Lieff Cabraser on Recovering Alpha with Non

Non-Traditional Approaches
To Antitrust and Securities Cases
Presentation to
Investment Company Institute
May 2016 General Membership Meeting
Bruce W. Leppla, M.S., JD.
Partner
Lieff Cabraser Heimann
& Bernstein, LLP
415-956-1000
[email protected]
1164248.20
Non-Traditional Approaches
To Antitrust and Securities Cases
Creative Legal Work Can Lead
To Substantial Recoveries
For Investment Company Litigants
(Case Studies)
Game Plan:
Ø Investment Losses due to fraud or serious corporate misconduct are
inevitable.
Ø When this happens, best practices includes a fiduciary duty to
evaluate recovering assets entrusted to our care.
Ø Investment loss recovery can be outsourced on a contingency fee
basis at zero cost and for reasonable contingent attorneys’ fees.
Ø My dual interest: Litigation Partner and
Chairman of an Investment Firm.
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Non-Traditional Approaches
To Antitrust and Securities Cases
Creative Legal Work Can Lead
To Substantial Recoveries
For Investment Company Litigants
(Case Studies)
Game Plan:
Ø Brief Background in Anti-Trust Price-Fixing
Ø A review of two very successful cases for institutional investors.
Ø In re CDS Antitrust Litigation (SDNY).
Ø Lieff Cabraser Securities and Antitrust Opt-Out Actions on behalf of Major
Institutional Investors.
Ø A discussion of what financial fraud negotiation/litigation can mean
for you.
Ø “The days of leaving money on the table are over.”
General Counsel, University Endowment Fund.
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Antitrust Price Fixing Claims:
General Background
Sherman Antitrust Act Section 1
Ø Prohibits unreasonable restraints of trade that injure competitors and/or
consumers.
Ø Examples include combinations or conspiracies to fix prices (it does not matter if
the fixed price is a reasonable price, the fixing of prices is itself unreasonable);
predatory pricing (selling goods or services below cost, causing competitors to
suffer loss or exit the market); tying arrangements – an agreement by a vendor
to sell a good or service but only on the condition that the buyer also purchases
a different product (known as the “tied” product). Restraints can be horizontal or
vertical.
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Antitrust Price Fixing Claims:
General Background
Elements of a Sherman Act Section 1 Price Fixing Claim
Ø There is an alleged combination or conspiracy between the defendants to fix the
price of [insert the relevant good, commodity or service].
Ø Two tests: 1) Price Fixing is “Per Se” illegal; or 2) Price fixing is deemed illegal
after applying the so-called “Rule of Reason” test.
1) Per Se Illegal: [Standard Favored by Plaintiffs.] US v. Socony-Vacuum Oil Co.,
310 US 150 (1940): Any “combination formed for the purpose and with the
effect of raising, depressing, fixing, pegging, or stabilizing the price of a
commodity in interstate commerce is per se illegal.”
Examples: Evidence of written price fixing agreement, or agreement to divide markets.
Defenses: 1) No Agreement. 2) Price was not affected – so no damages.
2) Price Fixing is Deemed Illegal After Applying a Rule of Reason Test [Standard
Favored by Defendants]. Core element of a Rule of Reason Price Fixing Claim:
Ø The combination or conspiracy caused an unreasonable restraint of trade.
Under Rule of Reason the Following
Additional Elements Must be Proven:
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Antitrust Price-Fixing Claims:
General Background
Elements of a Sherman Act Section 1 Price Fixing Claim (cont.)
The alleged restraint had a substantial effect on interstate commerce and involved a substantial
amount of such commerce.
Ø To meet this test the plaintiff must define 1) the relevant goods or services market, 2)
the geographic territory for such a market, and 3) that the defendants possessed
sufficient market power to adversely effect competition in this market.
Ø Market power, generally, includes the ability to control price, exclude competition, or
restrict output. So we examine: 1) the nature of the industry, 2) facts specific, unique
or peculiar to that industry, 3) the nature of the alleged restraint and its probable
effect, 4) the history of the restraint, and 5) reasons for adopting the restraint – are
they reasonable (e.g., a collaboration to develop a good or service, or unreasonable).
Ø The plaintiff suffered injury in his business or property as the result of the alleged
combination or conspiracy.
Ø Under Both Theories:
Ø Damages: if these elements are met, the court or jury may award damages. Treble damages
are available in antitrust cases.
Ø Note: the mere similarity or even identity of prices does not, without more, establish a
conspiracy to fix prices.
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In re CDS Antitrust Litigation
Background
Ø CDS (credit default swap): A type of financial derivative. Derivative: An instrument
whose value is based on the value of an underlying asset or security. There are many
types – e.g., derivatives based on loans, corporate debt instruments, equities,
commodities, municipal guaranteed investment contracts, etc. etc.
Ø A CDS derivative is a contract between the Seller (insurer) and buyer (insured) based
whose value is based on the value of the underlying asset or security. The CDS buyer
makes periodic premium payments. The CDS seller is required to make a lump sum
payment to the buyer in the event, typically, of a credit default. A credit default can
include ratings decline, loan payment default, bankruptcy, etc.
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In re CDS Antitrust Litigation
Background (cont.)
In this case:
Ø Plaintiffs: Investment Funds, both public funds and private investment firms, that
purchased and/or sold CDS contracts during the Class Period.
Ø Class Period: January 1, 2008 to September 25, 2015.
Ø Principal Legal Claims:
Ø First, CDS purchasers and sellers either paid more for a CDS contract, or received
less on the sale of a CDS contract, than they would have but for the alleged
conspiracy of defendants to “fix” the bid/ask spreads on CDS contract transactions.
Ø How was this alleged market manipulation achieved? Primarily by: 1) denying entry
to qualified market makers (e.g., Deutsche Borse, CME, Citadel Investments) to
defendants’ CDS exchange; and 2) thereafter allegedly conspiring to fix the bid/ask
spread in the purchase and sale of CDS’s in the US.
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In re CDS Antitrust Litigation
Background (cont.)
Ø Defendants: Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citigroup,
Credit Suisse, Deutsche Bank AG, Goldman Sachs & Co., HSBC Group, J.P. Morgan,
Morgan Stanley, The Royal Bank of Scotland Group, Société Générale, UBS AG, and
Wachovia Bank, N.A. (acquired by Wells Fargo) (“IB’s”).
Ø Also Markit Group, owned by the IB’s, and the International Swaps and Derivatives
Association (ISDA) based in NYC.
Ø The Markit Group provides CDS transaction data.
Ø The ISDA creates standardized derivatives contracts traded OTC.
Ø Estimated Class-Wide Damages: Some estimates were up to $8 billion.
Ø Status of the Class Case: Settled in October 2015 for $1,864,650,000, minus costs
and attorney’s fees.
Ø Damages Claim: Excessive bid-ask purchase price paid for CDS’s, and inadequate
consideration received on sale. Again: Antitrust violations, if proved, carry treble
damages remedies.
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In re CDS Antitrust Litigation
Notable Aspects of the CDS Antitrust Case
First: Case Ideas can come from unlikely places.
An inquiry into potential antitrust issues was first initiated by the US Department of Justice
Antitrust Division.
The US DOJ was interested in the fact that various investment banks (IB’s) owned the ICE,
a derivatives clearing house. However, after an investigation of whether this ownership
might have an adverse impact on competition, the DOJ dropped the inquiry.
But, in April 2011 the EC opened a similar investigation.
Ø Why did the EC open an investigation when the DOJ dropped its investigation?
Ø Between 2006 and 2009, the Deutsche Borse and Chicago Mercantile Exchange (CME)
tried to enter the CDS business. 2 issues were of interest to the EC:
1) Did IB’s and Markit collude to provide market information only to the IB’s.
2) Did IB’s and ICE collude to inhibit other clearing houses from entering the market?
Ø The EC later opened its probe to include the ISDA.
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In re CDS Antitrust Litigation
Notable Aspects (cont.)
Ø July 1, 2013: The EC issued a formal statement of objections to 13 IB’s (who controlled
the ICE), Markit and ISDA that it had come to preliminary conclusion that the
investment banks had violated EC antitrust rules and regulations prohibiting unlawful
restraints of trade.
Ø Shortly thereafter (in August and November 2013) the first US plaintiff class actions on
behalf of US purchasers and sellers of CDS’s was filed in SDNY.
Ø Lesson 1: Watch what the US and EC regulators investigate.
Ø In the US private antitrust class actions two primary claims were made:
1) The 2008 Blocking of Entry into the CDS market of a proposed exchange, the
CMDX, a JV between Citadel LLC and the CME. Denial of licenses for information
supplied by Markit and to ISDA’s industry standard licensing agreements. (Even
though Markit and ISDA would have enjoyed substantially higher profits from
more market participants.)
2) Control Over CDS Clearing and Exclusion of Alternate Dealers from the ICE. The
result: Excessive Bid/Ask spreads.
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In re CDS Antitrust Litigation
Notable Aspects (cont.)
Second: Persistence. Once committed, the plaintiff litigant must go all in.
Ø Note: The actions were filed in the US. But there were no pending US governmental
alleged antitrust violation criminal charges. Nor were there any US government
settlements, fines or penalties.
Defendants’ Primary Claims
Ø Conspiracy allegations were implausible and unproven.
Ø Alleged injuries to class members were too remote to provide the basis of an antitrust
claim.
Ø The statute of limitations barred the bulk of the claims.
Ø Dodd-Frank preempted the application of the antitrust laws to the case.
Plaintiffs’ Burden to Rebut these Claims
Ø The case required substantial litigation funding demands with no guarantee of any
return: E.g., 3 years of lodestar for countless attorneys; over 3 million pages of
document review; 27 adverse fact depositions; 24 depositions of third parties; briefing
on 4 motions to dismiss which required detailed factual inquiry to tease out facts that
show alleged collusion and conspiracy; and all the while over 15 of the largest defense
law firms globally fighting the case.
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In re CDS Antitrust Litigation
Notable Aspects (cont.)
Third: Novel Theory of Proof of damages.
Ø Notional value of the CDS transactions was in the trillions.
Ø Multi-step process to determine class damages:
1) Theory: Effectively barring CDMX from the market led to lack of a) competition
with respect to bid-ask spread and b) led to lack of transparency of bid-ask
spread;
2) The bid-ask spread was therefore wider than in other forms of exchange
transactions where the bid–ask spread can be calculated over time; and
3) In an effort to prove all of this the plaintiffs had to persuade the court to compel
defendants to produce transaction data.
4) Then, the plaintiffs had to analyze data points for millions of transactions,
removing non-qualifying transactions. Plaintiffs retained former CDS traders to
testify as to the manner in which transaction quotes were given to the market;
and econometricians and statisticians to create algorithms down to hours in the
trading day going back 5 years. All of this was then compared to bid-ask spreads
that are common in the US corporate bond market.
Ø Expert work alone required a millions of $$$ of academic and econometric damages
analysis.
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In re CDS Antitrust Litigation
Notable Aspects (cont.)
Fourth: Timing. The global CDS antitrust case settled in October 2015.
Ø But: On December 4, 2015, the European Commission, whose inquiry in July 2013 had
initiated the entire case, decided to close its investigation:
Ø “The Commission has decided to close antitrust proceedings against all 13
investment banks involved in the investigation into the credit default swap
market… Today’s closure regarding the 13 investment banks is based on a
thorough analysis of all information received from the parties in their replies and
during an oral hearing in May 2014, as well as on documents obtained through
additional fact finding. The evidence was not sufficiently conclusive to confirm the
Commission’s concerns with regard to the 13 investment banks.”
So – Great timing!
Fifth: All along, the plaintiff investment funds supported the case, and they and
the class obtained substantial financial benefit as a result.
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Introducing Lieff Cabraser
Ø One of the Nation's Largest Plaintiffs' Law Firms
Ø 40+ years of experience
Ø 80+ lawyers in San Francisco, New York, Nashville & Seattle
Ø Lead or Co-Lead Counsel in 300+ Class Actions Nationwide
Ø Recoveries Exceed $97 Billion in 7 Practice Areas including Antitrust and Securities &
Financial Fraud
Ø 25 Trial Verdicts and Settlements totaling over $1 Billion
Ø Recognitions: The National Law Journal’s “Elite Trial Lawyers: The 50 Leading
Plaintiff Firms in America,” “Plaintiffs’ Hot List;” U.S. News and Best Lawyers’ “Law
Firm of the Year” and Law360’s “Most Feared Plaintiffs’ Firms”
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Lieff Cabraser’s Antitrust and Securities
Fraud Negotiation and Litigation Services
Case Evaluation, Analysis, and Loss Calculations
Monitor U.S. and foreign securities litigation matters
Comprehensive analysis and written case evaluations
Economic loss and recoverable damages assessments (FIFO and
LIFO)
Ø Selective approach to recommending cases
Ø Litigation options include: Seeking Lead Plaintiff status in class
litigation, Opt-Out/Direct Action or Pre-Filing Demand
Ø Network of sophisticated foreign law firms
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Lieff Cabraser’s Opt-Out Litigation Practice
Ø Lead plaintiff in class action represents the entire class of
aggrieved investors, except those investors who “opt-out”
of the class.
Ø Some “opt-out” of the class, hire their own lawyers, and
negotiate / litigate investment loss recovery on their own.
Ø Fiduciarydutytoconsideralternativemethodstorecover
largelosses
Ø Potentialforsubstantiallygreaterfinancialrecoveries
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Lieff Cabraser’s Opt-Out Litigation Practice
Ø Opportunity to choose legal counsel and negotiate fee
arrangements separately
Ø Opportunity for pre-litigation negotiation / resolution of
claim
Ø Institutional investor’s threat of trial is credible, raising the
value of its case
Ø Control over litigation strategy, settlement, trial, and appeal
Ø Potential to assert significant additional claims for relief
(state law claims, etc.)
Ø Potential to seek punitive damages and other remedies not
generally available to the class plaintiff
Ø Upon resolution, immediate receipt of settlement funds
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Opt-Out Litigation Case Study: Qwest
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Representative Securities Litigation
Opt-Out Recoveries
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Lieff Cabraser’s Judicial Recognition
Ø “This really was an extraordinary case in which plaintiff’s counsel performed…an
extraordinary service... They did a wonderful job in this case. . . . This was an
outrageous wrong committed … and plaintiffs’ counsel deserve a world of credit for
taking it on, for running the risk, for financing it and doing a great job.”
§ U.S. District Court Judge Lewis A. Kaplan
§ Southern District of New York
Ø “Notably, Attorney Richard Heimann’s trial performance ranks as one of the best this
judge has seen in sixteen years on the bench.”
§
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U.S. District Court Judge William Alsup
§ Northern District of California
Representative Lieff Cabraser Clients
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PrivateInstitutionalClients
PublicFundClients
BlackRock
NewYorkStateCommon Retirement
Fund
LordAbbett
NYCPensionFunds
CharlesSchwab
NJOfficeoftheTreasury
JanusCapitalCorp.
StateRetirementSystemsofPA,ME,
Ohio,Iowa,MD,MI,others
Dodge &Cox
CalSTRS
NuveenInvestments
LA,Dallas,Houston andother
municipal retirementsystems
FranklinTempleton
UCRegentsEndowmentFund
Hermes
Numerous LaborUnionFunds
Non-Traditional Approaches
To Antitrust and Securities Cases
My partners and I would be pleased to discuss your firm’s opportunities
for investment loss recovery. Legal creativity can lead to significant
Institutional Investor recoveries.
Pleasecallorwrite:
BruceW.Leppla,Partner
LieffCabraserHeimann&BernsteinLLP
[email protected]
415-956-1000x3381
415-309-3535
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