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June 23, 2016 Articles

Will Securities Antitrust Cases Invite More Objections Because of the Complexity of Their Distribution Plans?

Objections in a recent case could signify that class members will start to examine distribution plans more closely

By Terry McMahon, Joel D. Rothman, and Peter M. Saparoff

The number of antitrust claims being brought in securities cases, especially class actions, in on the increase. See Peter M. Saparoff et al., “The Increasing Application of Antitrust Claims to Securities Transactions,” Securities Litigation, Winter 2016. Antitrust claims have appeared in several recent high-profile class action securities cases, including the litigations covering the LIBOR manipulation scandal [log-in required], the market for U.S. Treasuries, the foreign currency exchanges, and the precious metals markets [log-in required]. In one such class action, In re Credit Default Swaps Antitrust Litigation, No. 1:2013-md-02476 (S.D.N.Y.) (registration required), several institutional class members recently objected to a proposed settlement, criticizing, among other issues, the pricing models and methodology used to allocate settlement funds among the class plaintiffs. Although the court has now rejected those objections and approved the settlement, it is worth examining the objections in more detail. Traditionally, objections to class action settlements focus on attorney fees. But the objections in the credit default swap (CDS) litigation could signify that class members will start to examine distribution plans more closely, especially as part of these highly complex hybrid cases that address antitrust issues in the context of securities class action litigation.

Background on the Proposed Settlement
On October 16, 2015, class plaintiffs in the CDS litigation moved for the preliminary approval of a $1.865 billion settlement of the litigation. Memorandum in Support of Plaintiffs’ Motion for Preliminary Approval of Settlement, In re Credit Default Swaps Antitrust Litig., No. 1:2013-md-02476 (Oct. 16, 2015). The plaintiffs alleged that, in and around 2008 and 2009, a number of financial institutions conspired to prevent new entrants to the market from introducing exchange trading venues and electronic platforms that would have increased competition and transparency in the CDS market.

The proposed settlement class in the CDS case includes “[a]ll Persons who, during the period of January 1, 2008 through September 25, 2015, purchased CDS from or sold CDS to the Dealer Defendants, a Released Party, or any purported co-conspirator, in any Covered Transaction.” The settlement defines “CDS” to include “any and all types of credit default swap(s) and CDS-based products, including, without limitation, single-name CDS, CDS on corporate, sovereign and municipal reference entities, tranche CDS, basket CDS, index CDS, and CDS futures.” Under the settlement agreement, a purchase or sale of a CDS was deemed to be a “Covered Transaction” if the transaction was made by (or on behalf of) a person domiciled or located in the United States at the time of transaction, if the transaction was in United States commerce, or if the transaction otherwise fell within the scope of the U.S. antitrust laws. The “Dealer Defendants” in this case were BNP Paribas, Bank of America Corporation, Bank of America, N.A., Barclays Bank PLC, Citibank, N.A., Citigroup Global Markets Inc., Citigroup, Inc., Credit Suisse AG, Deutsche Bank AG, Goldman, Sachs & Co., HSBC Bank PLC, HSBC Bank USA N.A., JP Morgan Chase & Co., JPMorgan Chase Bank, N.A., Morgan Stanley & Co. L.L.C., Royal Bank of Scotland N.V., Royal Bank of Scotland PLC, UBS AG, and UBS Securities LLC.

One important way that the recovery process for antitrust settlements can differ from securities law settlements is in how settlement proceeds are distributed. In most class action settlements, class members must file claims and attach data to prove their entitlement to participate in the recovery. However, in antitrust settlements, the process of measuring and allocating damages based on the records of the defendants is so complex that this question alone often necessitates expert advice, and class members cannot simply assume that they will receive a distribution. In those cases, defendants and class plaintiffs typically jointly determine who is eligible and notify those parties. In some cases, such as the Forex settlement, class members who receive the notice of eligibility can only receive their distribution once they register on an online portal. The process in the CDS litigation is even more detailed: Class members must still file a proof of claim form on an online portal, but they can only do so once provided a claim number. Those claim numbers, however, were contained in notices that were randomly mailed out to only a subset of class members. Class members who did not receive this notice have had to do some digging to find their claim number in order to file their proof of claim.

The deadline for parties to object to the settlement was on February 29, 2016, and on that date several parties leapt to make their objections to the settlement, or at least to the plan for distributing the recovered funds among the plaintiffs. While in most cases parties typically object to settlements only in terms of how much they allocate to attorney fees, several potential settlement class members in the CDS litigation made specific, substantive objections to the potential distribution of settlement funds among the class members. In their memo of law in support of approval of the settlement, the class plaintiffs responded forcefully to these objections. Judge Denise Cote approved the settlement, denying the objections in one short paragraph. In re Credit Default Swaps Antitrust Litig., No. 1:2013-md-02476 (S.D.N.Y. Apr. 18, 2016). However, the types of objections made may signal a trend in class action settlement objections—at least in the antitrust context. In addition, the plaintiffs’ heavy reliance on experts to create a settlement model may reflect another trend worth watching.

Common Objections
Although each objector had its own set of criticisms about the proposed settlement, there were a few common themes throughout the group.

Inadequate time for analysis. In some cases, the February 29 deadline was itself the problem. Some class members were unable to have their questions fully answered concerning the settlement plan and methodology of apportioning the settlement funds in time, despite being in communication with co-lead counsel to the class plaintiffs. Because they still had questions as of the deadline to object, these class members objected to the settlement out of an abundance of caution. Similarly, another group of class members expressed concerns that information regarding the covered transactions “was not available on the website until on or about January 29, 2016,” 30 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.” Objections of Silver Point Capital, L.P., and Related Entities at 1–2, In re Credit Default Swaps Antitrust Litig., No. 1:2013-md-02476 (Mar. 1, 2016), ECF No. 496. 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.

Exclusion of certain trades. Several institutional class members objected to the proposed settlement because they believed that the proposed distribution plan failed to take into account many of their CDS trades that should have been included. The primary concern of these funds was 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.” Objections of the Anchorage Funds at 2, In re Credit Default Swaps Antitrust Litig., No. 1:2013-md-02476 (Mar. 1, 2016), ECF No. 494. 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.

Critique of methodology used to determine the settlement plan. Many of the objections concerned, as one set of objectors argued, “the methodology utilized” in the settlement distribution 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.” Letter to Clerk of Court from Counsel for FFI Fund Ltd., FYI Fund Ltd., Olifant Fund, Ltd., and Asset-Backed Recovery Fund, Ltd. (Feb. 29, 2016), at 1–2, ECF No. 489.  For example, one institutional class member argued 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.” Objections of MF Global Capital LLC at 1, In re Credit Default Swaps Antitrust Litig., No. 1:2013-md-02476 (Mar. 1, 2016), ECF No. 491. According to this institution, the proposed settlement defines relevant terms 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. 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. According to this objector, “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.

More specifically, some class members objected that the distribution plan unfairly awarded damages regarding multi-leg CDS index related trades. As one objector put it, these 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.” Objections of the Anchorage Funds, supra, at 3. The distribution plan, 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. One objector even suggested a nefarious purpose to this alleged error, arguing that the distribution plan

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).

Objections of Silver Point Capital, L.P., and Related Entities, supra, at 3.

In addition, another institutional class member filed an objection arguing that bid-ask spreads had also been miscalculated for package transactions. Specifically, this institution identified 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.

Letter to Clerk of the Court from Counsel for Saba Capital (Feb. 29, 2016), at 1, ECF No. 497.

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.

Class Plaintiffs’ Counterarguments
Because the court did not go into detail as to why it denied these objections, it is worth reviewing the class plaintiffs’ response to these objections, made in a memo of law filed on April 1, 2016. Memorandum in Support of Plaintiffs’ Motion for Final Approval of Settlement, In re Credit Default Swaps Antitrust Litig., No. 1:2013-md-02476 (Apr. 1, 2016), ECF. No. 503. First, according to the class plaintiffs, the objections “disregard the applicable legal standard.” Id. at 25. The 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, at this stage, is whether the plan has a reasonable, rational basis.” Id. (internal quotations omitted). Second, the plaintiffs call the objections “wholly impracticable.” Id. at 26. According to the 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. Pointedly, the 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.


Next, the plaintiffs argue that “the objections are speculative.”

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.


Perhaps more to the point, the 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. The 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, the 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 [their] rights prior to the opt-out deadline,” the 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, the plaintiffs also made several observations in their briefing as to the amount of work performed already by their expert. The 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.

. . . .

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 18, 20.

Because the court summarily rejected the objections made to the proposed settlement and distribution plan in the CDS litigation, the objections will not have a significant impact on this litigation. Still, the fact that these objections are even being made is an indication that substantive objections to plans of distribution may become the norm for future proposed class action settlements, especially in the antitrust context.

Keywords: litigation, securities, antitrust, settlement, distribution, objection, objector