After nearly a decade of litigation, the U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of a putative class action brought against more than twenty international financial institutions alleging a conspiracy to manipulate Yen-LIBOR and Euroyen-TIBOR rates.
In so ruling, the Second Circuit held that:
1) The plaintiff failed to alleged that significant acts took place in the United States, and as a result his federal Commodity Exchange Act ("CEA") allegations were impermissibly extraterritorial.
2) The plaintiff lacked antitrust standing because the plaintiff would not be an efficient enforcer of antitrust laws; and
3) The plaintiff failed to allege proximate causation for his RICO claims.
A copy of the opinion is available at: Link to Opinion
A United States resident who traded three-month Euroyen TIBOR futures contracts and related short positions between January 1, 2006 and June 30, 2011 on the Chicago Mercantile Exchange ("CME").
Yen-LIBOR ("Libor") and Euroyen TIBOR ("TIBOR") reflect the interest rates at which banks can lend Japanese Yen outside of Japan. The Japanese Bankers Association ("JBA") calculates the TIBOR by accepting submissions at which the banks could borrower offshore Yen. The JBA discards the two highest and lowest submissions and averages out the remaining submissions. TIBOR was calculated each business day at 11 am Tokyo time.
Similarly, the British Banker's Association ("BBA") calculates the Yen-LIBOR ("LIBOR") by discarding the highest and lowest 50% of submissions from a panel of London-based bank then averages the remaining 50% of submissions. The LIBOR was calculated each business day at 11 am London time.
The US resident filed a lawsuit against more than twenty international financial institutions claiming losses due to the false LIBOR submissions to the BBA. He claimed that the defendants' trader employees submitted false information to the BBA and requested other individuals to submit false information to the BBA so the benchmark rates change in a way that is beneficial to their compensation. As LIBOR rates were set earlier in the trading day, he further alleged that the defendant's manipulative actions altered the TIBOR rates and subsequent value of his TIBOR future contracts. He also alleged that the defendants had an inherent conflict of interest because they improperly held their own TIBOR based derivative positions and that the defendants' traders' compensations relied on these calculations.
The plaintiff initially asserted claims for alleged violations of the federal Commodity Exchange Act ("CEA"), the Sherman Antitrust Act, and the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"). After numerous amendments to his pleadings and nearly a decade of litigation, the trial court eventually dismissed all of the plaintiff's claims. This appeal followed.
Plaintiff's CEA Claim
On appeal, the plaintiff argued that the trial court erred by dismissing his CEA claims as impermissibly extraterritorial.
Under 7 U.S.C. § 13(a)(2), the CEA prohibits "manipulat[ing] or attempt[ing] to manipulate the price of any commodity in interstate commerce." The CEA also provides a private right of action permitting any party to sue to hold a party liable for "actual damages resulting from one or more of the transactions" listed in the statute. Id. 10 § 25(a)(1).
When determining whether to apply United States law to conduct that occurred in foreign countries, United States courts exercise a presumption against extraterritoriality. In determining whether the presumption against extraterritoriality has been rebutted, the courts must apply a two (2) step analysis.
First, the court must examine whether the "text provides a clear indication of an extraterritorial application." WesternGeco LLC v. 24 ION Geophysical Corp., 138 S. Ct. 2129, 2136 (2018). In the absence of clear expressed congressional intent, "federal laws will be construed to have only domestic application." RJR Nabisco, Inc., 579 U.S. at 335. Second, if the court determines the presumption has not been rebutted, the court must then decide "whether the case involves a domestic application of the statute." Id. at 337.
Applying these two factors, the Second Circuit held that Section 22 of the CEA lacks any affirmative intention by Congress to give extraterritorial effect." Loginovskaya v. Batratchenko, 764 F.3d 266, 272 (2d Cir. 2014). Furthermore, the Court held that the conduct alleged here was predominantly foreign because the plaintiff traded derivatives tied to a foreign asset, the derivatives were based on rates set by foreign entities in foreign countries, and that the manipulative conduct occurred abroad on overseas trading desks.
The Second Circuit rejected the plaintiff's argument that the conduct was domestic because the subjects of the manipulation -- the LIBOR and TIBOR rates -- were not commodities traded on a domestic exchange as required by the CEA. The Appellate Court further noted that benchmark-based future rates like the TIBOR and LIBOR do not contain any independent value like a commodity. In addition, Second Circuit had previously dismissed a similar CEA claim for being impermissibly extraterritorial. See Prime Int'l Trading, 25 Ltd. v. BP P.L.C., 937 F.3d 94 (2d Cir. 2019).
Accordingly, the Second Circuit affirmed the trial court's dismissal of the plaintiff's CEA claim.
Plaintiff's Antitrust Claim
In order to state an antirust claim, a plaintiff first must show that (1) he has "suffered antitrust injury," and (2) he is an "efficient enforcer of the antitrust laws." Gilboa v. Bank of Am. Corp., 823 F.3d 759, 769 (2d Cir. 2016).
In order to determine if a party is an efficient enforcer of antitrust laws, a court examines four factors: 1) the directness or indirectness of the asserted injury, which requires evaluation of the chain of causation linking appellants' asserted injury and the alleged price-fixing; (2) the existence of more direct victims of the alleged conspiracy; (3) the extent to which appellants' damages claim is highly speculative; and (4) the importance of avoiding either the risk of duplicate recoveries on the one hand, or the danger of complex apportionment of damages on the other. Id at 778.
The Second Circuit agreed with the trial court that the plaintiff lacked antitrust standing for numerous reasons. First, the plaintiff did not contract directly with any of the defendants, but instead with unknown third parties. Because he did not transact directly with any of the named defendants his injury was not proximately caused by the defendants. In addition, the plaintiff's theory of liability was based on a series of causal steps separate from his purported injury. Moreover, the plaintiff alleged he was an indirect victim of the defendants' conduct and other parties, such as interest swap-traders, would have qualified as direct victims and would be considered more efficient enforcers of antitrust law. Lastly, the Appellate Court held that the plaintiff's claims involved speculative causation and apportioning damages would be difficult, imprecise, and potentially impossible to calculate.
Therefore, the Second Circuit held that the plaintiff was not an efficient enforcer of antitrust law and lacked standing.
Plaintiff's RICO Claim
To establish a RICO claim, a plaintiff must show proximate causation. Here, the plaintiff's RICO claims were premised on wire fraud. The Appellate Court held that the plaintiff failed to allege that the supposed acts of wire fraud proximately caused his injury. For the same reason that the plaintiff's antitrust claim failed, the Appellate Court noted again that plaintiff's failure to allege any direct dealings indicated that he could not adequately plead proximate causation.
Accordingly, the Second Circuit affirmed the trial court's dismissal.
Ralph T. Wutscher
Maurice Wutscher LLP
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