Antitrust Law Daily Wrap Up, ANTITRUST—S.D.N.Y.: Firefighter pension system's antitrust complaint over British government securities price-fixing dismissed, (Sep 17, 2024)

By Kenneth H. Ryesky, M.B.A., J.D.

Report by UK's antitrust regulators in ongoing investigation of some of the defendant banks did not constitute adequate pleading of conspiracy in American bond markets.

A federal district court in New York, New York has dismissed the putative class action antitrust complaint by an Oklahoma state pension system against a group of Europe-based banks and their USA affiliates. The complaint alleged price-fixing for British government bonds in American secondary markets. The court found that the evidence proffered by the pension fund did not plausibly plead either a conspiracy under the Sherman Act or standing to bring an antitrust lawsuit. Having so ruled, the court found it unnecessary to address the statute of limitations issue, the issue of personal jurisdiction over the foreign defendant banks, or the propriety of the venue. The complaint was dismissed without prejudice (Oklahoma Firefighters Pension and Retirement System v. Deutsche Bank Aktiengesellschaft, No. 1:23-cv-05095-JGK (N.D. Ill. Sept. 13, 2024)).

Background. The United Kingdom Debt Management Office (DMO) issues bonds and similar securities on behalf of His Majesty's Treasury. Securities issued by the Bank of England had historically been issued on paper that featured thin gold leaf; these came to be known as "Gilt-edged securities." The term "Gilts" has accordingly come into financial industry parlance to generally refer to securities issued by the British government; such securities are considered to be of low risk.

The primary market for Gilts is their initial issuance at auction by the DMO. These primary market auctions are sustained by Gilt-edged Market Makers (GEMMs), which are banks designated by the DMO whose selection obligates them to actively distribute and market the Gilts to lower-tiered investors and dealers in the secondary market. GEMMs are required to bid on a minimum designated percentage of the Gilts placed on the primary market auction block. For each Gilt auction, one or more GEMM is designated as a primary dealer. The DMO monitors the GEMMs it designates, and provides incentives for them to meet and exceed certain performance goals.

Once issued, a Gilt is resold in the secondary over-the-counter market to other investors; these investors include individuals, hedge funds, banks, and governmental entities in the UK and elsewhere. The GEMM designated as a primary dealer for a given Gilt issue must maintain a designated share of that issue's market, and is required to buy and sell the relevant Gilt on demand in the secondary market; this facilitates secondary market liquidity.

The price at which a dealer will buy a Gilt in the secondary market is called the "bid" price, and the sale price quoted by the dealer for the same Gilt is called the "ask" price. Banks and other dealers stand to profit by retaining the difference between the bid price and the ask price. The dynamics of competition in the secondary market is based upon the bid-ask spread. A dealer that narrows its bid-ask spread has a lower profit margin but stands to attract more customers, while a dealer that widens its bid-ask spread earns a higher profit margin on each transaction, but stands to lose customers to dealers that have narrower bid-ask spreads.

The Oklahoma Firefighters Pension and Retirement System (OFPRS), which provides benefits for municipal police officers in the State of Oklahoma, is a secondary market investor that has invested in Gilts. The OFPRS brought a putative class action lawsuit against five European GEMM banks and their respective USA affiliates. OFPRS alleged that these banks violated the Sherman Act with a conspiracy to widen their bid-ask spreads on Gilts sold on United States secondary markets by increasing their ask prices and decreasing their bid prices. The conspiracy, alleged OFPRS, was carried out by exchanging sensitive information through private chatrooms and other means of communication.

The banks moved to dismiss the complaint.

Evidence. The court found that OFPRS did not proffer sufficient evidence to adequately plead a conspiracy that violated the Sherman Act. There was no direct evidence of an agreement to fix the bid-ask prices. Here, OFPRS placed great moment upon an ongoing investigation by the UK's Competition and Markets Authority (CMA) in which some of the British bank defendants admitted wrongdoing and tendered cooperation with the CMA. In and of itself, the foreign government investigation was "not direct evidence that any of the defendants participated in the price-fixing conspiracy alleged." Moreover, the CMA's findings did not evidence any conspiracies to fix Gilt prices in US markets.

Nor was there any circumstantial evidence that sufficed to show the particulars of any conspiracy by the defendant banks. No specific quotes to any customer, and no particulars for any transactions or chats by any identified individual. The complaint, replete with conclusory group allegations that the defendants, evidenced no parallel conduct. The historical yield curves of the Gilts were based upon a greater group than the Gilts subject to the US market transactions.

Even if parallel conduct were properly evidenced, the pleadings were deficient in "plus factors" to support a conclusion that the conduct of the plaintiffs were anything more than legal unilateral actions. That the yield curves for Gilts fell during the alleged conspiracy period could be explained by other theories, including the Bank of England's "quantitative easing" program.

Antitrust standing. The court found that while OFPRS did adequately allege antitrust injury for jurisdictional purposes, its allegations were insufficient to show antitrust injury on the merits. No particular instance was alleged of OFPRS receiving too little or paying too much for a Gilt in a transaction with any defendant bank. The court accordingly dismissed the complaint for failure to allege antitrust injury.

The Case is No. 1:23-cv-05095-JGK.

Judge: Koeltl, J.

Attorneys: Amanda F. Lawrence (Scott & Scott, Attorneys at Law, LLP) for Oklahoma Firefighters Pension and Retirement System. Avia Gridi (Simpson Thacher & Bartlett LLP) for Deutsche Bank Aktiengesellschaft a/k/a Deutsche Bank AG. Alexander John Willscher (Sullivan & Cromwell, LLP) for RBC Europe Ltd. Akatrina Marie Robson (Willkie Farr & Gallagher LLP) for Deutsche Bank and HSBC Bank PLC.

Companies: Oklahoma Firefighters Pension and Retirement System; Deutsche Bank Aktiengesellschaft a/k/a Deutsche Bank AG; RBC Europe Ltd.; Deutsche Bank; HSBC Bank PLC

Cases: Antitrust NewYorkNews