Iowa Pub. Employees' Ret. Sys. v. Merrill Lynch, Pierce, Fenner & Smith Inc.

340 F.Supp.3d 285

IOWA PUBLIC EMPLOYEES' RETIREMENT SYSTEM ; Los Angeles County Employees Retirement Association; Orange County Employees Retirement System; Sonoma County Employees' Retirement Association ; and Torus Capital, LLC, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs,

v.MERRILL LYNCH, PIERCE, FENNER & SMITH INC.; Merrill Lynch L.P. Holdings, Inc.; Merrill Lynch Professional Clearing Corp.; Credit Suisse AG; Credit Suisse Securities (USA) LLC; Credit Suisse First Boston Next Fund, Inc. ; Credit Suisse Prime Securities Services (USA) LLC ; Goldman Sachs & Co. LLC ; Goldman Sachs Execution & Clearing, L.P.; J.P. Morgan Securities LLC; J.P. Morgan Prime, Inc. ; J.P. Morgan Strategic Securities Lending Corp.; J.P. Morgan Chase Bank, N.A.; Morgan Stanley & Co. LLC; Prime Dealer Services Corp. ; Strategic Investments I, Inc. ; UBS AG; UBS Americas Inc., UBS Securities LLC; UBS Financial Services Inc.; EquiLend LLC; EquiLend Europe Limited ; and EquiLend Holdings LLC, Defendants.

17 Civ. 6221 (KPF)

United States District Court, S.D. New York.

Signed September 27, 2018

Julie Goldsmith Reiser, David A. Young, Emmy L. Levens, Kit A. Pierson, Richard A. Koffman, Robert White Cobbs, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Christopher James Bateman, Michael Benjamin Eisenkraft, Cohen Milstein Sellers & Toll PLLC, Maaren Alia Shah, Maxwell Paden Deabler-Meadows, Thomas Popejoy, Jeremy Daniel Andersen, Sascha Nicholas Rand, Steig Olson, Thomas Lepri, Daniel Lawrence Brockett, Quinn Emanuel Urquhart & Sullivan LLP, Peter George Safirstein, Safirstein Metcalf LLP, New York, NY, for Plaintiffs.

Adam Selim Hakki, Richard Franklin Schwed, Shearman & Sterling LLP, David George Januszewski, Elai E. Katz, Herbert Scott Washer, Jason Michael Hall, Margaret Ann Barone, Sheila Chithran Ramesh, Cahill Gordon & Reindel LLP, Andrew Hunter Reynard, Richard C. Pepperman, II, Sullivan and Cromwell, LLP, Staci Lynn Yablon, Winston & Strawn LLP, Damaris Hernandez, Daniel Slifkin, Michael A. Paskin, Lauren Michelle Rosenberg, Cravath, Swaine & Moore LLP, Alan J. Brudner, Katten Muchin Rosenman, LLP, Sarah Katherine Weber, Paul Weiss, Carmine D. Boccuzzi, Jr., Cleary Gottlieb, New York, NY, Ryan Ashby Shores, Shearman & Sterling LLP, Henry Liu, John S. Playforth, Kuntal Cholera, Robert D. Wick, Covington & Burling, LLP, Alexis L. Collins, David I. Gelfand, Cleary Gottlieb Steen & Hamilton LLP, Washington, DC, Robert Y. Sperling, Winston & Strawn LLP, David Charles Bohan, Peter Ginewicz Wilson, Katten Muchin Rosenman LLP, Chicago, IL, for Defendants.

OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

In a 398-paragraph complaint, Plaintiffs detail a wide-ranging conspiracy to prevent the antiquated stock loan market from evolving into a transparent, direct, all-to-all electronic exchange. This market is critical to the short selling of stocks, a not-uncommon investment tool. The thrust of Plaintiffs' allegations is that Defendants conspired to boycott new market entrants — specifically, AQS, SL-x, and Data Explorers — in order to maintain their monopoly grip as prime broker intermediaries, and, by extension, to charge excessive fees under the cover of price opacity.

Defendants have jointly moved to dismiss the Amended Class Action Complaint (the "Amended Complaint" or "AC") under Federal Rule of Civil Procedure 12(b)(6) on five primary bases: the allegations are implausible; the alleged conduct as to SL-x and Data Explorers neither qualifies as per se unlawful nor violates the rule of reason; Plaintiffs lack antitrust standing; Plaintiffs' claims are untimely; and Plaintiffs' claim of unjust enrichment fails for the same reasons as their antitrust claim. Defendant EquiLend adds, in a supplemental motion to dismiss, that its alleged conduct was consistent with rational business strategy, and that the Court lacks specific personal jurisdiction over EquiLend Europe.

As set forth in the remainder of this Opinion, the Court rejects these arguments and denies Defendants' motions to dismiss. While it remains to be seen whether Plaintiffs' factual allegations will be borne out in discovery, the Court is not permitted to dismiss them at this early stage of the litigation.

BACKGROUND¹

A. Factual Background

Construed in the light most favorable to Plaintiffs, the Amended Complaint alleges the following:

1. The Parties

During the class period, Defendants Bank of America,² Credit Suisse,³ Goldman Sachs,⁴ J.P. Morgan,⁵ Morgan Stanley,⁶ and UBS⁷ (collectively, the "Prime Broker Defendants" or "Defendants") engaged in securities lending and stock lending transactions with class members, either directly or through Defendants' affiliates. (AC ¶¶ 50, 56, 61, 69-70, 77-78, 86-87). The Prime Broker Defendants are each partial owners of Defendant EquiLend, and their employees served on EquiLend's Board of Directors during the Class Period. (Id. ). Employees from Bank of America, Goldman Sachs, J.P. Morgan, and Morgan Stanley also served on the Boards of Directors for the Options Clearing Corporation ("OCC") and the Depository Trust Clearing Corporation ("DTCC"), which are central clearinghouses for stock loan transactions. (Id. at ¶¶ 50, 61, 69, 77). Defendant UBS's employees served on the Board of Directors for DTCC. (Id. at ¶ 86). Defendant EquiLend is a "dealer consortium," which, it is alleged, Defendants used as a front for their conspiracy. (Id. at ¶¶ 10, 12).⁸

Plaintiffs Iowa Public Employees' Retirement System ("IPERS"), Los Angeles County Employees Retirement Association ("LACERA"), Orange County Employees Retirement System ("OCERS"), and Sonoma County Employees' Retirement Association ("SCERA") provide retirement and other benefits to public employees. (AC ¶¶ 40-43). Each manages many billions of dollars in assets and each has lent significant volumes of stock to the Prime Broker Defendants and their clients. (Id. ). SCERA has also borrowed significant volumes of stock from Defendant Credit Suisse. (Id. at ¶ 43). Plaintiff Torus Capital, LLC ("Torus") is a trading firm, headquartered in Connecticut, that has borrowed significant volumes of stock from Defendants Goldman Sachs and Bank of America. IPERS, LACERA, OCERS, SCERA, and Torus (collectively, "Plaintiffs") bring this suit as a class action on behalf of themselves and all other similarly situated persons and entities who entered into stock loan transactions with the Prime Broker Defendants from January 7, 2009, to the present (the "Class Period"). (Id. at 1). The proposed class in this action includes borrowers and lenders. (Id. at ¶ 7).

2. The Stock Loan Market

Stock lending transactions are used primarily to facilitate the short selling of stocks, in which short sellers predict that a stock price will decrease. (AC ¶ 94). Short sellers generally do not own the stocks they sell. (Id. at ¶ 95). Instead, they typically use the services of a broker-dealer to "borrow" the stock, in exchange for cash collateral and a lending fee. (Id. at ¶¶ 95, 97). In a stock "loan" transaction, the lender transfers title of the security to the borrower, and the borrower promises to return equivalent securities in the future, in exchange for return of the collateral. (Id. at ¶¶ 105-06). A short seller who accurately predicts that a stock price will decrease can profit by borrowing the stock, selling the "borrowed" stock at a high price to a third party, waiting for the stock price to fall, and then buying back the equivalent stock at the lower price to return to the "lender." (Id. at ¶¶ 95, 97, 105-06). This process is risky in part because stock loans typically have no set termination date; either the lender or borrower can terminate the loan at will. (Id. at ¶ 106).

A stock lending transaction generally involves a number of different parties. (AC ¶ 97). The owner of the stock is known as the "stock lender" or the "beneficial owner." (Id. ). An intermediary agent, called an "agent lender," works for the lender in exchange for a portion of the lending fee. (Id. ). Agent lenders are often banks that service many lenders, and thus have large aggregate collections of stocks to loan out. (Id. at ¶ 107). A "broker-dealer" acts as an intermediary matchmaker between the agent lenders and prospective borrowers. (Id. at ¶ 97). The broker-dealer collects a fee from the borrower, takes a cut, and pays the remainder to the lender. (Id. ). At present, broker-dealers do not reveal to either lenders or borrowers what their counterparty has paid or received, or what percentage of the fee the broker-dealer has pocketed. (Id. ). "Stock borrowers" are generally investors who borrow stocks to facilitate short selling. (Id. ).

The stock loan market is known as an "over-the-counter" (or "OTC") market because it has no central marketplace where participants can engage in direct exchanges, or obtain real-time data about trading prices and transaction volumes. (AC ¶ 98). These characteristics of the market leave prospective lenders and borrowers dependent on the broker-dealer intermediaries, who often set the price of a trade without negotiation, and who keep data about the prices and volume of trades hidden from the market as a whole. (Id. at ¶¶ 98-99).

"Prime brokers" are broker-dealers who offer an array of services that include stock lending. (AC ¶ 102). Between 2014 and 2017, the Prime Broker Defendants controlled between 76% and 80% of market share for prime brokerage services, and, accordingly, the vast majority of real-time price and volume data. (Id. at ¶¶ 102-03). In 2016, the Prime Broker Defendants' share of lending fees amounted to approximately 65% of total industry revenue. (Id. at ¶ 113). In presumed justification, Defendants represented to their clients that one aspect of their role as prime brokers was to "protect[ ] clients from credit and counterparty risk by standing between clients and lenders in every stock loan trade." (Id. at ¶ 147).

Plaintiffs allege that the stock loan market has...