United States: Will Antitrust Cases Relating To Securities Transactions Invite More Objections Because Of Their Complexity?

Last Updated: April 18 2016
Article by John S. McMahon

The deadline for parties to object to the settlement in the In re Credit Default Swaps Antitrust Litigation, Master Docket No. 13-MD-2476 (DLC) in the Southern District of New York recently passed on February 29, 2016. Unlike in most cases, where parties typically only object to settlements to the extent they allocate attorneys' fees, several potential settlement class members to this litigation ("CDS Litigation") have made specific, substantive objections to the potential distribution of settlement funds. In class plaintiffs' ("Plaintiffs" or "Class Plaintiffs") memo of law in support of approval of the settlement, Plaintiffs responded forcefully to these objections. Although Judge Denise Cote has yet to decide whether to approve the settlement, it is worth examining these new objections, which may suggest a trend in class-action settlement objections—at least in antitrust cases relating to securities transactions—moving forward. In addition, Plaintiffs' heavy reliance on experts to create a settlement model may reflect another trend worth keeping an eye on.

Initially, certain settlement class members sent a letter to the Court (489) expressing their "objections." While not necessarily finding fault with the methodology of apportioning the settlement funds, these class members stated that they were unable to understand that methodology and the pricing models used therein. Although these class members were engaged in communications with co-lead counsel for Plaintiffs, their questions had not been satisfactorily answered by February 29, the deadline to object, so in an abundance of caution, these class members objected to the settlement. Notably, these class members stated that, in particular, they "are concerned with the methodology utilized" in the settlement plan "for determining bid-ask spreads for the various types" of covered transactions, "and thus whether certain types of transactions received more favorable treatment than others." (Docket No. 489 at 1-2.)

Next, another institutional class member submitted its objections in a more formal memo (491). This institution argues that "[t]he proposed plan of distribution includes settlement terms which discriminate against a majority of class members and prevent a fair recovery for those who suffered the greatest harm." (Docket No. 491 at 1.) According to the institution, the proposed settlement defines the term "Covered Notional" in such a way that applying "the plan's allocation methodology ... unfairly results in the award of damages for a great number of covered transactions which in fact incurred a zero or a de minimis bid-ask spread." (Id. at 1.) As a result, "class members who bought or sold such CDS contracts unfairly benefit from the application of an anticompetitive inflation amount to trades that had zero or de minimis spread damages," and "the vast majority of class members, including institutional traders and others who did not employ these strategies, are being very substantially under-compensated." (Id. at 1-2.) Further, said institution argues that the proposed settlement omits many of its CDS trades that should be included in the settlement, claiming that "[t]he settlement website currently fails to list 320 CDS trades entered into by [class member] that satisfy the definition of covered transaction under the agreements of settlement and plan of distribution. ... While [class member] has notified the Administrator of the omission of these qualifying trades, as of this date it has not been notified whether they will be included as covered transactions." (Id. at 2.) It claims that "the plan for distribution of settlement funds could be readily adjusted so that the anticompetitive spread is not applied unfairly to all legs of packaged transactions, even those with a zero or de minimis spread," by identifying certain types of transactions and adjusting their treatment in the settlement. (Id. at 5.) The six suggested adjustments are:

  1. whenever a credit derivative index was traded the same day as at least 60% of that index's underlying components, then the covered notional amount should be adjusted to 50% of the sum of the notional amounts of all trades in such package;
  2. whenever a tranche was traded the same day as its underlying index or at least 60% of that index's underlying components, then the covered notional amount should be adjusted to 50% of the sum of the notional amounts across all components of such package;
  3. whenever convexity/curve trades were made and a buy and a sell occurred on the same trade date in the same reference entity but with at least 2 years difference between IMM maturity dates, then the covered notional of the longer to mature leg of such package should be adjusted to zero;
  4. whenever at least two single name trades were done within a 2 week period preceding and including an IMM date, which reflect both a buy and a sell of the same reference entity with the same notional amount, the same trade date for such buy and the sell (indicating a roll forward of an existing position) and the difference in maturity dates of both trades is between 3 and 6 months, then the covered notional amount of such package should be adjusted to 50% of the sum of the notional amounts of all buys and sells described herein;
  5. whenever a single name Payer/Receiver option was traded and a single name CDS were traded on the same trade date with the same reference entity, the covered notional amount on the single name CDS should be adjusted to 50% of the traded notional; and
  6. whenever an index Payer/Receiver option was traded and an index CDS were traded on the same trade date, with the same reference entity, the covered notional amount on the index CDS should be adjusted to 50% of the traded notional.

(Id. at 5.)

In addition, more institutions have also filed their objections (494). The primary concern of these funds is that "[t]he settlement website fails to include many of [the funds'] transactions that should be included as Covered Transactions," and "neither the Settlement Administrator nor Class Counsel has provided assurance that the missing transactions will be included before claims are paid and that [the funds] will be compensated based on those transactions." (Docket No. 494 at 2.) Thus, these funds "request[ed] that they be allowed to opt out of the Settlement Agreement once the Settlement Administrator finally determines which of [the funds'] CDS transactions are included in the Covered Transactions." (Id. at 2.) The funds also argue, similarly to the earlier institution above, that "[t]he distribution plan unfairly awards disproportionate damages to Multi-Leg CDS Index Related Trades," using calculations based off both legs of such trades, instead of just one:

Multi-Leg CDS Index Related Trades generally involve payment of the bid-ask spread on a single leg, or one side of the trade, or a significantly reduced bid-ask spread on both legs of the trade with the net effect being similar to paying the bid-ask spread on only one leg of the trade. The allocation methodology, however, awards full damages as though the full bid-ask spread had actually been paid on each leg of Multi-Leg CDS Index Related Trades. Therefore, class members that employed such trades were unfairly over-allocated settlement proceeds to the detriment of other class members.

(Id. at 3.)

Next, additional institutions filed their objections as well (496). The first concern expressed was that information regarding the covered transactions "was not available on the website until on or about January 29, 2016," thirty days before the opt-out deadline. According to these objectors, "[t]his is an extremely complicated case, and many of the key documents at issue are under seal. ... Allowing Settlement Class Members a mere 30 days to assess their rights and the adequacy of the settlement agreements is unreasonable, unfair, and inadequate." (Docket No. 496 at 1-2.) Thus, the objectors "request[ed] that the Court deny approval of the settlement agreements unless the date to opt out is extended at least four weeks, to March 27, 2016." (Id. at 2.) In addition, using somewhat harsher language than others, these objectors argue that "the definition of 'Covered Notional' peddles a fiction that the bid-ask spreads on various CDS trading strategies would have been equal for many trades where this certainly would not have been the case in reality." (Id. at 3.) This development, according to these objectors, "seems to be the result of a process whereby the Defendants' most active clients in CDS (who likely received discounted bid-ask spreads simply by virtue of their frequent use of the product) are disproportionately benefiting from the settlement at the expense of smaller consumers of CDS (who, in reality, would have been the proportionately larger beneficiaries of a transparent and liquid exchange)." (Id. at 3.) The objectors argue that, instead, "the plan for distribution of settlement funds should be adjusted so that the damage awards reflect the actual inappropriate bid- ask spreads incurred by each class member's trading strategies, rather than a fictional presumption of equal spreads for all strategies." (Id. at 3.)

Finally, another institution submitted its objection via a letter to the Court from its general counsel (497). Said institution identifies two types of trades, index arbitrage packages and correlation trade packages, which could create issues with calculating bid-ask spreads similar to those described above. According to the objector, "[t]rading an index arbitrage package requires simultaneously buying or selling a credit index and buying or selling all of the underlying single names that make up the index. ... Due to the packaged nature of these trades and volume of activity, it is common market practice for dealer defendants to significantly mark down or reduce heavily the bid/ask spread." (Docket No. 497 at 1.) For correlation trade packages, a "class member's trade bespoke or customized tranches along with single name CDS to express views on correlation levels. This type of trade requires exchanging single name CDS at mid-market levels which would cause class members to not pay bid-ask spread hence not making them a Covered Transaction." (Id. at 1.) As a result, this objector asked the Court to consider implementing, on a best efforts basis, a procedure for identifying and either discounting or removing the (i) index arbitrage package trades and (ii) correlation trade packages." (Id. at 2.)

In response, on April 1, 2016, Class Plaintiffs filed a memo of law in support of approval of the settlement plan, which included responses to the objections (Docket No. 503). Plaintiffs' memo argues that the objections lack merit, starting with general attacks on all the objections. First, according to Plaintiffs, the objections "disregard the applicable legal standard." (Docket No. 503 at 25.) Plaintiffs acknowledge that "[n]o damages model or distribution plan in a case where damages are this complex could ever be perfect," but "[t]he only question, as this stage, is whether the plan has a reasonable, rational basis." (Id. at 25 (internal quotations omitted).) Second, Plaintiffs call the objections "wholly impracticable." (Id. at 26.) According to Plaintiffs, "[t]o the limited extent they offer 'solutions' to the problems they purport to identify, those solutions are either unworkable given the limitations of the available class-wide data, obviously subjective, or they even contradict each other, which powerfully illustrates that these solutions are not themselves objective or practicable." (Id. at 26.) Pointedly, Plaintiffs argue that "[n]either in their written comments nor otherwise have these Objectors expressed any understanding of the practical limitations of what can be done with the available class-wide datasets or of the inherent challenges of building a claims model that works objectively on a class-wide basis. Their narrow focus on maximizing the value of their own claims has simply blinded them to any other considerations." (Id. at 26.)

Next, Plaintiffs argue that "the objections are speculative." (Id. at 26.) "While objectors assert that other class members may have engaged in trades or trading strategies that could have resulted in tighter bid-ask spreads and thus may have been overvalued by the Plan, they offer no citation to any objective evidence or source establishing how exactly such trades were performed, what the volume of such trades were during the relevant time period, or what impact there would be on spreads for such trades and why." (Id. at 26.) Perhaps more to the point, Plaintiffs argue that the volume of such transactions is small: "having gone back (at the expense of the Class) to evaluate these types of transactions, Co-Lead Counsel and their consulting experts have not been able to identify anything other than potentially (using subjective and arbitrary criteria) a de minimis number of such transactions in the available dataset." (Id. at 27.) Plaintiffs observe that "if these entities truly feel that they have a superior way of proving their own individual damages, they were free to opt out. ... But they should not be permitted to stay in the Class and hold up a widely embraced distribution plan in the process." (Id. at 27-28.) As for the class members who raised objections because the settlement website did not include certain of their transactions, Plaintiffs argue that "because Objectors have successfully availed themselves of the 'challenge' process available to every class member on the settlement website, ... the vast majority of these trades will now be included in Objectors' claims." (Id. at 29.) In addition, "[i]t is well accepted that often the details of allocation and distribution are not established until after the settlement is approved," and "[i]t is impracticable for each class member to know with mathematical precision what its payment will be prior to making a decision about whether to remain a class member." (Id. at 36 (internal citations omitted).)

In regard to the claim that objectors "did not have 'sufficient opportunity' to assess its rights prior to the opt-out deadline," Plaintiffs respond that "notice and description of the Settlement were sent to class members on January 11, 2016, and individual claimants were provided a tremendous amount of additional information about their transactions on January 29, 2016," which they argue was an ample amount of time to decide whether to object. (Id. at 40.)

Finally, as an interesting corollary, although several objectors requested that more work be done to analyze the trades at issue, Plaintiffs also made several observations in their briefing as to the amount of work performed already by their expert. Plaintiffs noted that "[t]he expert work alone in this complex financial market case was extremely costly, exceeding $7 million as of January 29, 2016." (Id. at 7.) More specifically, "[t]he expert work required to build a viable damages model was tremendous. Plaintiffs' experts processed over 100 million individual CDS transaction records in less than a year, and provided Defendants with a functioning (and defensible) damages model months before class certification." (Id. at 12.) "To develop a class-wide damages model, Co-Lead Counsel first worked with their consulting experts to model the spreads paid by class members in the actual world. This was a herculean task for many reasons — including because there was no available source of class-wide data on the spreads paid by class members in the OTC market." (Id. at 18.) "To provide class members with a great deal of information early in the process, Co-Lead Counsel and their consulting experts took the initiative to identify the Covered Transactions applicable to each class member that could be identified in the DTCC Trade Dataset. This, too, took an enormous amount of work — work that, arguably, Co-Lead Counsel could have left for each class member to do itself as part of the claims process." (Id. at 20.)

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