it must have, at least, placed plaintiffs on inquiry notice. And on diligence, Defendants claim that Plaintiff’s reading of the Rule 9(b) requirement to say that “a plaintiff’s diligence is often satisfied by allegations of a defendants concealment” is inadequate, as it functionally reads the diligence requirement out of existence. Moreover, Plaintiffs fail to explain what happened during the limitations period to prompt the investigation by counsel that resulted in the lengthy complaint—and without that, it is impossible, as per Defendants, to ascertain whether Plaintiffs could or should have discovered their claim within the period.


And with that, I will close this post; we’ll update this series again when the motion to dismiss decision comes down, so stay tuned for developments.

*No, you’re not missing a reference. Call it creative license.

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

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