Stock Loan Lowdown, Part Two: To Dismiss or Not to Dismiss?

“To dismiss or not to dismiss” is the question that Judge Failla presently mulls, and will likely continue to do for the coming weeks. Or months? Anticipation is running high here at the Manipulation Monitor, so let’s hope it is not a question of years.
For those of you who may be wondering what, exactly, is at risk of dismissal, a prudent proposition may be to promenade yourself into the recent past for a perusal of a popular post on this very topic – the original Stock Loan Lowdown.

Now that we’re all up to speed, it’s time to dig in to the defenses put forward by the Prime Broker Defendants in their motion to dismiss papers, filed back in January 2018. Defendants’ arguments cover four main topics: first, Plaintiffs failed to adequately allege a violation of the Sherman Act; second, Plaintiffs lack antitrust standing; third, Plaintiffs’ claims are time barred; and fourth, Plaintiffs have failed to state a claim for unjust enrichment. Let’s get started.

Adequacy of Allegations under the Sherman Act

  1. Plausibility

The first argument put forward by the Prime Broker Defendants goes directly to the heart of Plaintiffs’ allegations: is the conspiracy they allege not just “conceivable,” but plausible, as required under Twombly? Defendants argue that it is not, and their leading reason is, on its face, a simple one: stock loans are poorly suited to anonymous trading. That is to say, because lenders are able to recall loaned shares at any time, a rational borrower seeks not an anonymous trade via an exchange, but rather to develop relationships with the source of their loans and thus minimize the risk that those loaned shares will be recalled. Proof of this, Defendants assert, is the fact that such an exchange did not emerge despite the actions of the Defendants, given that there are numerous other prime brokers who could have participated if demand existed.

In further support of their theory of implausibility is Defendant’s assertion that no clearinghouses offer their clearing services directly to borrowers and lenders. As such clearing arrangements are a necessary precondition for the alternative trading environment that Plaintiffs envision, Defendant’s position is that the marketplace as Plaintiffs discussed could not reasonably be expected to come to fruition.

Beyond assertions of facial implausibility, the Prime Broker Defendants focus on the two pathways through which Plaintiffs may satisfy the plausibility standard required: they must either provide “direct evidence” of a conspiracy, which is explicit and requires no inferences to establish the proposition, or “circumstantial facts” showing parallel conduct together with “plus factors” demonstrating that the conduct was the result of a preceding agreement, and not independent business priorities.

Direct evidence of a conspiracy—the “smoking gun” style of evidence so common in courtroom dramas—does not exist in this case, because “Plaintiffs fail to allege who attended any such meeting, where and when it occurred, what a was discussed, and what agreement was allegedly reached.” Defendant’s position is, essentially, that none of the examples given in Plaintiffs’ complaint provide enough factual specificity to rise to the level of direct evidence. The reference by a BofAML executive to a “meeting of the five families,” for example, fails this test because it does not provide precise details of the circumstances of the meeting, identify the executive in question, or even specify who the members of the “five families” may be.

Defendants further assert that the Plaintiffs have failed to plead the existence of any parallel conduct from which a conspiracy can be inferred. Their first complaint here is that a pleading must allege “particular activities” by each “particular defendant,” and cannot rely on generalizations about the defendants as a group. For example, such statements as “the Prime Broker Defendants not only boycotted the platform themselves, but pressured other market participants to do so,” are not sufficiently nonconclusory to successfully allege parallel behavior. Moreover, the complaint does not distinguish between the Defendants within their various corporate families, thus failing, as per the Prime Broker Defendants, to place them on notice as to how each Defendant participated in the conspiracy.

Where Plaintiffs did offer specific allegations concerning the individual defendants, those allegations demonstrate conduct that was “more divergent than parallel.” Claims of parallel behavior concerning AQS, for example, are undermined by the fact that at least one defendant, BofAML, was initially a strong supporter of the platform. Indeed, Defendant’s brief later makes the request that, “[b]ecause BofAML did not act in “parallel” with the other Defendants (indeed, it invested in AQS)—and there are no “plus factors” linking it to any conspiracy—BofAML should be dismissed.” That the others put forth an identical position of support for AQS only as a broker-only platform is not, according to Defendants, parallel conduct preceded by conspiracy, but merely sound—and independent—business judgments arising from the fact that the by-laws of the OCC only permitted broker-dealer members of the OCC to transact on the platform. Parallel behavior as concerns SL-x faces a similar issue: as Defendants were approached together about forming a consortium for the purpose of investing in that entity, it was only reasonable, so Defendants suggest, that they would have engaged in a common response.

Defendants further attack Plaintiffs’ allegations of a common motive to conspire, arguing that “it is not enough to allege that each Prime Broker Defendant had an interest in maintaining its profits.” Rather, Plaintiffs must demonstrate that Defendants had a strong interest in conspiring to engage in conduct that they were unlikely to undertake absent a conspiracy. In this case, Defendants allege, the unilateral business motives of the individual defendants were responsible for the actions that Plaintiffs claim as conspiratorial.

  1. Rule of Reason

The second branch of Defendant’s argument pertains to the “rule of reason” analysis that is the standard for antitrust claims. The alternative—per se liability—is limited to those agreements whose “nature and necessary effect are so plainly anticompetitive” that no industry analysis is needed to establish illegality. The rule of reason analysis, in comparison, requires Plaintiffs to bear the burden of showing that the alleged agreement “produced an adverse, anti-competitive effect within a relevant geographic market.” Arguing that the conduct alleged in the complaint does not fit into any previously recognized category of conduct that is illegal per se, Defendants maintain that the rule of reason must apply to the challenged actions by Equilend and the Prime Broker Defendants.

In support of that notion, Defendants point to the lack of allegations defining EquiLend’s product, geographic market, or market share and power. This argument is particularly strong, Defendants claim, with respect to the allegations concerning the creation of DataLend to compete with Data Explorers. The operative word there is, of course, “compete,” for how can evidence of competition demonstrate a restraint of trade? Specifically, Defendants argue that Plaintiffs’ allegations about DataLend’s lower prices merely show “robust competition,” and, in fact, the Prime Broker Defendants did not even decline to subscribe to the service offered by Data Explorers.

Defendants make similar arguments concerning SL-x and AQS. A decision not to merge with SL-x, even if taken based on the unanimous decision of EquiLend’s board of directors, cannot be seen as anti-competitive where Plaintiffs failed to allege that such a merger would have been in EquiLend’s best interest—particularly given that SL-x lacked an operational platform. EquiLend’s later decision not to make a capital investment is subject to the same analysis. Even EquiLend’s ultimate purchase of SL-x’s patents after its failure was legitimate joint venture conduct, per Defendants, even though they never ultimately commercialized the technology. With respect to AQS, Defendants point out that Plaintiffs did not allege any facts demonstrating why a deal between AQS and OCC would have posed “a significant threat to the Prime Broker Defendants,” and, further, that Defendants’ subsequent acquisition of AQS was not for the purpose of “burying it”—AQS had, in fact, already failed.

  1. Standing, Statute of Limitations, and Unjust Enrichment

With apologies for lumping these disparate categories together, this section will overview Defendant’s three remaining arguments for dismissal, beginning with Defendant’s assertion that the injuries pleaded are too speculative to confer antitrust standing.

Defendants characterize Plaintiffs’ claim of injury as one based on a “hypothetical world of all-to-all trading in which the elimination of the Prime Broker Defendants as middlemen would have allowed borrowers and lenders to execute stock loan trades at lower costs.” This is unavailing, say the Defendants, for two reasons: first, neither Data Explorers nor SL-x had any plans to offer all-to-all trading; second, to the extent that AQS did hold that goal, rules requiring broker-dealers to function as intermediaries would have prevented its actualization. In order to plead antitrust standing, a plaintiff must allege that it is “an efficient enforcer of antitrust laws”; one of the ways that can be demonstrated is the speculative of the alleged injuries.

Describing Plaintiffs’ injury theories as both “conjectural” and “attenuated,” Defendants posit that their speculative nature alone is sufficient to defeat antitrust standing. Defendants rely here—as they do at several points in their brief—on the case of In re Interest Rate Swaps Antitrust Litigation, which ruled that, despite the presence of three out of four “enforcer factors” favoring antitrust standing, their “extraordinarily conjectural” injury theory was sufficient to preclude standing.

Next, Defendants’ statute of limitations argument was presented in two parts. First, while Plaintiffs’ complaint, filed August 16, 2017, asserts claims for damages stretching back to January 7, 2009, claims under Section 1 of the Sherman Act are subject to a four-year statute of limitations. To the extent that Plaintiffs allege continuing violations, Defendants say, that exception only permits a Plaintiff to recover for “damages caused by over acts committed inside the limitations period.”

Under New York law, the statute of limitations for Plaintiffs’ unjust enrichment claims vary depending on the relief sought: six years for an equitable remedy, but just three where money damages are sought. Defendants argue that Plaintiffs’ sought-after “restitution of [] monies of which they were unfairly and improperly deprived” is a demand for monetary damages subject to the three-year limitation period. Under that standard, claims for conduct prior to August 16, 2014 is barred.

In response to Plaintiffs’ argument that the Prime Broker Defendants fraudulently concealed their conduct, thus tolling the limitations period, Defendants claim that such concealment allegations conflict with Plaintiffs’ theory of the case. Specifically, Defendants point to allegations by Plaintiffs that Defendants openly threatened industry participants, including members of the proposed class—if such threats occurred, Defendant ask, how could it also be true that the Plaintiffs did not know of the behavior? Other arguments in this section concern the adequacy of Plaintiffs’ pleadings, with Defendants contending that Plaintiffs failed to meet their burden in proving that “misleading” statements by the Defendant were intentionally false when made.

Finally, with respect to unjust enrichment, Defendant’s argument is simple: the claim is based wholly on Plaintiffs’ antitrust claim. If the antitrust claim fails, as Defendants believe it should, then there no longer exists a “viable claim of illegality,” and any claims for unjust enrichment are, essentially, no longer unjust, and thus must be (justly?) dismissed.

The EquiLend Defendants

Concurrently with the Prime Broker Defendant’s filing, Defendant EquiLend filed a brief supplemental memorandum of their own. The two arguments in this brief contend, first, that all allegations relating to EquiLend are insufficient under Twombly, and, second, that no personal jurisdiction exists over EquiLend Europe.

In order to pass muster under Twombly, the complaint must plead facts sufficient to plausibly suggest that EquiLend joined a conspiracy to boycott. As an initial matter, EquiLend protests the conflation of the three EquiLend entities, both between each other and often together with the Prime Broker Defendants as a group. These collective allegations do not satisfy Plaintiff’s burden to plead individual participation of each participant entity. Even within this group pleading, EquiLend insists that the complaint contains no allegation of a communication in which EquiLend agreed to boycott any entity. The two statements attributable to CEO Brian Lamb are, according to EquiLend, impermissibly vague, and no facts are pled that would allow for the inference that the statements (instructions not to “break ranks,” and to “support an agenda”) were either an invitation or agreement to a boycott.

To the extent that the complaint alleges that the EquiLend board meetings served as a “forum” in which the Prime Broker Defendants conspired to actuate their boycotts, EquiLend relies on the holding in In re Interest Rate Swaps Antitrust Litigation to assert that, even if the allegations were well-pled, such conduct by the Prime Broker Defendant would not implicate EquiLend.
EquiLend’s other arguments with respect to the allegations are largely repetitive of those put forward by the Prime Broker Defendants: the actions that EquilLend took with respect to AQS, SL-x, and DataLend were all the result of rational, competitive business strategy that ought to be examined under the rule of reason.

Finally, the arguments concerning EquiLend Europe are straightforward: the brief argues that the entity has no meaningful connection to the United States, that it is incorporated in the United Kingdom, has its head offices in London, keeps no office, employees, bank accounts, or assets in the United States, and serves no clients here. Plaintiff’s allegations as they concern EquiLend Europe are limited to the result of overlap between the individuals serving as directors of EquiLend and EquiLend Europe, and that overlap is not sufficient to create personal jurisdiction over EquiLend Europe.

EquiLend and the Prime Broker Defendants have done their best to undercut the allegations put forward by Plaintiffs, but we all know this isn’t a done deal. To find out just what Plaintiffs had to say in response, keep your eyes open for the next installment of this Stock Loan Lowdown series.

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

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