Antitrust Law Daily Wrap Up, TOP STORY: Banks reach $1.9B settlement in credit default swaps conspiracy case, (Oct 19, 2015)

By Greg Hammond, J.D.

A group of major banks have reached a nearly $1.9 billion settlement of claims that they conspired to restrain trade in the market for credit default swaps (CDS) in violation of Section 1 of the Sherman Act, representing one of the largest antitrust class action settlements in history. Plaintiffs have asked the federal district court in New York City to give preliminary approval to the proposed settlement, contending that the settlement is fair, reasonable, adequate, and the result of arm’s-length negotiations (In re Credit Default Swaps Antitrust Litigation, Dkt. 1:13-md-02476-DLC).

A CDS is used as a tool for hedging credit risk. It is a financial derivative contract in which the buyer pays the seller in exchange for the seller’s promise to make the buyer whole on an agreed amount in the event of some “credit event,” such as a default on the debt instrument by a third party.

Investors who purchased CDS from, or sold CDS to, defending U.S. banks alleged that the banks conspired to prevent new entrants from successfully introducing exchange trading venues and electronic platforms in the CDS market that would have led to greater transparency and competition. The defending banks included Bank of America Corp.; JPMorgan Chase & Co.; The Goldman Sachs Group, Inc.; HSBC Holdings plc; Barclays Bank PLC; Citigroup Inc.; Deutsche Bank AG; Morgan Stanley & Co., LLC; Royal Bank of Scotland, N.V.; and UBS AG.

Under the terms of the proposed settlement, the defendant banks will create a common fund of $1,864,650,000, which will be made available to class members. Attorney fees will not exceed 14 percent of the settlement fund. In addition, defendant International Swaps and Derivatives Association (ISDA)—a trade association with significant influence in the market—has agreed to injunctive relief in which it would: (1) adopt a new licensing framework; (2) create a new independent licensing sub-committee; (3) implement a dispute resolution mechanism; (4) publicize decisions of the sub-committee on ISDA’s website; and (5) have the ISDA Board of Directors formally consider and vote on a proposal for ISDA to make an official statement in favor of abolishing the practice of post-trade name disclosure in the CDS market.

The investor plaintiffs seek to represent a settlement class that includes all persons who, during the period of January 1, 2008 through September 25, 2015, purchased CDS from or sold CDS to the banks, a released party, or any purported co-conspirator, in any “covered transaction.” A purchase or sale of CDS is a “covered transaction” under any of the following circumstances: (1) if the purchase or sale was by or on behalf of a person domiciled or located in the United States at the time of the purchase or sale; (2) if the person was domiciled and located outside of the United States at the time of any purchase or sale, but the purchase or sale was in U.S. commerce; or (3) where the purchase or sale otherwise falls within the scope of U.S. antitrust laws.

Finally, the investor plaintiffs claim that the settlement meets the requirements for preliminary approval because the proposed settlement was the result of extensive arm’s-length negotiations facilitated by an experienced, well-respected mediator; the proposed settlement is substantively fair and reasonable in light of risks and the potential range of recovery; and the settlement class satisfied the requirements of Federal Rule of Civil Procedure 23(a) and 23(b)(3).

Attorneys: Daniel L. Brockett (Quinn Emanuel Urquhart & Sullivan LLP) and Bruce L. Simon (Pearson, Simon, & Warshaw, LLP) for plaintiffs.

Companies: Bank of America Corp.; JPMorgan Chase & Co.; Goldman Sachs Group, Inc.; HSBC Holdings plc; Barclays Bank PLC; Citigroup Inc.; Deutsche Bank AG; The Goldman Sachs Group, Inc.; Morgan Stanley & Co., LLC; Royal Bank of Scotland, N.V.; UBS AG; International Swaps and Derivatives Association

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