in re: libor-based financial instruments antitrust litigation: transcript of march 5 argument

1

1 UNITED STATES DISTRICT COURT

1 SOUTHERN DISTRICT OF NEW YORK

2 ---------------------------------------x

2 In re LIBOR-Based Financial Instruments

3 Antitrust Litigation 11-MD-2262 (NRB)

3

4 Oral Argument

4 ---------------------------------------x

5 New York, N.Y.

5 March 5, 2013

6 10:57 a.m.

6

7 Before:

7

8 HON. NAOMI REICE BUCHWALD,

8

9 District Judge

9

10 APPEARANCES

10

11 SUSMAN GODFREY LLP

11 Attorneys for Over the Counter Class Plaintiffs

12 BY: BILL CARMODY, ESQ.

12 SETH ARD, ESQ.

13

13 HAUSFELD LLP

14 Attorneys for Over the Counter Class Plaintiffs

14 BY: MICHAEL D. HAUSFELD, ESQ.

15 WILLIAM P. BUTTERFIELD, ESQ.

15 HILARY K. SCHERRER, ESQ.

16 NATHANIEL C. GIDDINGS, ESQ.

16

17 LOVELL STEWART HALEBIAN JACOBSON LLP

17 Attorneys for Exchange-Based Plaintiffs

18 BY: CHRISTOPHER LOVELL, ESQ.

18

19 KIRBY McINERNEY LLP

19 Attorneys for Exchange-Based Plaintiffs

20 BY: DAVID E. KOVEL, ESQ.

20

21 WEINSTEIN KITCHENOFF & ASHER LLC

21 Attorneys for Gelboim Bondholder Class Plaintiffs

22 BY: DAVID H. WEINSTEIN, ESQ.

22

23 MORRIS AND MORRIS LLC

23 Attorneys for Gelboim Bondholder Class Plaintiffs

24 BY: KAREN L. MORRIS, ESQ.

24 PATRICK F. MORRIS, ESQ.

25 R. MICHAEL LINDSEY, ESQ.

SOUTHERN DISTRICT REPORTERS, P.C.

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1 APPEARANCES

1 (Continued)

2

2 LIEFF CABRASER HEIMANN & BERNSTEIN, LLP

3 Attorneys for Schwab Plaintiffs

3 BY: STEVEN E. FINEMAN, ESQ.

4 BRENDAN P. GLACKIN, ESQ.

5 SCHLESINGER LAW OFFICES, PA

5 Attorneys for Absent Putative Class Members

6 BY: ZANE BERG, ESQ.

6

7 ROBBINS GELLER RUDMAN & DOWD LLP

7 Attorneys for SEIU Pension Plans Master Trust Plaintiffs

8 BY: PATRICK W. DANIELS, ESQ.

8 NATHAN W. BEAR, ESQ.

9

9 KAPLAN FOX & KILSHEIMER LLP

10 Attorneys for Plaintiffs Earle, Malinowski, and Carr

10 BY: GREGORY K. ARENSON, ESQ.

11

11 BLOCK & LEVITON, LLP

12 Attorneys for Plaintiffs Earle and Carr

12 BY: WHITNEY E. STREET, ESQ.

13

13 COTCHETT, PITRE & MCCARTHY, LLP

14 Attorneys for Plaintiffs San Mateo, Riverside, Richmond,

14 San Diego, East Bay

15 BY: IMTIAZ A. SIDDIQUI, ESQ.

15

16 DAVIS POLK & WARDWELL LLP

16 Attorneys for Defendant Bank of America

17 BY: ROBERT F. WISE, JR., ESQ.

17 ARTHUR J. BURKE, ESQ.

18

18 SIMPSON THACHER & BARTLETT LLP

19 Attorneys for Defendants JPMorgan Chase

19 BY: THOMAS C. RICE, ESQ.

20 JUAN A. ARTEAGA, ESQ.

21 HOGAN LOVELLS US LLP

21 Attorneys for Defendants Lloyds Banking Group and HBOS

22 BY: MARC J. GOTTRIDGE, ESQ.

22

23 BOIES, SCHILLER & FLEXNER LLP

23 Attorneys for Defendant Barclays

24 BY: DAVID BOIES, ESQ.

24 JONATHAN D. SCHILLER, ESQ.

25 MICHAEL A. BRILLE, ESQ.


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1 APPEARANCES

1 (Continued)

2

2 SULLIVAN & CROMWELL LLP

3 Attorneys for Defendant Barclays

3 BY: DAVID H. BRAFF, ESQ.

4 YVONNE S. QUINN, ESQ.

4 MATTHEW J. PORPORA, ESQ.

5

5 HUGHES HUBBARD & REED LLP

6 Attorneys for Defendants WestLB/Portigon

6 BY: ETHAN E. LITWIN, ESQ.

7 MORGAN J. FEDER, ESQ.

7 CHRISTOPHER M. PAPARELLA, ESQ.

8

8 LOCKE LORD LLP

9 Attorneys for Defendant HSBC

9 BY: EDWIN R. DeYOUNG, ESQ.

10 ROGER B. COWIE, ESQ.

10 GREGORY T. CASAMENTO, ESQ.

11

11 CAHILL GORDON & REINDEL LLP

12 Attorneys for Defendant Credit Suisse Group

12 BY: HERBERT S. WASHER, ESQ.

13 ELAI KATZ, ESQ.

13 JOEL KURTZBERG, ESQ.

14

14 CLIFFORD CHANCE US LLP

15 Attorneys for Defendant The Royal Bank of Scotland Group

15 BY: ROBERT HOUCK, ESQ.

16 JAMES MILLER, ESQ.

16 ALEJANDRA DE URIOSTE, ESQ.

17 TIMOTHY CORNELL, ESQ.

17

18 SIDLEY AUSTIN LLP

18 Attorneys for Defendant Norinchukin Bank

19 BY: ALAN M. UNGER, ESQ.

19

20 SULLIVAN & CROMWELL LLP

20 Attorneys for Defendant Bank of Tokyo-Mitsubishi

21 BY: DARYL A. LIBOW, ESQ.

21 CHRISTOPHER M. VIAPIANO, ESQ.

22

22 MILBANK TWEED HADLEY & McCLOY, LLP

23 Attorneys for Defendant Rabobank

23 BY: DAVID R. GELFAND, ESQ.

24 SEAN M. MURPHY, ESQ.

24 ROBERT LINDHOLM, ESQ.

25


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1 APPEARANCES

1 (Continued)

2

2 COVINGTON & BURLING LLP

3 Attorneys for Defendants Citibank, Citigroup

3 BY: ALAN M. WISEMAN, ESQ.

4 ANDREW A. RUFFINO, ESQ.

5 GIBSON DUNN & CRUTCHER LLP

5 Attorneys for Defendant UBS AG

6 BY: JARRETT D. ARP, ESQ.

6 PETER SULLIVAN, ESQ.

7 LAWRENCE J. ZWEIFACH, ESQ.

8 PAUL, WEISS, RIFKIND, WHARTON & GARRISON, LLP

8 Attorneys for Defendant Deutsche Bank

9 BY: MOSES SILVERMAN, ESQ.

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1 (In open court)

2 THE COURT: Before we begin, let me say something, and

3 I mean it very seriously. Every cellphone, every BlackBerry

4 should be off. Anybody who was allowed to bring them in, turn

5 them off now. Not on to vibrate. Off. If any of us see any

6 of you utilize any electronic device, not only will I

7 confiscate it, but I will do everything in my power to

8 discipline you. Is that clear?

9 (Case called)

10 THE CLERK: Are the plaintiffs ready to proceed?

11 MR. CARMODY: We are.

12 THE COURT: How about by name? Just we need are the

13 names of the lawyers who are going to actually speak today.

14 Okay? Thank you.

15 MR. CARMODY: Bill Carmody here with Sussman Godfrey,

16 interim colead for the over the counter class.

17 THE COURT: And you are going to be speaking on what

18 issue?

19 MR. CARMODY: I'm going to be speaking, your Honor, on

20 behalf of the over the counter class but on behalf of all

21 plaintiffs as it pertains to the antitrust Twombly issues,

22 restraint of trade -- excuse me -- restraint of trade and

23 antitrust injury.

24 MR. WEINSTEIN: David Weinstein of Weinstein

25 Kitchenoff & Asher, interim colead counsel for the bondholder


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1 class, and with me is Karen Morris. I will be speaking only

2 with regard to the special issues of standing with respect to

3 our class.

4 MR. LOVELL: Chris Lovell, Lovell Stewart. I will be

5 speaking on CEA, manipulation, and antitrust standing for the

6 exchange plaintiffs, your Honor.

7 MR. KOVEL: David Kovel with Kirby McInerney on behalf

8 of the exchange plaintiffs. I will be speaking on the statute

9 of limitations issues and the extraterritorial tissues in the

10 Commodity Exchange Act motion to dismiss.

11 MR. FINEMAN: Good morning, your Honor. Steve

12 Fineman, from Lieff Cabraser for the Schwab plaintiffs. We'll

13 be addressing anything that has to do with the Schwab case,

14 including RICO and state claw claims, and with me is my partner

15 Brendan Glackin, who will address some of those issues.

16 THE CLERK: For defendants, are you ready to proceed?

17 MR. WISE: We are, your Honor. Bob Wise, Davis Polk &

18 Wardwell, for Bank of America. I'll be speaking on the

19 antitrust, and we've kept it a little bit simpler, so --

20 THE COURT: I appreciate that.

21 MR. WISE: I'll be speaking on the antitrust.

22 MR. GOTTRIDGE: And Marc Gottridge from Hogan Lovells,

23 on behalf of Lloyds Banking Group and HBOS, plc, and I will be

24 addressing Commodity Exchange Act issues.

25 MR. RICE: Good morning, your Honor. Tom Rice from


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1 Simpson Thacher for JPMorgan, and I'll be dealing with RICO and

2 state law claims that are alleged principally in the Schwab

3 case.

4 MR. BOIES: Good morning, your Honor. David Boies of

5 Boies, Schiller & Flexner, with my partner Jonathan Schiller.

6 I'll be addressing issues relating to Barclays and particularly

7 the Barclays settlement, to the extent that that becomes an

8 issue.

9 THE COURT: All right. I'm not sure I can keep track

10 of what I just heard. Let's proceed as follows. I have

11 questions. I have questions by briefing category. I am

12 willing and happy to ask my questions based on the order that I

13 understand you want to argue in, so as I understand it, it's

14 antitrust, exchange based, RICO, and then I guess state law

15 claims. And then what I would suggest is that after my

16 questions, your answers, depending on what time it is -- it

17 can't go on forever, and it won't -- I'll give you just some,

18 you know, brief time to speak.

19 You know, do appreciate, as I'm sure you do, that your

20 briefs have been read and a tremendous amount of preparatory

21 work has gone into this, so one thing you don't need to do is

22 repeat what you've already wrote.

23 But let me begin with a broad question. As everyone

24 is aware, following, you know, the briefing in this case,

25 settlements were reached with UBS and The Royal Bank of


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1 Scotland. Obviously the briefing references the earlier

2 Barclays settlement. Other than the fact that there are now

3 three settlements and not one settlement, do either or both of

4 those settlements have a significant impact on the legal

5 landscape? I'd ask someone on the plaintiffs' side to respond.

6 MR. CARMODY: Your Honor, we have in those two

7 settlements --

8 THE COURT: It would be helpful I think for the court

9 reporter -- just stay where you are. I just want you to state

10 your name.

11 MR. CARMODY: Sorry. Bill Carmody here.

12 THE COURT: It's really just helpful for me. I use

13 the court reporter as an excuse.

14 MR. CARMODY: Certainly I know there have been

15 documents that are attached to the -- those settlements. I

16 know with RBS, for example, they refer to the cartel in London.

17 We can see in the UBS settlement ten different entities, I

18 believe, have colluded with respect to the yen LIBOR collusion.

19 As to the specific issue of collusion of United States dollar,

20 I'm not aware of any documents in those two settlements that

21 specifically refer to that issue.

22 MR. WISE: Your Honor, just two points on that. I

23 agree that there's nothing in the two settlements that refers

24 to US dollar LIBOR. That's what this case is about and

25 therefore, those settlements do not, in our view, bear upon the


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1 issues before you this morning.

2 To the extent that they were to be considered, we

3 actually think that they are helpful to the defendants in that

4 the government in those cases did not make any allegations,

5 despite years of investigation, of the sort of antitrust

6 conspiracy that is alleged by the plaintiffs here. Not one

7 word. And they reviewed millions and millions of documents.

8 MR. LOVELL: Chris Lovell, your Honor. Do you want to

9 just handle the antitrust aspects now or would it apply to the

10 Commodity Exchange Act claims as well as the two new

11 settlements? The implication for the Commodity Exchange Act

12 claims, are you interested in that now, Judge, or is that for

13 later?

14 THE COURT: Make your argument.

15 MR. LOVELL: Well, I do think that the Commodity

16 Futures Trading Commission has made analogous claims that the

17 underlying commodity was manipulated and that it enables the

18 exchange plaintiffs in an amended complaint to make more

19 detailed allegations, your Honor.

20 THE COURT: With regard to US dollar LIBOR?

21 MR. LOVELL: With regard to the -- no, not with -- no,

22 not specifically, your Honor, but with regard to the pattern of

23 conduct.

24 THE COURT: Let's remember, this case only involves US

25 dollar LIBOR, okay?


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1 MR. LOVELL: UBS does involve dollar LIBOR, your

2 Honor.

3 THE COURT: All right. Let's just go on now to the

4 antitrust aspect.

5 Mr. Wise, the plaintiffs have alleged that the

6 defendants engaged in a conspiracy to fix the price of US

7 dollar LIBOR, they argue price fixing as a per se violation of

8 the antitrust laws. Therefore, plaintiffs say, they win.

9 What's wrong with that argument?

10 MR. WISE: Several things, your Honor. We make

11 basically three arguments, as we've outlined them in our brief.

12 One is the absence of an agreement or a conspiracy. That is an

13 essential element to a Section 1 claim. Section 1 does not

14 reach single-firm conduct. So our first argument is that under

15 the Supreme Court's case in Twombly, plaintiffs have failed to

16 meet their pleading burden to show that there's a plausible

17 basis to believe there was an agreement amongst the defendants

18 to suppress LIBOR. I believe that's the allegation of the

19 complaint.

20 We readily agree that the defendants participated in

21 the setting of LIBOR. No question about that. It's set by the

22 British Bankers Association. We do not understand the

23 plaintiffs to be challenging, under the antitrust laws, that

24 essential procedure that's used by the BBA, that is, the

25 submission by each bank of the rates which it believes it could


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1 borrow money at in the London Interbank market. They do not

2 charge, as we understand it, that that is a conspiracy or

3 agreement in violation of the antitrust laws. What they charge

4 instead is a supposed agreement amongst the defendant banks to

5 submit incorrect or false LIBOR reports. What we say, there's

6 no basis for any plausible -- there's no plausible basis to

7 believe that in fact such an agreement ever existed. Indeed,

8 all of the allegations in the plaintiff's own complaint

9 established that in fact such an agreement is implausible. I

10 can go into that in more detail. I don't want to hijack this

11 into entirely a discussion of Twombly, but that is a major

12 point that we make.

13 We have two other arguments.

14 THE COURT: Yes, go ahead.

15 MR. WISE: We say that even if there were an

16 agreement, it's not in restraint of trade. LIBOR is unlike the

17 goods and services that are the subject of so many of the cases

18 that are cited in the brief. We have cases about copper, we

19 have cases about cheese, I think we have a case about running

20 shoes. There's quite a number of different commodities and

21 products that are discussed in various cases that both sides

22 have cited. LIBOR is unique. LIBOR is not a price set by any

23 one of the banks. LIBOR is the rates which the banks believe

24 they would be charged if they were to borrow money in the

25 particular currency in the particular town. So it's not a


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1 rate -- it's not a rate that a bank sets competitively, saying,

2 look, we'll set this interest rate and try to get business from

3 other -- away from other banks because our interest rate will

4 be more attractive. It's the -- it's the reverse of that, your

5 Honor. The bank is simply reporting what it is seeing from

6 other banks in the London Interbank market. It is only an

7 estimate. It is not a statement of fact. It's not sup -- it's

8 not required to be a statement as to any particular

9 transaction, only an estimate of what that bank could borrow,

10 the cost at which that bank could borrow if it were to choose

11 to do so.

12 Your Honor, it is essential to our argument here that

13 that is not a competitive process. The banks do not compete

14 with one another in the submission of LIBOR. LIBOR is not

15 something that is bought or sold or traded. LIBOR is simply an

16 average published by the British Bankers Association and it's

17 used as a benchmark rate. Indeed, because it's an average, the

18 LIBOR on any given date may not be an interest rate that any

19 particular bank is being charged.

20 For instance, if one bank were being charged 5 percent

21 and another bank being charged 7 percent, LIBOR might be

22 6 percent. That's a rate that no bank is being charged. It is

23 simply a benchmark, an average. Again, it is not a, itself,

24 something that is bought or sold. Banks don't sell LIBOR.

25 Banks do engage in financial transactions on both sides as


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1 lenders and borrowers, and of course there are interest rates.

2 Our argument is that the market for interest rates is huge,

3 particularly if you look at it globally, but even if you're to

4 look at it just simply for the United States. There are

5 thousands and thousands of borrowers and creditors interacting

6 every day in the markets for interest rates. The plaintiffs do

7 not allege, and we don't believe they could, that there was any

8 restraint of trade in that marketplace, the marketplace for

9 borrowing and lending of US dollars. Indeed, it's almost

10 absurd to think that 15 banks, even 15, 16 large banks, could

11 in fact fix interest rates either in the bond market or in the

12 futures markets or any other market because of the large number

13 of actors both on the borrowing and the lending side, both

14 sides of transactions. These markets are huge, and there's no

15 allegation that there was any agreement amongst the defendants

16 to affect those markets. The only allegation is that LIBOR is

17 used as a reference rate in many of the financial products in

18 those markets -- financial products like swaps, bonds, other

19 kinds of financial instruments that want to take advantage of

20 an adjustable interest rate, 'cause interest rates, as we all

21 know, go up and down, and in many financial products, the

22 parties desire to use some benchmark or reference rate, and

23 that's all LIBOR is is a benchmark for reference rates.

24 Plaintiffs do not complain that the use of LIBOR as a reference

25 rate is somehow an antitrust violation or a Section 1


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1 violation. Instead what they say is, well, it would be okay if

2 LIBOR were the correct number, but it becomes an antitrust

3 violation because the banks in London didn't submit the correct

4 numbers. In other words, they convert, if you will, something

5 that they concede was not an antitrust violation, which is the

6 use of LIBOR generally as a reference rate in setting -- in the

7 markets for financial products in the United States, they

8 convert it into a supposed antitrust violation by saying, well,

9 there was this agreement in London to not report correctly the

10 interest rates at which the submitting banks could actually

11 borrow. But there is no competition, your Honor, there is no

12 competition amongst the banks in submitting their estimated

13 rates to the British Bankers Association. That is not a

14 competitive process.

15 One way to look at it is, if in fact LIBOR, as the

16 plaintiffs allege, was improperly suppressed, that LIBOR rate,

17 to the extent it was used in a financial product which one of

18 the plaintiffs may have purchased or been a counterparty with

19 respect to, that rate, LIBOR would still be there, would still

20 be in that instrument regardless of what the LIBOR rate was,

21 whether it was a higher rate or a lower rate. The competition,

22 if you will, in the market for that instrument would be exactly

23 the same. It isn't as if different banks, when competing, for

24 instance, to get the swap business of the OTC plaintiffs, said,

25 look, my LIBOR is better than his LIBOR. There is no


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1 competition with respect to what LIBOR is. It's set by the

2 British Bankers Association each day. The competition, if

3 there were to be any, would have to be in London, but as we

4 say, there is no competition in the submission of LIBOR. It

5 simply is a report that each bank submits.

6 So we say -- our second argument is, this really is

7 not a restraint of trade.

8 Our third argument is based on antitrust standing.

9 And it falls into two parts, your Honor. There is the

10 antitrust injury argument, which is common to all of the

11 plaintiffs. Is this the type of thing the antitrust laws were

12 meant to get at, misreporting of interest rates in the London

13 Interbank market? Is that -- is that what Congress had in mind

14 in enacting Sherman Act Section 1? This is the Brunswick

15 argument. And we say no, this is not the sort of thing that

16 the antitrust laws were designed to police. So it's an

17 antitrust injury. If we're correct about that, that applies

18 across the board.

19 There's a second part to our antitrust standing

20 argument, and I'll refer to that as the Associated General

21 Contractors, or AGC, argument. The Supreme Court, in the

22 Associated General Contractors case, laid down factors courts

23 must take into consideration in determining whether any

24 particular plaintiffs have antitrust standing, and we argue --

25 and we can go through the details, as I understand my


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1 colleagues here to my right have different people who are going

2 to address different parts, so I'll try to do the best I can.

3 I'm outnumbered. But essentially what we're saying there is

4 that most of those plaintiffs cannot, under the tests that are

5 the factors that are laid out in AGC, show that they really

6 have antitrust standing to bring the claims that they do.

7 And your Honor, that really encompasses our entire

8 argument. And I know I've given you a preview here in answer

9 to what was a fairly simple question, but the bottom line is,

10 we say there was no agreement, there was no restraint of trade,

11 and even if there were an agreement and a restraint of trade,

12 these aren't the right plaintiffs.

13 I'd be happy to -- if I haven't answered your Honor's

14 question, I'd be happy to --

15 THE COURT: All right. So let's just flip that sort

16 of question to the plaintiff's side.

17 MR. CARMODY: I guess they're clearing the room here,

18 your Honor.

19 THE COURT: Guys, look, let me just say something

20 about slides. Lawyers get absolutely too dependent on slides.

21 Answer my questions. Don't worry about what some fabulous

22 person was able to do that I can't do, okay? You heard what

23 Mr. Wise said, and which leads right into the questions really

24 that I have for you, so let me just ask them both and let you,

25 you know -- or maybe it's three.


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1 In what way do the plaintiffs claim that competition

2 was restrained from the conspiracy that you allege? Are you

3 alleging that in any way the defendants failed to compete? And

4 how are you injured if there was a reduction in competition?

5 MR. CARMODY: The answer, your Honor, before I get to

6 the restraint of trade, if I could spend about a minute or two

7 just talking about collusion, because what counsel said there

8 that we haven't properly pled --

9 THE COURT: I'm not interested in that argument.

10 MR. CARMODY: Okay. In terms of the restraint of

11 trade, your Honor, counsel suggest that LIBOR is some

12 standalone index, but what it really is is a component of

13 price. In fact, it is an inseparable part of price on any

14 LIBOR-based instrument, the market for which all these

15 defendants competed. We have pled horizontal price fixing, and

16 of course this court well knows that automatically,

17 categorically gives rise to an unreasonable restraint of trade,

18 but what the Supreme Court says, it's not just fixing the

19 ultimate price. If you fix a single component of price, like

20 the Catalano case and so many others, if you fix a single

21 component of price, that of course is unlawful. The Supreme

22 Court in the Socony case said anyone who tampers with the

23 structure of price is committing an unlawful act.

24 And so we're at a motion to dismiss stage. We have

25 pled, of course, your Honor, that there's just not some --


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1 we're not complaining about just some standalone index. We are

2 complaining about the fact that the manipulation of the LIBOR

3 rates which come from that index -- excuse me -- that index, of

4 course, is a part of price, so once that index is manipulated,

5 it's suppressed downward. All the prices on LIBOR-based

6 instruments are, of course, affected. That's what we have

7 pled, and the defendants haven't cited a single -- not one case

8 of all of America jurisprudence where there's been a horizontal

9 price fixing case that's been dismissed for failure to allege

10 an unreasonable restraint of trade. When we get to antitrust

11 injury, your Honor -- yes.

12 THE COURT: But after the LIBOR rate is arrived at,

13 don't the defendants still compete for the plaintiffs'

14 business?

15 MR. CARMODY: Of course, but what happens, your Honor,

16 they should have been competing for the plaintiffs' business on

17 its LIBOR-based derivatives, but what happened, of course, is

18 they used the LIBOR rate, they collude to suppress that rate --

19 THE COURT: Are they competitors when they're

20 submitting the bids or the prices?

21 MR. CARMODY: I don't believe so, your Honor.

22 THE COURT: So they're not competitors then, you

23 agree.

24 MR. CARMODY: Absolutely.

25 THE COURT: So they are competitors when?


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1 MR. CARMODY: They compete in the financial products

2 market, and in that financial products market in which they

3 have LIBOR-based products, they're absolutely competing in that

4 market.

5 THE COURT: And they're still competing, right?

6 MR. CARMODY: They were competing at the time they

7 submitted the pricing information which is being used by the

8 British Bankers Association.

9 THE COURT: You just told me they weren't competitors

10 then.

11 MR. CARMODY: Well, they're competitors, your Honor,

12 in the sense that they're always competing in the financial

13 products market.

14 THE COURT: But they continue to compete to make deals

15 in the financial products market regardless of what the LIBOR

16 reference rate was, right?

17 MR. CARMODY: Of course.

18 THE COURT: Okay.

19 MR. CARMODY: But what happens when you manipulate the

20 LIBOR rate, you're starting off in the financial products

21 arena -- someone, for example, as the class representatives

22 here, they're buying a financial product that contains an

23 already manipulated suppressed rate, and that rate, of course,

24 is part of the pricing of the instrument they purchased.

25 THE COURT: I appreciate that if we were at the merits


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1 level that you could state a per se violation of the antitrust

2 laws, but you have to get there first.

3 MR. CARMODY: Sure.

4 THE COURT: And you have to establish antitrust injury

5 and you have to establish antitrust standing, and my questions

6 to you are directed to that aspect of your burden. And they

7 are not the same questions.

8 MR. CARMODY: In terms of antitrust injury, your

9 Honor, we have certainly alleged here harm to competition, and

10 that is the harm to the LIBOR-based products market.

11 THE COURT: There is still competition in that market.

12 It's just with respect, under your theory, to a different

13 reference point.

14 MR. CARMODY: What happens, your Honor, is, in that

15 market, once the defendants are fixing a component of price,

16 that affects and that suppresses, first of all, the entire

17 price of that instrument -- in other words, for the City of

18 Baltimore, for example, at the time it's buying some interest

19 rate swap, the components or price of that swap are the LIBOR

20 rate and the expected future LIBOR rate, and the price of that

21 instrument is calculated as the difference between the cash

22 flows of the fixed rate Baltimore's paying and what they're

23 expected to receive. Once the defendants manipulate the LIBOR

24 rate, the yield curve that Baltimore is buying on is not

25 correct, Baltimore in fact is then overpaying -- overpaying for


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1 its LIBOR-based swap. That's the harm to competition. It also

2 causes the injury in fact to Baltimore, and it all flows from

3 this unreasonable restraint of trade, and it's unreasonable,

4 your Honor, because it's price fixed, and what the defendants

5 have done is, just like the defendants in Catalano, have fixed

6 a component of price. In Catalano, it was just a bunch of beer

7 wholesalers selling to beer retailers, and that specific case,

8 what the Supreme Court focused on is the wholesaler said, we're

9 going to remove a credit term, we're going to remove a credit

10 term which is going to reduce the price, and what we're going

11 to ask for is cash on the barrelhead by way of the retailers'

12 payments. The defendants said that's not harm to competition;

13 in fact, we're inviting more competition into the market by way

14 of reducing the price. The United States Supreme Court said,

15 as soon as you touch a component of price, in that case a

16 credit term, which the court said was an inseparable part of

17 price, you're price fixing. Once you touch the LIBOR rate,

18 which is an inseparable part of the price of every single

19 LIBOR-based instrument, you're price fixing. That's what we

20 have pled, your Honor, and there's never been a case dismissed

21 like this at the motion to dismiss stage when horizontal price

22 fixing is alleged for a component of the price of financial

23 instruments that have been purchased by the plaintiffs.

24 THE COURT: Mr. Wise, do you want to respond to that?

25 MR. WISE: Yes, your Honor.


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1 I think I just heard a concession, if I heard it

2 correctly, that there is no competition in the setting of

3 LIBOR, that is, in the submission of the daily rate reports,

4 and we agree with that. I think the confusion that my friend

5 has is that in the marketplace for the financial products, it

6 really wouldn't make any difference what LIBOR is on any

7 particular date because in fact, if it's set properly, as the

8 plaintiffs would say, you'll have one set of competition, or

9 you'll -- the competition will be what it is, and then even if

10 that rate is set at some other number, the competition at

11 that -- for that financial product remains the same, and I

12 think -- I think they've conceded that.

13 The component cases, what's different -- and that's

14 what they relied upon is component cases like Catalano and

15 others, but what's different is that in all of those cases,

16 your Honor, the component itself was the subject of

17 competition. It was a part of the overall price, and the

18 competitors in that marketplace were supposed to be competing

19 with each other with respect to that supposed component.

20 That's what makes this case different. Plaintiffs are

21 conceding that there was no competition in the setting of LIBOR

22 itself. That is not a marketplace where competition occurred.

23 The plaintiffs I believe are confusing a claim of being perhaps

24 deceived, perhaps some sort of manipulation, some sort of false

25 reporting information, with a claim for harm to competition.


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1 That is our point. This is not a case about harm to

2 competition. They may well say LIBOR was improperly set. They

3 may well say the rates were suppressed. The rate wasn't what

4 it should have been. Economists can argue. They have experts

5 who say, well, the LIBOR was lower than it should have been.

6 You can argue about all that. But it's not a claim that there

7 was less competition in any relevant market. And in that

8 respect, it's different from all of the component cases, all of

9 which, if you look at them -- and there are, in the briefs,

10 probably a half dozen of them are cited. They all involve a

11 situation where it can be said there should have been

12 competition in the setting of that component price. The

13 underlying component price was itself something that should

14 have been subject to competition. We just had a concession

15 here that the setting of LIBOR is not a competitive process.

16 That's the difference.

17 MR. LOVELL: Your Honor, Chris Lovell for the exchange

18 plaintiffs on this point, and I think your question has been

19 directly answered for the plaintiffs, but I want to say that

20 for the exchange plaintiffs, and I believe for my colleagues as

21 well, there's a related question that bears on competition,

22 your Honor, which is that for the future -- for the exchange

23 plaintiffs, the euro dollar futures contract becomes 100 minus

24 LIBOR. The price is LIBOR, and everything trades to LIBOR.

25 Instead of having deliveries from a cash market where there's


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1 supply and demand, the euro dollar futures contract depends on

2 LIBOR, and the harm to competition for the exchange plaintiffs

3 occurs at two levels, your Honor, and they merge into one on

4 the settlement where they become the same market. On one level

5 there's supposed to be a competitive process by which each

6 defendants' borrowing rates are determined on supply and

7 demand. That competitive process is a proxy for the exchange

8 plaintiffs and I believe for the other plaintiffs as well to

9 have a competitive price at the end of the futures contract

10 trading. By falsely reporting a rate, the defendants have

11 superseded and eliminated the competitive process that

12 determined their borrowing rate. That's one level of harm to

13 competition. It's snuffing out the compet -- the proxy for

14 competition, your Honor, in violation of the antitrust laws.

15 Second --

16 THE COURT: So you're saying that when the prices are

17 put in to the BBA, that that's a competitive process?

18 MR. LOVELL: It's a proxy for a competitive process,

19 your Honor.

20 THE COURT: So it is or it isn't a competitive

21 process?

22 MR. LOVELL: Well, I would say that, your Honor, that

23 it's a harm to competition under the antitrust laws. With due

24 respect and great respect, your Honor, I wouldn't say that the

25 sole competition under the antitrust laws -- it relates to


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1 supply and demand-determined price, your Honor. It does not

2 relate to two people always trying to grab the same business at

3 the same time. The antitrust laws are more flexible than that.

4 And the second --

5 THE COURT: So Mr. Carmody conceded, I think

6 appropriately, that the process before the BBA, that banks are

7 not competitors. You want to take the opposite position,

8 that's okay, but I just want to be sure that you are.

9 MR. LOVELL: I'm taking the position that under the

10 futures contract, instead of having supply and demand from the

11 cash market come in to determine the futures market price,

12 they're depending on the LIBOR to do that, and the competitive

13 process in LIBOR, which both the Commodity Exchange Act and the

14 antitrust laws want prices determined as a result of, is the

15 competitive price -- process for each bank's borrowing rate.

16 Second, the LIBOR price is -- because it's 100 minus

17 LIBOR, the LIBOR price, by being deflated, inflates

18 anticompetitively, by breaking the competition, the price for

19 the euro dollar futures contract. Those are both restraints of

20 trade under the antitrust laws, your Honor.

21 Thank you.

22 MR. WISE: Judge, very briefly, if I could respond to

23 Mr. Lovell on the exchange -- limited to the exchange issue.

24 My understanding -- and I'm not an expert in futures

25 contracts and the Chicago Exchange -- but essentially what


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1 people are doing there is making bets, if you will. They

2 probably would be very angry with me for calling them bets, but

3 they're taking a position with respect to where LIBOR is going,

4 up or down. It's a futures contract, settleable sometime in

5 the future. And the way that market works -- and it's an open

6 exchange market. The way that market works is, anyone who

7 wants to take one side of that position, if you will, saying, I

8 think LIBOR is going to go up, they can come in and they can

9 take one side of the futures contract. People who think that

10 LIBOR is going to go down can come in and they can take the

11 other side of that contract. That's where the supply/demand

12 is. That's what is the competition in the futures market that

13 moves prices. It's various investors who are taking different

14 views regarding the future of LIBOR. Some people think it will

15 go up, some people think it will go down. And that's what

16 people do when they buy futures contracts. There's no

17 allegation in these complaints that anything the defendants did

18 interfered with that marketplace. There are thousands and

19 thousands of people every day who go in and use the futures

20 markets. Some of them buy, some of them sell. Clearly the buy

21 and sell is what moves the futures market, like any other

22 auction market. There's no allegation that anything the

23 defendants did changed the willingness of people to come in and

24 buy and sell or affected the supply and demand in the futures

25 markets in Chicago. Instead what they're claiming is that the


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1 reference -- the reference rate which is used in trading --

2 trading that futures contract was not what it should have been.

3 Again, they have no complaint with the idea that there is a

4 reference rate. They're not saying the existence of LIBOR and

5 the agreement amongst the banks to submit their daily rates to

6 the British Bankers Association is an antitrust violation.

7 They're perfectly happy to have there be a LIBOR used as a

8 reference rate. Their only complaint, again, is that the

9 proper rates weren't submitted and therefore it throws you

10 back, once again, to the same point that was conceded, which is

11 that the submission of the rates, that's not a competitive

12 process.

13 MR. LOVELL: 15 seconds, your Honor, just a brief

14 reply?

15 On the one hand, the competition in setting the rate

16 was snuffed out. On the other hand, everyone traded to a

17 noncompetitive rate in the euro dollar futures contract and it

18 automatically moved the prices of euro dollar futures contracts

19 anticompetitively higher by interdicting the competitive forces

20 that set the bank's rates.

21 Second, although it's not in the complaint, there's a

22 number of references in the Barclays settlement to misreports

23 to LIBOR specific to the BBA for LIBOR, specifically made in

24 order to influence derivatives, including on the day of euro

25 dollar settlement, your Honor, which could be pleaded in the


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1 amended complaint and would leap over into what Mr. Wise is

2 implying and allege to the contrary. That is that the

3 defendants did make -- take steps in LIBOR in order to

4 interdict the competitive determination of prices in the euro

5 dollar futures contract with that intent.

6 THE COURT: Mr. Lovell, you have argued that the

7 setting of the LIBOR rate is a proxy for competition. I think

8 you would agree with your colleague that the banks continued to

9 compete for business in the marketplace after the LIBOR rate

10 was set. Do you have any authority for the proposition that

11 your proxy argument is supported by caselaw?

12 MR. LOVELL: The easy part is that I would agree that

13 they continued to compete, your Honor. But the extension of

14 that is that they had a self-serving competitive advantage

15 because they knew that the rate was false.

16 THE COURT: The question was: Do you have any caselaw

17 supporting your argument?

18 I take that as a no. Okay. That's all right.

19 MR. LOVELL: On the proxy argument, your Honor, there

20 are -- I come back to the cases that were referred to by

21 Mr. Carmody. There are a series of cases, including Catalano

22 in the Supreme Court, in which a component of price --

23 THE COURT: All right. You know what? You see how

24 many people there are in the room that are standing? We have a

25 lot to cover, so let's, you know, say it with brevity.


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1 MR. LOVELL: The component is a proxy when it's not

2 decided competitively.

3 THE COURT: The cases he cited are the cases you're

4 relying on.

5 MR. LOVELL: That's one aspect of it.

6 MR. CARMODY: What I was going to do, your Honor, is

7 clarify my concession. What I mean by that --

8 THE COURT: This better be a good one.

9 MR. CARMODY: What I mean by that, your Honor, is,

10 certainly the process that the 16 panel banks are going for by

11 submitting pricing information to the British Bankers

12 Association, I don't think someone could fairly label that

13 aspect a competitive process.

14 But what I want to clarify is that at the time, each

15 and every day, that these 16 panel banks are submitting their

16 own pricing information from which the LIBOR rate is

17 determined, at that point in time each and every day these

18 banks are competitors. So while the process itself is not

19 competitive, you have competitors submitting pricing

20 information each and every day.

21 And for example, your Honor, one of the cases that I

22 know you're familiar with, the old Rail Freight case, one of

23 the index cases we cited, the importance of that in relation to

24 the question on the table is, while the railroads in that case

25 were manipulating, I mean, what their goal was, of course, was


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1 to add additional fuel surcharges to all the rail freight

2 customers, so what they did is they kind of tampered with an

3 index. They weren't competing in relation to the index they

4 were tampering with or altering. And so what happens is,

5 because they were competitors, though, what they did

6 ultimately, by tampering with this index, which affected

7 pricing and allowed them to implement the fuel surcharges they

8 did, they harmed competition. And in short what we have here,

9 your Honor, is, the harm to competition is when you manipulate

10 a LIBOR rate, you artificially suppress that rate. You're

11 harming competition because these banks that are not motivated

12 to compete with one another in that market to bring in new

13 benchmarks, to think of additional pricing formulas, to think

14 of things that would be more beneficial to competition, what

15 counsel talks about, well, you have the LIBOR rate itself, but

16 there's still competition on the spread, LIBOR plus X. You

17 still compete with the X. The Supreme Court has rejected that

18 case after case after case because once you start off with a

19 price fixed rate, it affects the entirety of the price of the

20 instrument, and so that argument doesn't work.

21 And the last thing I would end with, your Honor, is

22 almost where I began on this position, which is, defendants

23 haven't cited a single case in which there have been

24 allegations like us at the motion to dismiss stage where

25 horizontal price fixing among competitors has been alleged


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1 where the court has found it not to constitute a restraint of

2 trade and dismissed the case as a result, and I haven't found

3 one in the history of America.

4 And so we go back to: What is LIBOR? LIBOR is an

5 inseparable part of price. They concede on page 25 of their

6 brief the LIBOR payments absolutely affect the pricing of the

7 LIBOR instruments. It has to by definition. That's why they

8 call them LIBOR-based instruments. And so once you suppress or

9 alter or manipulate in any way, you fix that rate, by

10 definition what you are doing is fixing the price of that

11 instrument and starting with the wrong price, which the Supreme

12 Court has condemned forever.

13 MR. WISE: Very briefly, your Honor.

14 Several times there's been a reference to the price

15 that the banks are submitting. As we said, we just want to

16 remind the court, it's not a price. It's the rate at which

17 they think they can borrow. They don't set a price. They are

18 reporting what they estimate others would charge them. So it's

19 not a price that they set, number one.

20 Number two, the Rail Freight case -- and again, like

21 all the component cases, the railroads in that case were

22 supposed to be competing with respect to the overall price of

23 transportation, including the fuel. What was attacked in the

24 Rail Freight case was the attempt by the railroads to get

25 together and in effect make an agreement with respect to the


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1 fuel -- amount of the fuel surcharge.

2 This case is different. The reason why there aren't

3 any cases like this is because no one has had the temerity to

4 bring a case like this where, effectively, we're talking about

5 something that is not a component of a price, or it's not a

6 competitively fixed value.

7 I don't want to repeat myself.

8 MR. GLACKIN: Your Honor, if I may, I'd like to say

9 something about the injuries that were suffered by my client.

10 My name is Brendan Glackin, and with Mr. Fineman, I'm

11 here representing the Charles Schwab entities. And I think if

12 I can explain a little bit about how our client alleges it was

13 injured, it will help the court perhaps understand how

14 competition was restrained here.

15 Our client during the relevant period of time bought

16 something like 500 to $600 billion worth of LIBOR-based

17 financial instruments -- fixed and floating rate instruments.

18 Many of them from these defendants; hundreds of billions of

19 dollars of them from these defendants, actually. Now every day

20 these defendants and other issuers in the marketplace show my

21 client and other participants in the market interest rates

22 on -- to borrow money, either on certificates of deposit or on

23 notes, or any other number of instruments. That interest rate

24 is the price that they are willing to pay for the use of my

25 client's money. They -- every one of these banks shows a price


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1 like that every day. They either show a fixed rate that

2 they're willing to pay out to various different terms in the

3 future or they show a floating rate that is LIBOR plus a

4 spread. They are competing to get my client's money, my

5 client's hundreds of billions of dollars.

6 Now they don't -- they don't -- they may or may not --

7 I think it's an interesting argument, actually, whether or not

8 they're competing to set the LIBOR rate, but they are actually

9 competing to get our money, and when they suppress LIBOR, they

10 are getting our money. They're getting the use of our money at

11 a lower price than they otherwise would have. And in that

12 sense, that is -- this is just a very run-of-the-mill price

13 fixing case, in my view. I mean, this is not really any

14 different than all the banks getting together and saying, well,

15 we agree that we're going to go out and we're going to compete,

16 we're going to show different rates to people to use their

17 money, but we're not going to show any rates that are lower

18 than X. We're going to compete at everything above X. Clearly

19 that would be a restraint of competition. Clearly that would

20 be a restraint of competition. We don't have to show that

21 there's no competition. We don't have to show the absence of

22 competition. All we have to do, as Mr. Lovell was saying, is

23 show that this price -- that any part of this price was -- was

24 fixed by the defendants, the competitive process was

25 superseded -- was the word he used, it was an excellent word --


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1 was superseded as a part of this price. And it's very easy to

2 see.

3 My client has a very tangible harm. These defendant

4 banks got my client's money and they paid my client less for it

5 than they would have had they not suppressed LIBOR. It's a

6 very simple case.

7 MR. WISE: Same point, your Honor. It's not because

8 it was a harm to competition. I don't hear my friend saying

9 that there was a lack of banks who are willing to show him or

10 show his client financial products and interest rates or that

11 there was any competition that was restrained in that market.

12 What he's saying, basically, is that the ultimate price was

13 affected because they used LIBOR at one rate when he -- when

14 the plaintiffs say it should have been another. That just

15 takes us back again to the core question. Is that a

16 competitively set value? And in that sense, it's different

17 than the Rail Freight case and all of the other component

18 cases. We've made that argument.

19 MR. CARMODY: Even Catalano, the beer wholesalers

20 weren't competing with the credit terms. What they were

21 competing for was the sale of beer to retailers. And so once

22 they decided to delete the credit terms, they weren't competing

23 there as in a, you know -- while they're competitors. They

24 weren't competing there. They just all decided to alter the

25 credit terms, like the defendants here -- I called it pricing


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1 information, not a price. What they'd submit, what comes out

2 as a price, they'll submit pricing information, and from that

3 the British Bankers Association determines price, each and

4 every day. And what they did was just like what was done in

5 Catalano. They didn't have to compete in that aspect of the

6 process because once you tamper with price, that's always

7 unlawful, according to the Supreme Court, and it's always an

8 unreasonable restraint of trade.

9 THE COURT: I'd like to move from the antitrust to the

10 exchange-based claims.

11 First, just quickly, let me ask the plaintiffs, do you

12 seriously dispute that Morrison is a reference point for

13 extraterritoriality here?

14 MR. KOVEL: No, your Honor.

15 THE COURT: Okay. Good.

16 And would all counsel agree that there's no clear

17 indication that the Commodity Exchange Act was intended to

18 apply extraterritorially?

19 MR. KOVEL: Your Honor, the Commodity Exchange Act

20 applies to domestic futures exchanges and the underlying

21 commodities that are the basis --

22 THE COURT: Could you answer my question.

23 MR. KOVEL: It prohibits --

24 THE COURT: Is there in the statute clear indication

25 that it is intended to apply extraterritorially, yes, no?


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1 MR. KOVEL: Yes.

2 THE COURT: Yes? Okay.

3 MR. KOVEL: Exterritorial in the sense that interstate

4 commerce includes a foreign nation, and it says that explicitly

5 in Section 2(b).

6 THE COURT: Yes.

7 MR. KOVEL: And there's a -- there is an interstate

8 commercial transaction involving LIBOR that goes directly to

9 the Chicago Mercantile Exchange. The licensing agreement

10 between BBA -- the BBA panel banks -- well, and BBA as its

11 proxy, and the Chicago Mercantile Exchange. In our slides --

12 and I know your Honor doesn't want to look at the slides or

13 rely on them, but --

14 THE COURT: The slides can't replace your complaint,

15 right? Or your briefing.

16 MR. KOVEL: The complaint references to the CME's

17 contract specifications. The CME's contract specifications

18 include explicitly that the BBA is licensing to the CME, the

19 Chicago Mercantile Exchange, the use of LIBOR as the underlying

20 basis, the sole pricing component of euro dollar futures. It

21 also licenses to the Chicago Mercantile Exchange the marketing

22 rights for this -- for the euro dollar to use the term LIBOR.

23 There is a direct financial relationship between the BBA and

24 the CME involving LIBOR.

25 LIBOR is also a product or a by-product of futures


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1 contracts, the euro dollar futures. Euro dollar futures

2 contracts -- and Barclays has admitted this. Euro dollars

3 futures contracts are commodities, and they contain as a

4 product or by-product LIBOR as the pricing component. LIBOR is

5 therefore traded in interstate commerce by definition in

6 Section 2(b) of the Commodity Exchange Act. The argument that

7 LIBOR is not a product in interstate commerce is belied almost

8 as a tautology because it's a component of euro dollar futures.

9 It's a component of many other products which are also traded

10 in interstate commerce. It's definitionally, under the

11 Commodity Exchange Act, Section 1(a)(30) and Section 2(b),

12 interstate commerce includes trade to another nation, to a

13 foreign nation or from a foreign nation, and it includes any,

14 quote-unquote, expectation that a product or by-product of a

15 commodity --

16 THE COURT: Seriously. Morrison says that trades on

17 foreign exchanges aren't covered, right?

18 MR. KOVEL: Yes, it --

19 THE COURT: Isn't your point simply that there were

20 trades on the Chicago Mercantile Exchange which are tied to

21 LIBOR, therefore, they are domestic trades?

22 MR. KOVEL: That is one point, but it is not the sole

23 point. The Commodity Exchange Act is -- governs

24 jurisdictionally commodities traded in interstate commerce.

25 That's Section 13(a)(2). And if they're the underlying


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1 commodity for a futures contract, as LIBOR is, definitionally,

2 LIBOR is the underlying commodity for --

3 THE COURT: Okay. I don't necessarily have a problem

4 with that. I just don't see why you are arguing that the

5 Commodity Exchange Act has an extraterritorial application

6 greater than the securities laws. That just doesn't seem to me

7 to make any logical sense, given the way the two statutes are

8 written and given that you don't need to argue that.

9 MR. KOVEL: Your Honor, I agree that we don't need to

10 argue that, but as a matter of clarification, I think Morrison

11 says you have to look to the intent of the statute, and the

12 statute at issue is the Commodity Exchange Act, which does

13 allow for interstate commerce and including commerce with

14 another nation when it involves a commodity, and particularly a

15 commodity underlying a futures contract.

16 I agree we don't need to go any farther than the fact

17 that the exchanges here domestically were manipulated. In

18 fact, the Barclays settlement shows -- and we say this in

19 footnote 9 of our brief in opposition to the motion to

20 dismiss -- that Barclays was directing its LIBOR submissions to

21 influence on the settlement day, the fixed price of euro dollar

22 futures. This is in footnote 9 of our -- of our opposition.

23 So there's a direct -- there's a direct action toward

24 the euro dollar futures market as an initial matter, but

25 there's also an interstate component to LIBOR. LIBOR is a


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1 commodity under Section 1(a)(9) of the Commodity Exchange Act

2 because it is the basis in which a contract for future delivery

3 is dealt in. That's the language. It's an interest in which a

4 commodity for future delivery is dealt in.

5 THE COURT: Mr. Gottridge?

6 MR. GOTTRIDGE: Your Honor, a couple of things.

7 First of all, to the extent that the Barclays

8 settlement becomes relevant here, I'll defer to my friend

9 Mr. Boies. I'm not sure that that's any place of interest on

10 this issue.

11 I think that we're getting a little bit hung up on

12 this. The Morrison case itself involved the Securities

13 Exchange Act, which actually had a reference to interstate

14 commerce in it, and the Supreme Court said a general reference

15 like that doesn't make a difference. The thrust of the statute

16 does not have to show any indication to apply to transactions

17 on foreign securities exchanges. Full stop.

18 Likewise here, we're dealing with a different statute,

19 with some similarities and some differences to the Exchange

20 Act. But you have to look at what is the statute's focus. And

21 the statute is focusing on two things. It's focusing on

22 transactions on domestic exchanges -- I don't think anybody

23 will say that a transaction on the futures exchange in London

24 is covered. We're only talking about Chicago as far as that's

25 concerned, or New York.


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1 And then secondly, it has a focus on commodities in

2 interstate commerce. But the commodities in interstate

3 commerce must be the commodity that underlies -- that's tied to

4 the futures contract. So there's actually a futures

5 contract -- there's all kinds of futures contracts if you go on

6 the website. The Chicago Mercantile Exchange and the New York

7 Mercantile Exchange have contracts on things like Russian

8 export grade crude oil, which only exists in Russia and is

9 delivered in Primorsk, Russia. Nobody would suggest that just

10 because there's a futures contract trading in the United States

11 that relates to that, that the underlying contract is in the

12 United States or could be the subject -- or manipulation of

13 that could be the subject of a CEA claim. If there was some

14 manipulation on the exchange in New York or Chicago, fine;

15 that's a CEA claim. But if somebody did something in the

16 underlying physical futures market to corner it or squeeze it

17 or do something manipulative to it in Russia, nobody would ever

18 say that that's a violation of the CEA. And that's really what

19 we're dealing with here with LIBOR.

20 First of all, there's a real question about what the

21 right commodity is here, because I agree with Mr. Kovel's

22 analysis -- and there was a slide that was handed out that says

23 that if you go to the Chicago Mercantile Exchange listing, it's

24 a contract specification, and that is the right place to go.

25 It says, "Each futures contract shall be for a euro dollar


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1 interbank time deposit having a principal value of 1 million US

2 dollars with a three-month term to maturity."

3 Now the reason that's relevant is that the Commodity

4 Exchange Act, at 7 U.S. Code Section 25(a)(1)(D) talks about

5 manipulation of futures contracts or "the price of the

6 commodity underlying such contract." And the courts have held

7 and cite cases, such as the Three Crown case that Judge Carter

8 decided in 1993 in this courthouse, and the Hershey case in the

9 Fifth Circuit that's cited at page 27 of our brief. The courts

10 have held that what you need to do is to look at what is the

11 commodity that is specified in the contract specifications. So

12 if you look at a euro dollar, it's very easy what a euro dollar

13 deposit is. The CME defines it, and the plaintiffs embraced

14 this definition at paragraph 200 of their amended complaint. A

15 euro dollar is a deposit of a dollar in a commercial bank

16 outside the United States. It is clearly domestic -- is not

17 domestic but foreign by definition. It cannot be domestic.

18 So if you look at it from that point of view, if

19 that's the commodity, there's no question it is not a domestic

20 commodity at all; it's a foreign commodity. And if somebody

21 manipulates the price for it, which may be denominated by -- by

22 reference to LIBOR, that is a foreign manipulation. There may

23 be an effect on the US exchange, but that's a different story,

24 because Morrison tells us effects are not relevant.

25 But even if we said that LIBOR itself was the


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1 commodity, which is the other way of looking at this, as

2 opposed to LIBOR merely furnishing the price at -- excuse me --

3 at maturity on the settlement date, at the end of the contract

4 that trades in Chicago Mercantile Exchange, even if you looked

5 at LIBOR itself as the commodity, LIBOR was created in London

6 by the British Bankers Association. It has been up to this

7 point entirely owned, controlled, and governed by the British

8 Bankers Association. It's the BBA in London that licenses the

9 name to the Chicago Mercantile Exchange so that they can use it

10 in connection with their futures contracts. The LIBOR is set

11 every banking day in the UK, but not if they have a bank

12 holiday in the UK, but it's set every banking day in the UK by

13 taking submissions in London from banks, asking each bank, what

14 offers do you think you would get in different currencies,

15 different tenors, if you needed to go into the market and

16 borrow funds from another bank in the London market? It's all

17 about London, it's done in London, it's centered in London, and

18 therefore it's clearly not domestic, it's extraterritorial. So

19 if somebody is monkeying around with LIBOR, in this case the

20 allegations are suppressing it, continually, for 34 months,

21 they're doing it in London. It's London centered.

22 So that is the way we look at the commodity.

23 Now if you look at the futures contracts, yes, the

24 futures contracts are within the scope of the manipulation

25 provision of 7 U.S. Code Section 13(a)(2). The problem for the


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1 plaintiffs here is the only thing they allege was manipulated

2 was the underlying commodity, which they call LIBOR. Doesn't

3 matter whether you call it LIBOR or euro dollars. They don't

4 allege that the defendants got together or even single, singly,

5 individually, manipulated the futures contract with Chicago. I

6 mean, there are plenty of cases, your Honor, in which that sort

7 of allegation is made. One example would be the Platinum &

8 Palladium case that Judge Pauley had, which was dismissed a

9 couple of years ago, which we cite, where there was an

10 allegation that the defendants got together and did something

11 called "banging the close."

12 There are all kinds of things one can do to manipulate

13 futures contracts. Not one of those things is alleged here.

14 The only allegation is that the underlying commodity was

15 manipulated abroad, it's a foreign commodity, and clearly the

16 extraterritorial reach of the statute does not -- does not

17 reach what was done in London.

18 I would just finally add on this point that the Second

19 Circuit has made it very clear in cases such as Cede�o and also

20 the Absolute Activist fund case that we cited, that it is part

21 of the pleading burden of the plaintiff at this stage of the

22 case to allege plausible facts from which the court can infer

23 that this is not an impermissible extraterritorial application

24 of the statute. The Cede�o was in the RICO context and the

25 Absolute case was in the securities context, but the same thing


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1 applies in any context because Morrison applies across various

2 statutes, and there's nothing in this complaint that would show

3 this court that the alleged violation of the Commodity Exchange

4 Act is actually a violation because it was all

5 extraterritorial.

6 MR. KOVEL: Your Honor, I think I've heard the

7 defendants backing away from what they said on page 15 of their

8 motion to dismiss brief where they call the LIBOR the cash

9 basis for the euro dollar futures contracts. Euro dollars

10 futures contract is meant to reflect the euro dollar lending

11 market, but as a proxy, it uses LIBOR -- and there is a lease,

12 or there's a license between the BBA and the CME in order to

13 use that term and use that price as the sole settlement price

14 of euro dollar futures. The relationship between euro dollar

15 futures and LIBOR is, in absolute value sense, 1 to 1, it's 1

16 to negative 1. There is no other variable price component in

17 euro dollar futures.

18 Defendant Barclays, in paragraph 33 of its agreed

19 statement of facts with the Department of Justice, states

20 that -- that the -- that euro -- that its manipulation of US

21 dollar LIBOR affected or tended to affect commodities,

22 including euro dollar futures. Euro dollar futures are the

23 only commodity that are mentioned in that sentence. That's at

24 paragraph 33 of the agreed statement of facts.

25 With that in mind, the reason why "affected" or


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1 "tended to affect" language was used is because

2 Section 13(a)(2) of the CEA, which makes manipulation illegal,

3 uses that very language. It's no coincidence that the

4 settlement with Barclays, the monetary settlement went vastly

5 to the CFTC rather than the DOJ or the FSA in the UK. That's

6 the same pattern that's occurred with the UBS settlement, by

7 the way, and that's the same pattern that's occurred with the

8 RBS settlement.

9 In terms of whether there's been any directed activity

10 toward the euro dollar futures market directly, we now know --

11 and this is again in footnote 9 of our -- of our opposition

12 brief. We now know that Barclays -- and this is -- this is

13 from a period of time that was not alleged in the complaint,

14 this is from 2006 -- several instances when they tried to

15 change LIBOR, and in fact did change their own quote, on the

16 day of settlements of euro dollar futures. Now what that means

17 is that euro dollar futures will settle to 100 minus LIBOR on

18 that day. Anyone who owns euro dollar futures will be paying

19 100 minus LIBOR because that's the settlement price. And

20 anyone will be receiving 100 minus LIBOR who was short euro

21 dollar futures on that date. So if there is a suppression of

22 it, there will be an inflation of euro dollar futures. It's a

23 1 to negative 1 relationship. And the fact that the conduct,

24 some of it -- and by the way, from the Barclays settlement we

25 know that many of these manipulations, including the one that


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1 we describe in footnote 9, originated at least in part from New

2 York, but it's irrelevant where the misconduct occurred as long

3 as it was affecting a commodity in interstate commerce, and for

4 our private right of action, it needs to be the commodity

5 underlying the futures contract.

6 Here, the defendants agreed to that on page 15 of

7 their brief, and now they're moving away from it. They cite to

8 a case called Three Crown, which does not state -- and I think

9 they're directing your Honor toward it because it does mention

10 euro dollar futures. The defendants there argued that euro

11 dollars, euro dollar deposits, were the underlying commodity

12 for euro dollar futures, but the court did not hold that. The

13 court says you have to look to what the underlying commodity

14 is, what the variable price component of the commodity is, and

15 here, the only variable price component, 1 to negative 1, is

16 LIBOR.

17 MR. GOTTRIDGE: Your Honor, if I could just respond to

18 that.

19 First of all, this 1 to negative 1 business, I think

20 I'd go back to what Mr. Wise was saying about how these futures

21 contracts worked. The futures contracts were to expire on a

22 given day, so let's say the third Monday, say, in June. That

23 contract will trade for months and months and months before

24 that.

25 Now on the day it settled, yes, there is a 1 to


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1 negative 1, as Mr. Kovel calls it, relationship in that the

2 settlement price is 100 minus that day's LIBOR. But along the

3 way, for all those many months that the contract trades, it's

4 trading not based on what some future LIBOR will be -- will

5 actually be in June but rather on what the traders, the people

6 taking the long side and the people taking the short side,

7 people with very different views of the market, what they think

8 it will be on that day and whether they think the rate is

9 trending up or trending down. And they'll buy and they'll sell

10 and they'll go long and they'll go short. And the price that's

11 set along the way, nobody is contending that that price was not

12 a price that was arrived at through the usual market processes.

13 The only allegation is that on the settlement date, there

14 was -- because there was this relationship between the LIBOR on

15 that date and the settlement date, settlement price of the

16 contract, that on that date was influenced by the LIBOR.

17 I think in terms of the Barclays comments, it's very

18 misleading to talk about the Barclays settlement and not keep

19 in mind that there is different -- two different types of

20 allegations made in the Barclays case.

21 THE COURT: I'm very aware of that. That's an up and

22 down.

23 MR. GOTTRIDGE: Yes, and paragraph 33 specifically

24 referred to the up and down.

25 On the other hand, your Honor, paragraph 41, in the


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1 same Department of Justice statement, which didn't refer to the

2 up and down, the so-called trader-based conduct, but instead

3 referred to something more like what's being alleged in this

4 manipulation claim, says, "As stated above, the intent of the

5 Barclays managers who gave the instruction and the submitters

6 who contributed improperly low rate submissions," so this is

7 the suppression, "in response to the instruction, was to

8 influence Barclays' benchmark interest rate submissions, not

9 the resulting fixes."

10 And then the CFTC settlement at footnote 2 says very

11 much the same thing.

12 So even in the Barclays example, which is the one

13 example that the plaintiffs keep raising because they've raised

14 nothing about the other defendants, even as an example, there

15 is absolutely nothing to support the notion that they've got a

16 claim for manipulation of LIBOR. The CFTC and the DOJ don't

17 even say that.

18 Now it is true the CFTC says in passing, in each of

19 these settlements, that they describe LIBOR as a commodity in

20 interstate commerce. That is in the context of a settlement.

21 It's a litigation position taken in a proceeding that the CFTC

22 settled, and under the Lipsky principle which we cite in our

23 brief, that has absolutely no relevance, it has no credibility,

24 it wasn't a litigated determination, it wasn't a rulemaking

25 determination. There's nothing of any credibility out there


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1 that says that LIBOR --

2 THE COURT: But there is reliance on agency views

3 short of rulemaking.

4 MR. GOTTRIDGE: Yes. I agree.

5 THE COURT: I mean, I've relied on it within the last

6 year.

7 MR. GOTTRIDGE: Yes. For example, your Honor, if the

8 CFTC had an adjudicated case before it --

9 THE COURT: Even not adjudicated. If they simply make

10 a statement to Congress about their policy, courts have the

11 right to show some respect -- may not be binding deference, but

12 respect for the agency's view certainly of its own

13 jurisdiction.

14 MR. GOTTRIDGE: Yes, but it's the Lipsky case -- your

15 Honor, the question here isn't its own jurisdiction but rather

16 the reach of the statute, which the Supreme Court told us is

17 not a question of this court's subject -- of the federal

18 court's subject matter jurisdiction, nor is it a question of

19 CFTC's jurisdiction to adjudicate or to investigate. It's a

20 question of whether a plaintiff claiming manipulation under the

21 statute has alleged facts that come within the four corners of

22 that statutory provision, and the CFTC has taken the view in

23 the settlements -- and obviously the banks that were -- that

24 engaged in the settlements were not inclined to contest it for

25 that purpose, for good and sufficient reasons that we can all


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1 understand. They've taken the position that yes, this is a

2 commodity in interstate commerce, but they cite absolutely

3 nothing in support of it, they cite no cases, they make no

4 arguments. It's a position they've taken. I don't think,

5 given the Lipsky principle in the Second Circuit, that that

6 mere assertion is worth anything in terms of this court's view

7 of the Morrison questions.

8 THE COURT: Could we change topics a little bit?

9 MR. LOVELL: Nine seconds, your Honor?

10 I don't think that -- and talk about prior cases by

11 your Honor, you can't sever the buying and selling that leads

12 up to the last date from the false LIBOR reports every day.

13 That's what we allege that the false reports were happening

14 every day and that's what the euro dollar market was looking

15 to, your Honor.

16 Thank you.

17 THE COURT: One of the submissions to the court was

18 the declaration of Mr. Zweifach, and Exhibit 1 to that

19 declaration was an article from the Wall Street Journal dated

20 May 29th, 2008, which contained a comparative statistical

21 analysis between LIBOR rates and default insurance costs. The

22 analysis -- maybe I should just go back and say that the title

23 of the article was, "Study casts doubt on key rate," subtitle

24 was, "Wall Street Journal analysis suggests banks may have

25 reported flawed interest data for LIBOR." And as I was saying,


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1 the Wall Street journal undertook a study comparing LIBOR rates

2 to the rates in the default insurance market. This statistical

3 analysis was shown, according to the article, to three academic

4 reviewers, who agreed to its validity. The article reflects

5 rate changes in response to published information that any

6 prosecutor would have argued constituted consciousness of

7 guilt. There is a reference in the article to institutional

8 review by the British Bankers Association about the LIBOR rate,

9 and overall I would say the article looked like it had a

10 healthy degree of skepticism over the accuracy of US dollar

11 LIBOR.

12 And so my question to the plaintiffs is: How can you

13 argue, with the publication of this article, let alone any

14 number of other articles, that you were not on inquiry notice?

15 MR. KOVEL: Your Honor, as I guess a preliminary

16 matter, we agree that inquiry notice is the correct standard.

17 The defendants issued -- or provided the court with a notice of

18 supplemental authority, the Koch v. Christie's case, which we

19 responded to with a letter. This was back in October,

20 October 11th, and October 18th was our letter.

21 THE COURT: I'm sorry. I'm not aware. My law clerk

22 may be aware of those articles, those letters. I'm not.

23 MR. KOVEL: The letter we responded to essentially

24 agreed that under the CEA, the correct analysis is an inquiry

25 notice standard, and we cite in that letter a number of cases


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1 involving the Commodity Exchange Act where notice -- I'll come

2 back --

3 THE COURT: Just to interrupt you a second. It's

4 rude, but I don't want to forget it. Do you have copies in

5 court of the other articles that were cited in the complaint?

6 MR. KOVEL: We do.

7 THE COURT: If there are extras, could I just have

8 them?

9 MR. KOVEL: We can distribute them.

10 THE COURT: That would be great. I would appreciate

11 those.

12 MR. KOVEL: Under the inquiry notice standard -- and

13 the Koch v. Christie's case is actually an excellent example of

14 why even this May 29th, 2008 Wall Street Journal article was

15 not sufficient to put our client on inquiry notice.

16 The standard is -- it's a high standard that the

17 defendants have to plead -- have to affirmatively defend -- at

18 the pleading stage it's very hard to meet. The standard is

19 that a person of ordinary intelligence would consider it

20 probable that fraud had occurred. That's the standard in

21 footnote 3 of Koch v. Christie's.

22 THE COURT: It lays it out. It gives you motive, it

23 gives you methodology, it reflects experts who think it's

24 valid. This is not the only piece. This article takes the

25 same kind of approach that you have taken in this case.


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1 I mean, frankly, I am totally puzzled, given that

2 plaintiffs bar in this area uses the Wall Street Journal as

3 their source of clients and cases, right? You guys read it

4 every day, looking for scandal, right? Other people read

5 People Magazine, but you read the Wall Street Journal.

6 MR. KOVEL: I read the Financial Times, your Honor.

7 THE COURT: We don't have to discuss what the court

8 reads, but go ahead. It's not People.

9 MR. KOVEL: Your Honor, I think --

10 THE COURT: So how could anyone, any good lawyer have

11 seen this article as well as the others and not said: Oh, my

12 lord, think of the amount of money that trades against LIBOR?

13 This is worth an investment of my time.

14 MR. KOVEL: Your Honor, I think that goes -- that

15 question, and the fact that there weren't cases filed, goes to

16 what was going on in the market in 2008 at the time. The

17 amount of dislocation -- and the defendants say this in their

18 briefs, in their antitrust briefs, in footnote 18 of their

19 antitrust brief, their initial one, page 6 of their reply

20 brief. They talk about how our euro dollar deposit study --

21 euro dollar deposit rate study in our complaint is

22 questionable, may not be plausible because --

23 THE COURT: But you didn't do it. You argue in here

24 that you were entitled to wait until you saw a footnote in -- I

25 forget which bank it was.


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1 MR. GOTTRIDGE: UBS, your Honor.

2 THE COURT: UBS's, some filing that they made, I

3 assume, with the SEC.

4 MR. GOTTRIDGE: I think it was a 20(f), your Honor.

5 THE COURT: Whatever. That you were entitled to wait

6 to see a footnote in an SEC filing that said that the

7 government had served a subpoena on the bank on the subject of

8 US LIBOR.

9 MR. KOVEL: On the manipulation of LIBOR. That's

10 right. Your Honor --

11 THE COURT: Why?

12 MR. KOVEL: I'm going to step back and talk about Koch

13 v. Christie's, because what it shows is that courts should not

14 engage in what's known as hindsight bias. Hindsight bias is a

15 very seductive thing to do, which is --

16 THE COURT: What's the hindsight here?

17 MR. KOVEL: The hindsight is that today, sitting here

18 today, we now know that Barclays was suppressing, we now know

19 that UBS was suppressing, we don't yet know what RBS was doing

20 because --

21 THE COURT: Wait a second. Your job here, as

22 plaintiffs' counsel, looking for whopping legal fees, is not to

23 piggyback on the government. Indeed, the reason that there are

24 statutes that provide plaintiffs' counsel with attorney's fees

25 is a recognition that the government has limited resources.


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1 You are supposed to be the private attorneys general who, for

2 reasons of legitimate self-interest, are seeking out the same

3 kind of wrongdoing that the government might.

4 MR. KOVEL: And your Honor, with due respect, the

5 Second Circuit also says that courts should not engage in

6 hindsight bias. The plaintiff in Koch bought -- a very wealthy

7 man who bought wine -- I need to describe this case because it

8 will illustrate why our clients did not have a probability that

9 they had been defrauded in this case. In Koch, the plaintiff

10 bought wine in 1988 from -- supposedly with a provenance of

11 Thomas Jefferson. By 1995 this man knew that there were

12 articles saying that this wine was counterfeit. He knew that a

13 German -- that in Germany, German investors in the same wine

14 had filed a lawsuit saying that this wine was counterfeit. He

15 knew that in that lawsuit there had been studies which

16 substantiated their claims that this wine was counterfeit. And

17 yet -- and he consulted counsel in 1995 and '96 or thereabouts

18 to bring a case -- wait, your Honor. Then in 2000, in the year

19 2000, he went to Woods Hole Observatory and he commissioned a

20 study to get the date of the wine, and the Woods Hole

21 Observatory came back and said there's a 95 percent probability

22 that this wine does not come from the date they said it came

23 from. And the court, the Southern District -- and it was

24 affirmed in footnote 3 of Koch v. Christie's. Second Circuit,

25 the court said that --


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1 THE COURT: But this is an entirely different context.

2 MR. KOVEL: Your Honor, it's --

3 THE COURT: That's someone's personal interest in his

4 wine cellar. That is not the role of counsel representing a

5 class in the context of a securities fraud case, a civil RICO

6 case, or a Commodity Exchange Act case.

7 MR. KOVEL: Your Honor, the standard is an ordinary --

8 a person of ordinary intelligence, not an exceptional

9 plaintiff's lawyer who reads the Wall Street Journal.

10 THE COURT: I understand that. And I don't trade in

11 futures. This is in simple English --

12 MR. KOVEL: Your Honor, this article also --

13 THE COURT: -- that anybody who's trading in futures

14 ought to be bright enough to read.

15 MR. KOVEL: Your Honor, a Citigroup spokesman in this

16 article said, "We continue to submit our LIBOR rates at levels

17 that accurately reflects our perception of the market." An

18 HBOS spokesman says that, "the LIBOR quotes are genuine and

19 realistic and an indication of borrowing costs."

20 THE COURT: It cannot be --

21 MR. KOVEL: The WestLB spokesman says, "The banks

22 provide accurate data." The BBA, a month earlier, had come out

23 and said they were going to do an investigation of LIBOR, and

24 they came back with a feedback statement just a month and a

25 half later from this article, or even less, and said: There is


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1 no problem with LIBOR, it is a legitimate rate, it is a rate,

2 and we asked the submitting banks and the submitting banks say

3 that they provide accurate rates. And in that -- and LIBOR

4 itself is, as Mr. Wise has said -- my friend Mr. Wise has

5 said --

6 THE COURT: I'm glad everybody's friends.

7 MR. KOVEL: Everybody's friends. That's what they say

8 in Canada.

9 -- that the rate reflects the belief of a bank, the

10 belief of a bank, and we say this in paragraph 7 and in other

11 paragraphs of our complaint. It involves the perception of the

12 bank's borrowing costs. And to get inside a bank and know what

13 their borrowing costs are is for the person of ordinary

14 intelligence, which is the standard here, next to impossible --

15 THE COURT: But that's not your theory. That's not

16 how this case is proceeding. It is not proceeding on some sort

17 of defendant confessional. It is proceeding on, if you take

18 LIBOR rates and you compare them, first of all, to other

19 publicly available rates, you're proceeding on a disparity.

20 Moreover, you don't need to have some special insight

21 as to what the defendant banks were putting in as their LIBOR

22 rates because the day after the LIBOR rate is published, you

23 learn exactly what they put in.

24 So the point is that apart from the various

25 publications -- and you will give me those other copies -- the


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1 fact is the LIBOR rate is published, the bids are published,

2 and the comparable interest rates that you're relying on now

3 existed then, and the same type of study that you have experts

4 do now, they were perfectly capable of having done then. And

5 indeed, the Wall Street Journal did one for you.

6 MR. LOVELL: Your Honor, I'm not going to disagree,

7 but let me just say, everything changed. There were all these

8 contraindicators in 2008 in that every time there was a

9 newspaper article, not a government submission, none of the

10 prosecutors did anything in 2008. Every time there was a news

11 article, your Honor, the defendants whose, under Rule 11,

12 subjective perception of what they could borrow at -- and

13 Mr. Wise was pointing out how flimsy subjectiveness is. A

14 plaintiff, to get over Rule 11, would have to say that that

15 subjective perception in 2008 was off. When the defendants

16 were repeatedly saying in the press everything is okay, when

17 the BBA says everything is okay, all these --

18 THE COURT: Sir, the problem is, A, inquiry notice

19 cannot turn on the failure of the defendants to confess to

20 their wrongful acts.

21 Secondly, general denials are one thing when all the

22 information is in the hands of the defendants, as it often is

23 in other situations. Here, they can deny whatever they want to

24 deny, but you always had access to the bids the day after, the

25 LIBOR rate the day of, and all the other benchmarks that you're


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1 now relying on. So defendants' denials here are much less

2 significant than in a situation in which they really are the

3 repository of the relevant information.

4 MR. LOVELL: I don't think your Honor's logic -- and I

5 know it has force in certain contexts, your Honor. I don't

6 think it has logic in the context where we have to allege that

7 their subjective perception --

8 THE COURT: Excuse me. You brought this case before

9 the Barclays settlement --

10 MR. LOVELL: Yes, your Honor.

11 THE COURT: -- so you brought it in exactly the --

12 MR. LOVELL: No.

13 THE COURT: -- same context.

14 MR. LOVELL: May I respectfully disagree, your Honor.

15 Once the subpoenas came out from the government, all the

16 denials stopped, your Honor. Instead there was no BBA saying:

17 Everything's okay. Every defendant wasn't running out saying:

18 Our LIBOR was okay.

19 THE COURT: Mr. Lovell, it really cannot turn on

20 whether the defendants don't admit to wrongdoing. And what is

21 the big deal anyway? You have a subjective standard.

22 Subjectively, that's what we believe. I mean --

23 MR. LOVELL: It's not just subjective, your Honor.

24 The market was under great distress in 2008. There were

25 supposed reasons for this. In 2010 and '11, the market came


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1 back the other way and the historical rates fused up again.

2 The temporary plausibility, extreme plausibility of what the

3 defendants were saying about their subjective state of mind

4 removed the probability from a person of average intelligence

5 to know that they were monkeying with their subjective

6 perception of borrowing, your Honor.

7 THE COURT: You had the article. It gave you a road

8 map.

9 MR. LOVELL: It really didn't, your Honor. It was

10 full of contraindicators, and they have an affirmative defense

11 to show that we had -- on a pleading that we put in, that we

12 had a probability to an average person when there's all these

13 denials in the market? Plausible explanations for their

14 subjective cost of borrowing?

15 THE COURT: You didn't even start to see if you could

16 either duplicate what the Wall Street Journal did or use

17 another relevant benchmark and do the same thing that you did

18 now, and, frankly, I'm just puzzled. Leave aside the law and

19 what the answer may ultimately be regardless of my question. I

20 don't understand, as someone who has some familiarity with the

21 plaintiffs bar, why --

22 MR. LOVELL: I understand. Sorry, Judge.

23 THE COURT: -- you guys weren't all over this back

24 then, and I don't really see what the Rule 11 problem would

25 have been. I really don't.


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1 MR. LOVELL: I understand what your Honor's logic is,

2 but I think if your Honor looks at the cases that we submitted

3 in the letter, there have been many less contraindicating

4 factors and many more indicating factors, and the courts have

5 said, you can't decide this on a pleading, on a motion to

6 dismiss. This has to wait till later.

7 In order to have inquiry notice, you need some

8 indications of what the wrong here is. Here the wrong is that

9 the subjective perception of the borrowing cost is off in a

10 crazy market in which the defendants are saying, no, we're

11 reporting it correctly, and the BBA, which is not a defendant,

12 is saying the same thing, your Honor, until after the subpoenas

13 start, when everything changes. Why didn't the government go

14 forward, your Honor? Don't they have the same duty as the

15 plaintiffs?

16 THE COURT: Look, you can't have sequesters, you can't

17 have cuts in government funding and then argue that you have no

18 obligation until the government acts. You are not entitled to

19 massive attorney's fees if all you ever do is wait for the

20 government to make your case for you and then, you know, hop on

21 their back and say, oh, now we want damages and we want one

22 third of them. I mean, that's not your proper role in the

23 system. And you cannot therefore say that you simply are

24 entitled to wait for the government.

25 MR. LOVELL: Well, no, I'm not saying -- it's not a


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1 one size fits all, your Honor. I'm saying in this situation,

2 they regulate the banks heavily. They're in there. If the

3 banks were saying to the public, our rates are fine, LIBOR's

4 fine, if the BBA is saying to the public, our rates are fine,

5 and the regulators who are in there looking at it every day

6 don't do something, the average intelligence is supposed to

7 think it's probable they're all wrong? Sorry, Judge.

8 THE COURT: They're not going to get it right all the

9 time. I mean, they missed Madoff too, right?

10 MR. LOVELL: A fact not known until, what, December

11 2008 anyway, but they had more credibility then than

12 postMadoff. I agree with that.

13 But the specific fact context, your Honor, of a

14 subjective perception and of the regulators being there to look

15 at it and of the regulators doing nothing till years later, it

16 seems that they're a proxy for what any plaintiff could know.

17 When the regulators do nothing, either they had a policy reason

18 that perhaps your Honor should consider for doing nothing or

19 they couldn't see anything at --

20 THE COURT: Or maybe they just had other things on

21 their plate. I mean, the government agencies have to make

22 decisions about where their attention and efforts are going to

23 be spent. I mean, if the US Attorney's Office, you know,

24 prosecutes ten crimes, it doesn't mean those are the only ten

25 crimes, you know, that exist. We all understand that.


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1 MR. LOVELL: Thank you for giving me the time to go

2 into it, your Honor. I do think that Mr. Kovel has specific

3 cases.

4 MR. KOVEL: Your Honor, the cases that we cited, at

5 least some of it -- my Exchange Act cases that we cited in this

6 letter from October 18th --

7 THE COURT: I'll find the letter.

8 MR. KOVEL: -- one of them is the Anderson case from

9 the District of Wisconsin, another one is a copper case out of

10 the Seventh Circuit, and those cases make it clear that there

11 has to be far more than what was available here for a person of

12 ordinary intelligence to be on inquiry notice. And those were

13 summary judgment cases. And in both of those cases there were

14 government investigations, there were news articles, including,

15 in the copper case, a Wall Street Journal article connecting

16 the defendant to the misconduct and suggesting that there was

17 a -- there was wrongdoing. But the Wall Street Journal in the

18 copper case didn't go so far as to say there was any

19 indication -- that there was any proof that the defendant had

20 done anything wrong. The same -- that same kind of

21 qualification is present in all of the Wall Street Journal

22 articles and other articles that we will provide the court and

23 that we cited in our brief. These qualifications -- for the

24 purposes of inquiry notice, the Seventh Circuit found that it

25 created an issue of fact.


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1 The Tomlinson case is a case that the defendants rely

2 on for inquiry notice. It's also in the Seventh Circuit out of

3 the Northern District of Illinois. The Tomlinson case is a

4 case in which the defendants had admitted to their conduct,

5 except for the purpose -- for the purpose of saying that they

6 actually intentionally meant to do it. They said they did it

7 by mistake. The actual contours of the conduct were known,

8 exactly what they traded and when, trading the bonds I think

9 before the release of data. There was a government

10 investigation by the SEC, and the SEC had issued Wells notices

11 on the defendants. That's when an inquiry notice was

12 triggered, according to the report. That's not an analogous

13 situation here.

14 And the fact of the matter is, in the context of 2008,

15 the market was so dislocated to such a degree that the

16 defendants to this day are arguing that our -- that the

17 discrepancies between euro dollar deposit rate and LIBOR that

18 they reported it, those still are too fuzzy to figure out

19 because they were subjective reports and because the markets

20 were dislocated.

21 THE COURT: And in fact, that's not a totally specious

22 argument, is it? Because in fact, right, there was no actual

23 or very little actual borrowing between banks at that time,

24 right?

25 MR. KOVEL: And that's what defendants said at the


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1 time. And there was -- at least from the person of ordinary

2 intelligence, there is some validity to that if you don't know

3 they're intentionally misreporting it, your Honor.

4 THE COURT: Well, as I said, sorry I didn't see that

5 those letters. I will, of course, look at all those cases.

6 But let me just turn the tables on the defendants for

7 a moment. Footnote 36 of the exchange-based plaintiffs' memo

8 makes, you know, reference -- I'll give you a moment to find

9 it -- to statements by the head of the Bank of England and the

10 British FSA indicating that they were either ignorant until

11 2012 or, in the case of the FSA, that they didn't really think

12 about the manipulation of LIBOR until sometime in mid November

13 2009 and didn't start their own investigation -- this is FSA's

14 director of enforcement of financial crimes -- until May 2010.

15 So I think it's a fair question, if those high-ranking

16 officials didn't figure it out, why should we be demanding that

17 the plaintiffs figure it out?

18 MR. GOTTRIDGE: Your Honor, at the risk of what I

19 think my friend would call the hindsight bias, I mean,

20 obviously, there's been a lot of discussion I know in the UK

21 press and in effectively the UK Parliament about this and

22 whether the UK regulatory approach at the time was the right

23 approach. The BBA LIBOR was not really a regulated activity.

24 The BBA was not overseen by the regulators. The Bank of

25 England, as I understand it -- I'm not an expert on the


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1 regulation in the UK, but I don't believe it had regulatory

2 authority. I think both the Bank of England and the Federal

3 Reserve in this country have been criticized recently in, among

4 other places, the Wall Street Journal, I think, for, you know,

5 not having a closer watch or for not thinking that LIBOR was

6 part of their beat.

7 But I don't think it defeats what the court -- the

8 court's colloquy with Mr. Kovel, which is that if you had a

9 person of reasonable intelligence opening up the Wall Street

10 Journal and Bloomberg, the FT, and the other papers that were

11 discussed, they were put on ample inquiry notice and they did

12 absolutely nothing, that is really the point.

13 If you look at the pleading in this case, the amended

14 complaint, it doesn't say anything that was done by the

15 plaintiffs to inquire, to follow up on, to be -- to exercise

16 any degree of due diligence, and in fact the complaint as

17 written -- if you excise material that could be stricken under

18 Rule 12 that -- which is all kinds of references to government

19 investigations, the complaint as written is exactly what they

20 would have written over two years before they filed it, which

21 of course is the statute of limitations period. So I don't

22 think that the fact that, you know, one can question the degree

23 of diligence of certain regulators -- which, again, is

24 something that has been done I know in the Parliament in the UK

25 and the press -- I don't think that excuses the plaintiffs' own


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1 failure to exercise due diligence.

2 THE COURT: Would the plaintiffs agree that there

3 would be a different analysis of whether plaintiff suffered

4 actual damages for euro dollar futures contracts that were

5 purchased and settled within the class period versus euro

6 dollar contracts that were purchased during the class period

7 and settled afterwards?

8 MR. LOVELL: I understand your point, your Honor,

9 which I take to be that if the artificiality is over, you don't

10 have to compare them, and I --

11 THE COURT: Well, no. That if the artificiality

12 exists throughout the time period, proportionately what

13 difference does it make?

14 MR. LOVELL: Well, I take your point, and I would

15 agree that if the artificiality is over, that it's zero in the

16 one transaction, there's no comparison required.

17 With respect to the class period, the transaction open

18 and closed in the class period, the methodology has always been

19 a damage ribbon or an artificiality ribbon, comparing the

20 amount of artificiality at the time of the purchase with the

21 artificiality at the time of the sale. In the defendants'

22 causation of loss or causation of actual damages, they start

23 calling it in the reply argument, they referred to Dura, and

24 Dura had the pure logic static inflation presumption from one

25 misstatement. Here, there were different reports every day.


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1 There were futures contracts coming to an expiration. There

2 were a number of factors that break the mold of the Dura static

3 artificiality presumption that applies to securities where

4 there's one false statement by an issuer and then you have to

5 wait for the corrective thing. As Judge Scheindlin found in

6 the IPO case and as many other judges have found, and Judge

7 Scheindlin in the Amaranth case, for that matter, and Judge

8 Scheindlin held as follows: "If one transacts in a manipulated

9 market in commodity futures, injury may be presumed."

10 Actually, there's other decisions. The Jack Carl case

11 from the Northern District of Illinois that we did not cite,

12 your Honor, that says, where somebody is subjected to

13 violations of law that are truly violations, then they allege

14 harm, that presumes to state a claim and the amounts are for

15 discovery. Here, until there could be an artificiality ribbon

16 and the purchases and sales could be compared to that within

17 the class period, one can't know if one paid more artificiality

18 than one received.

19 THE COURT: But haven't you alleged a consistent,

20 longstanding conspiracy to suppress LIBOR, and just as a source

21 of information, but one of the points in the Wall Street

22 Journal, you know, article that I referred to earlier was that

23 the spread during the time that they studied it of the LIBOR

24 bids averaged within the range of only .06 percentage points,

25 so -- and I certainly can't speak to whether that's true, you


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1 know, for the entire period. Maybe you can.

2 MR. LOVELL: Yeah, it's not. But I understand, if it

3 were true, that there's a uniform amount of artificiality, if

4 you could extrapolate --

5 THE COURT: If you inflate it or deflate it the same

6 amount, at the beginning and the end --

7 MR. LOVELL: Right.

8 THE COURT: -- it's a wash.

9 MR. LOVELL: Yeah, right. But the defendants can't

10 get there from here on the pleading stage, and the pleading is

11 to the contrary, your Honor. If we alleged in the complaint

12 that there was a uniform amount of artificiality, then you

13 could get there at the pleading stage. We don't allege that.

14 In fact, it shows, there's -- in a slide that was to be

15 presented, there's big jumps --

16 THE COURT: I'm not forbidding slides. I'm not

17 forbidding a slide showing up on the screen. My point is that

18 I've seen too many lawyers come into court with their prepared

19 slides and then all they want to do is give me the slides.

20 Apart from the fact that I'm pretty capable of reading it

21 myself, it loses the whole point of oral argument, which is

22 answering the questions that bother me, not what you prepared

23 to say when you came in. So if you have a slide, you know, I'm

24 not really trying to, you know, destroy them. I'm just saying,

25 unless they really are responsive to the questions, don't be


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1 dependent on them. That's my only problem.

2 MR. LOVELL: Sorry for interrupting, your Honor. Page

3 22 of the complaint -- I don't need the slide to answer this

4 one. Page 22 of the complaint, the fluctuations in the amount

5 of presumed artificiality at this point, we have to do -- as I

6 keep saying, it's a subjective perception test. Objectively

7 there's no reason to think with these big jumps and everything

8 that it could ever even out to uniform artificiality, your

9 Honor. If there's good reason to believe in fact that it

10 follows -- at this time the closest reasonable inference, the

11 plausible inference from the pleading is as follows: The

12 degree of artificiality got much worse, particularly after

13 Lehman Brothers, and then had fluctuations, and then in 2010

14 and in 2011, after the subpoenas, disappeared. But it's

15 varied. That's the answer, your Honor.

16 THE COURT: Mr. Gottridge?

17 MR. GOTTRIDGE: Your Honor, I'm at a bit of a loss

18 here because we've been hearing that for 34 months straight,

19 every bank, every one of the 16 banks, in a drumbeat just kept

20 putting in falsely low submissions for the alleged purpose of

21 suppressing LIBOR, which is another issue we can come to, if

22 the court cares to, about specific intent. But the same thing

23 was supposedly going on for 34 months, and then all of a sudden

24 we're hearing now that actually there were quite different

25 conditions so we don't have to plead anything.


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1 With all due respect, this complaint does not say

2 anything other than that these plaintiffs, these exchange-based

3 plaintiffs, quote-unquote transacted in euro dollar futures

4 contracts. We don't know if they went long, we don't know if

5 they went short, we don't know if they held throughout the

6 period, rolled their positions forward, we don't know if

7 they -- if they sold after a day or after a week or after a

8 month. And they ought to know at least what their own

9 positions are, and they ought to be able to tell us, how have

10 they suffered actual loss, and this is not really -- it doesn't

11 have to be a Dura question. We think Dura is instructive and

12 may be applicable in this context, but even if it isn't,

13 it's -- under Section 25(a)(1)(A) of Title 7 in the Commodity

14 Exchange Act, there's an absolute requirement that a plaintiff

15 bringing a claim like this shows actual loss and that it is

16 attributable to the conduct of the defendant that constitutes

17 the violation, and if that's not Dura, it's at least some form

18 of loss causation injury, proximate cause, call it what you

19 like, all of which is missing from this complaint.

20 MR. LOVELL: Just briefly, your Honor.

21 Although there were misreports for the whole class

22 period -- I can't say this any clearer -- the amount of the

23 false report was not the same. Because that varied, the

24 traders at different points are experiencing different amounts

25 of artificiality, and when you compare the artificiality on the


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1 purchase to the artificiality on the sale, there will be a net

2 result.

3 Now under the second --

4 THE COURT: Well, where in your complaint do you plead

5 the actual damages?

6 MR. LOVELL: Where do we plead what? I'm sorry. I

7 couldn't hear.

8 THE COURT: Where in the complaint do you plead actual

9 damage?

10 MR. LOVELL: The actual damages, paragraphs 21 to 26

11 or 27. The plaintiffs are alleged to have transacted in a

12 manipulated market from which the inference of injury arises.

13 The -- and then as I showed your Honor before and at other

14 places, page 22 of the complaint and other places, we're

15 showing that it's not a uniform amount of artificiality. So

16 the Dura presumption does not apply. Any uniform artificiality

17 does not apply.

18 Now, your Honor, cases have held -- Kohen v. Pimco is

19 one case, has held that the loss causation doesn't apply here

20 from securities. The securities laws -- the PSLRA has a

21 statute that says, the plaintiff has to prove loss causation.

22 No -- no -- loss causation is not used in the Commodity

23 Exchange Act --

24 THE COURT: But you have to prove actual damages.

25 MR. LOVELL: Well, the actual damages exist in the


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1 securities laws. I agree --

2 THE COURT: No, it's right in the statute.

3 MR. LOVELL: Yeah, yeah, I agree. We have to show

4 proximate cause, your Honor, and that our recovery is limited

5 to actual damages. And there is a presumption of injury and

6 actual damages when you transact in an artificial market. As

7 the court in Pimco said in the Seventh Circuit, your Honor, you

8 can't put the cart before the horse and require a plaintiff to

9 figure out the artificiality ribbon at the beginning of the

10 case. All that the plaintiffs can do under these cases that

11 I've referred to, Kohen v. Pimco and -- the Pimco decision in

12 the Seventh Circuit and Amaranth by Judge Scheindlin, is put

13 forth that they transacted in the artificial market. Injury is

14 presumed. If there's an offset to injury, your Honor, which is

15 what this is talking about, the Second Circuit cases -- I

16 believe it's the Denny case -- are clear that offsets do not

17 hurt standing or stop proximate cause. They're a matter for

18 later.

19 THE COURT: Let me ask you one more question on

20 commodities, and then we need to move on to the Schwab

21 plaintiffs and their RICO claims.

22 There's a claim in the complaint here for aiding and

23 abetting liability. What are you referring to that's distinct

24 from your main claim of direct liability? In other words, how

25 could you have an aiding and abetting claim if you didn't


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1 succeed on your main claim?

2 MR. LOVELL: Okay.

3 THE COURT: Okay.

4 MR. LOVELL: Oh, boy. So in the Diplacido case, your

5 Honor, the CFTC did what they frequently do. They charged both

6 a primary violation on manipulation and aiding and abetting for

7 the whole case. They won on both at trial, and the sanctions

8 for aiding and abetting were vacated afterwards and said, you

9 can't have both. Why did they do that? Why do we do that? In

10 this case, your Honor --

11 THE COURT: I mean practically, give me a real world

12 example of how you can not prevail --

13 MR. LOVELL: I'm going to. I'm there. I'm there.

14 Let me give the context in my -- to help me with perspective.

15 In this case I believe, your Honor, if your Honor

16 finds that there is a plausibly alleged Twombly agreement, then

17 all of the defendants in the agreement had a specific intent to

18 manipulate, they put their orders in -- they put their rates

19 in, pardon me -- and they are all primary manipulators, and

20 liable -- primary violation for manipulation. But as your

21 Honor knows, the private right of action in commodities, unlike

22 securities, gives a claim for aiding and abetting. To the

23 extent that the defendants have a subsidiary who works on the

24 exchange or to the extent that your Honor does not find that

25 there is a plausible Twombly conspiracy, there is still -- if


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1 there were just knowing parallel conduct, that you know what

2 your neighbor is doing and you also falsely report, so you do

3 something wrong and you know what they're doing, there are

4 situations where that could wind up being that the rate that

5 you put in may not have manipulated the price but you're aiding

6 and abetting by going along and creating this environment in

7 which everything is artificially low. And it's all alleged in

8 the complaint. Well, it's come out more later, your Honor,

9 with Barclays, etc., about being in the pack and not wanting to

10 stand out and --

11 THE COURT: But that's an entirely different motive,

12 an object of your conspiracy, and at least in the criminal

13 context, you need unanimity on the object, and here, if the

14 object is to protect your reputation and it appeared that no

15 one was on to you, the one thing you would never do is tell

16 anybody. You know, that that was your concern. So you

17 certainly wouldn't be conspiring with anyone else. And that

18 is, you know, a dramatically different motive than the banks

19 all agree that if we keep LIBOR rates low, we make more money,

20 even though that's inconsistent with some of the Barclays

21 settlement admissions that is indeed -- because in fact, if it

22 was simply an agreement -- and this is something you'll have to

23 deal with some day -- simply an agreement to keep them low,

24 they don't have to keep talking to each other. You know, they

25 just agree to it once and, you know, it kind of applies for the


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1 next X number of years.

2 MR. LOVELL: I think I should yield my time to

3 Mr. Carmody, to the extent the general agreement plausibility

4 and the motive, but on the aiding and abetting, your Honor, you

5 know, there are situations where it can come out --

6 THE COURT: Just give me an example here where it

7 seems realistic that aiding and abetting is meaningful. And I

8 recognize that you all learned in law school, you know, you can

9 argue both sides, you know, but I'm always interested as a

10 judge in knowing why you can do it.

11 Like, for example, if I can understand common law

12 cause of action here, you're worried that you have the statute

13 of limitations issue on your, you know, Commodity Exchange Act

14 claim, right? The common law cause of action is a longer

15 statute, that makes sense. What, in this context, is the

16 reason to add an aiding and abetting claim? And give me just

17 an example of how it would operate in so-called the real world.

18 MR. LOVELL: An example would be that if a subsidiary

19 of a defendant who didn't report to the BBA or if a defendant

20 perhaps whose report did not impact LIBOR, or argued that --

21 this is not the plaintiffs' claim, your Honor, but if they

22 successfully argue that in the fact finding, but their conduct,

23 you know, knowing, you know, the Learned Hand test -- I just

24 argued this in the Second Circuit two weeks ago, one on aiding

25 and abetting in the Second Circuit. Now they'd never decide it


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1 on the Commodity Exchange Act, but the Learned Hand test of you

2 know, knowingly associating with the conduct. Well, if you put

3 in false reports yourself and you know everybody else is doing

4 it and you're making an artificially low environment like, say,

5 to interdict the competitive processes but you yourself don't

6 actually cause the manipulated price on that day or some

7 days --

8 THE COURT: In just theory, somehow that's --

9 MR. LOVELL: My concern.

10 THE COURT: -- the four on the top, you know, but the

11 four on the top and the four on the bottom are not your real

12 co-conspirators here, they're just aiders and abettors?

13 MR. LOVELL: It's not my theory. I don't think it's

14 going to happen, but your Honor asked for an example, and if

15 there was pushbacks that was successful, that would be an

16 example of knowing association with the manipulation and

17 furthering it by what you did, even though your rate itself

18 didn't cause the artificial price.

19 THE COURT: Okay.

20 MR. GOTTRIDGE: Your Honor, I don't want to take up a

21 lot of the court's time, but something Mr. Lovell said just

22 caught me, which is conflated, perhaps inadvertently, false

23 reporting with manipulation.

24 I think we have to be very clear, manipulation as a

25 violation of the CEA is a specific intent violation, and


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1 obviously, when you talk about aiding and abetting, you've got

2 to have the underlying principal violation and then the aider

3 and abettor has to know of it and then sub -- contribute

4 substantially to the achievement of it.

5 But in terms of the motivation here, right, the

6 motivation supposedly is that each of these 16 banks, either

7 operating together, which seems implausible, or operating

8 singly, individually, which equally seems implausible,

9 supposedly had this motivation to suppress LIBOR in order to

10 make themselves look more attractive in terms of their

11 financial health and their credit standing, but actually, the

12 only thing that that is a motive to do is for each bank to

13 submit to the BBA in London a LIBOR that is low and not to have

14 the ultimate LIBOR setting or fixing for the day be low. In

15 fact, if that's your motivation, you want to show yourself as

16 comparatively healthier than the next bank. The last thing you

17 would want to do, other than picking up the phone and calling

18 the next bank and saying, hey, let's put a low LIBOR in today,

19 the last thing you want to do is to see those other banks come

20 down where you are. You want to be lower than them, and you

21 want to be lower than the fixing. So all you've really got

22 here is an intent to put in a low submission. That is not the

23 same thing as an intent to manipulate because the intent to

24 manipulate would require specific intent to cause the LIBOR

25 fixing to be low, whereas in fact, if you accept the motivation


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1 that the plaintiffs ascribe to each of these banks, over 34

2 months of the swap period, they are either indifferent to

3 whether -- to where the BBA fixing is, or they would prefer it

4 to be higher than their own submission. So the entire mot --

5 the entire theory of violation for manipulation falls apart.

6 There is no plausible basis to infer the specific intent. The

7 only thing that's plausible is to infer the exact opposite of

8 the intent, and nowhere under the Commodity Exchange Act, even

9 if submitting a -- even -- excuse me -- if the fixing or

10 suppression of LIBOR were not improperly extraterritorial and

11 even if that were within the statute, certainly simply

12 submitting my own rate, my own submission as one bank among the

13 16, that certainly is not a violation of the CEA, and I've seen

14 nothing in plaintiffs' papers to support that.

15 Now I just had one other point I wanted to make, your

16 Honor, sort of as housekeeping on our side, and I apologize for

17 taking the court's time, but -- I know you wanted to move on

18 from the CEA. I just want to remind the court that three of

19 the defendants, Bank of Tokyo-Mitsubishi, Credit Suisse, and

20 Norinchukin, had submitted separate briefs in support of their

21 motions to dismiss, and they wanted me to remind the court of

22 that and that they're prepared to rest on their papers unless

23 the court had any questions for them.

24 Thank you, your Honor.

25 MR. LOVELL: 59 seconds, your Honor, before you move


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1 on, just to try to respond to that.

2 A reasonable inference from our pleading, your Honor,

3 is that the defendants had the motive to suppress their own

4 rate for their financial health but also that it helped them

5 with their -- with the other banks. Now when they do that and

6 affect the underlying commodity, that -- what the private right

7 of action provides under Section -- under Section 22(a) of the

8 Commodity Exchange Act, your Honor, is that one who suffers

9 damages in the futures market may sue for manipulation of the

10 futures contract or the manipulation of the underlying

11 commodity. When they have a specific intent to manipulate

12 LIBOR, they give -- they have specific intent sufficient to

13 create a private right of action for us in the euro dollar

14 futures contract who are hurt by that. This is what I tried to

15 get into at the beginning a little bit, your Honor. It's a

16 long history of when the Sherman Act came out, and the slide I

17 gave your Honor --

18 THE COURT: If we're starting with the Sherman Act,

19 you're going to be more than 59 seconds.

20 MR. LOVELL: It greatly reduced the corners and

21 manipulations, but it wasn't enough in the commodity market.

22 It worked wonders but not enough. And then the Commodity

23 Exchange Act came out. There is no preemption of the antitrust

24 laws. Both laws seek to have the prices determined

25 competitively, so Congress has made a statutory determination


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1 that there's CEA standing to sue for the futures market when

2 the manipulation is of the underlying commodity. That

3 statutory determination, given the congruent purposes of the

4 CEA and the antitrust laws, should inform on antitrust standing

5 as well.

6 My housekeeping -- housekeeping, your Honor, is to

7 point out that the Barclays type of manipulation -- if I could

8 use that phrase with no offense to Mr. Boies -- of the trades,

9 of adventitious trading to help the trading in up and down from

10 2005 to 2007 or whatever that period is, was not known to

11 anybody. There was never a tipoff as to that. Second -- in

12 terms of the statute of limitations argument.

13 Second, your Honor, the end of our class period is

14 what's filed within the statute, including the post2011 key

15 break in the prices, after the subpoenas. So, you know, it's

16 another reason in judicial management that the claims are going

17 to go forward. Why press now, your Honor, to deal with --

18 THE COURT: It's something called bargaining power.

19 Okay. RICO.

20 (Discussion off the record)

21 (Pause)

22 THE COURT: Okay. Guys, we're back in business.

23 There's substantial authority to support the

24 proposition that if one of the predicate acts supporting the

25 RICO claim sounds in securities fraud, that the PSLRA RICO


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1 amendment bars a plaintiff from bringing a RICO cause of action

2 despite the existence of nonpredicate acts.

3 Let me ask the plaintiffs, do you have any authority

4 to the contrary?

5 MR. FINEMAN: Steve Fineman for Schwab.

6 Let me make sure I understand the question, your

7 Honor. You're talking about the situation where a single

8 alleged fraudulent scheme contains predicate acts that could be

9 the basis of securities claim and others that may not be?

10 THE COURT: Yes.

11 MR. FINEMAN: Okay. I think the only real case in the

12 Second Circuit that addresses it is Gilmore. And so the

13 answer, the direct answer to your question is: I don't think

14 there's a specific case that says that you don't throw them all

15 out. The Gilmore case, however, I think is distinguishable in

16 a lot of ways from our case.

17 THE COURT: Is Gilmore Judge Pauley's case or am I

18 just --

19 MR. BOIES: Yes.

20 THE COURT: Yes?

21 MR. FINEMAN: Yes, and then there was a summary Second

22 Circuit authority.

23 THE COURT: I just wanted to make sure we were roughly

24 on the same page.

25 MR. FINEMAN: Right. So the thing about that case is


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1 it's very unusual because it involved a family dispute, you may

2 recall, and the RICO claim was pleaded, it contained, as the

3 court found on summary judgment, found that it contained

4 predicate acts that could be the basis for a securities claim

5 and therefore the court said that the RICO amendment to the

6 PSLRA applied and the court threw out the whole case.

7 I have to say, your Honor, I can't -- I don't think

8 that case deals with our situation. I mean, I understand why

9 the defendants argue it is, but it's such a unique case.

10 That's a situation where the only conceivable people who could

11 have a securities case were the people who were in the

12 courtroom. And also that was a situation where the court -- in

13 fact the defendants in that case --

14 THE COURT: They brought a securities case here. Oh,

15 which actually reminds me of a question. Just hold that.

16 Are there pending in any courts in the country

17 securities cases arising out of LIBOR?

18 MR. WISE: Not that we're aware of, your Honor.

19 MR. FINEMAN: Your Honor, there's --

20 THE COURT: There's one in front of Judge Scheindlin.

21 MR. FINEMAN: Not on these facts. Not -- I don't

22 think there's a single securities case that's based on the

23 facts alleged in the Schwab complaint. There may be -- there

24 may be some securities cases involving the common stock of

25 Barclays falling after the disclosure, but that's not based on


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1 the same fraudulent course of conduct alleged in these

2 complaints.

3 THE COURT: Okay.

4 MR. FINEMAN: Sorry. Was that --

5 THE COURT: Yes. Yes.

6 MR. FINEMAN: Okay. So the answer, your Honor, is I

7 think that Gilmore really is it. And Judge Baer dealt with

8 this in the --

9 THE COURT: Let me ask you this: Leave Gilmore aside.

10 You filed this case originally as a securities fraud. How can

11 you now sort of say that none of the predicate acts here were

12 pled as a securities fraud?

13 MR. FINEMAN: We did plead -- in the original

14 complaint that was filed in the Northern District of California

15 before the MDL include a claim for securities fraud along with

16 RICO claims. It was right in the same time period as the MLSMK

17 cases coming down. Had we focused more on that case, we

18 probably would have included it. But that complaint is not

19 operative, of course, now, your Honor, only this case is, but

20 I'm going to answer --

21 THE COURT: But just because you amended --

22 MR. FINEMAN: No, no.

23 THE COURT: -- doesn't mean it vanishes. It's still

24 there. There are facts that are pled. There are still

25 admissions.


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1 MR. FINEMAN: Actually, it does matter that we didn't

2 plead the claim. I agree with you, though, that the predicate

3 acts themselves need to be analyzed by you to determine whether

4 a securities claim could be brought on those claims. And in

5 fact, it's actually the defendant's burden. In the Gilmore

6 appeal on the Second Circuit, the Second Circuit referred to

7 this RICO amendment as an affirmative defense.

8 The defendants, of course, do not acknowledge that

9 there's a securities claim that can be brought here. In their

10 reply brief to your Honor, they specifically say they do not

11 concede that Schwab's allegations to state a securities fraud

12 claim against them that could be brought by a private

13 plaintiff, and then they pivot and say but the SEC could bring

14 a case. See, we had pointed out --

15 THE COURT: But that's sufficient, right?

16 MR. FINEMAN: Excuse me. It's what?

17 THE COURT: The purpose of the PSLRA amendment, it is

18 sufficient that the SEC could bring a securities claim. It is

19 not necessary that a private plaintiff be in a position to

20 bring a securities claim.

21 MR. FINEMAN: SEC has nothing to do with it. Their

22 argument shouldn't count for anything because the PSLRA doesn't

23 apply -- the RICO amendment doesn't apply --

24 THE COURT: That's not what the law is.

25 MR. FINEMAN: Yeah, it is. The RICO amendment is part


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1 of the PSLRA. The PSLRA applies to private litigants, not the

2 SEC.

3 THE COURT: Right. We're talking at cross-purposes.

4 MR. RICE: Your Honor, Tom Rice.

5 In this case, this isn't even like the Gilmore case.

6 The only conduct here that is alleged to be fraudulent is

7 conduct that would have been actionable under the securities

8 laws, and therefore the RICO amendment clearly applies, and

9 that conduct is, you know, the alleged suppression of LIBOR

10 pricing submissions in order to permit the defendants, among

11 others, to sell their securities at -- with artificial interest

12 rates and therefore, you know, by implication, at prices that

13 are higher than they otherwise should have been. That clearly

14 is securities fraud. You don't even have to get to Gilmore,

15 and the language of the RICO amendment is clear. That's the

16 conduct that's at issue, it would have been actionable as

17 securities fraud, and therefore the RICO amendment applies.

18 MR. FINEMAN: I totally disagree. The caselaw

19 requires an actionable securities fraud claim on the predicate

20 acts. The reason we took the claim out, your Honor --

21 THE COURT: Because you learned about the loss, right?

22 MR. FINEMAN: No, your Honor. Actually, what we said

23 in our brief is what happened, which is that we looked more --

24 we were able to look more closely over time at our client's

25 transactions. Our client Schwab made thousands upon thousands


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1 of individual transactions, purchased contracts and securities

2 purchases. There is no conceivable way that we could

3 demonstrate reliance on any specific misrepresentation in

4 connection with the purchase and sale of those securities. If

5 I was here arguing before your Honor --

6 THE COURT: Isn't that foregone in the market? Isn't

7 that a rather well-established securities law?

8 MR. RICE: Right, exactly, your Honor, and this is

9 also a deception case, and what their real allegation is -- and

10 again, they disguise this by not really giving you all the

11 predicate act pleading in the detail that they can. What

12 they're really alleging is that there was a fraud going on and

13 it either affected, right, the whole price on the market or it

14 wasn't disclosed to them and that's why it was deceptive, and

15 when they say they relied on LIBOR, what they're saying is that

16 they relied on the omission when my clients or when the

17 defendants sold securities to them, the omission of information

18 that that LIBOR rate was not real.

19 MR. FINEMAN: No, it alleges we're relying on the

20 accuracy of LIBOR when we entered into the purchases, which

21 required that the banks independently submit honest LIBOR when

22 they submitted their quotes to the BBA.

23 THE COURT: Look, let's --

24 MR. FINEMAN: Your Honor, if I can just say, I am

25 certain -- I've done this -- I've done securities fraud cases,


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1 and I know you have a lot of experience with those cases

2 yourself. If I was standing here today arguing in favor of --

3 in support of a 10b-5 case, I could not do it credibly, and

4 that's the reason that claim is not in the case. That's why no

5 plaintiffs' lawyers filed one of these cases in the securities

6 case, and it's the reason it's not a securities case. There's

7 no predicate act here that gives rise to a 10b-5 case.

8 THE COURT: Exactly why isn't this a securities case?

9 MR. FINEMAN: It's not a securities case because we

10 can't make out the elements of a 10b-5 claim. The fraudulent

11 misrepresentations here were not made to Schwab. The

12 fraudulent misrepresentations were made when the BBA -- when

13 the submissions were made to the BBA. That's the fraud.

14 THE COURT: But aren't you just creating that

15 construct simply to avoid this being a securities case?

16 MR. FINEMAN: No. I'm saying that's the construct

17 because that's what happened. That's the same theory that

18 underlies the entire case, whether it's the antitrust claim or

19 the common law claims.

20 THE COURT: But then they sold you a security based on

21 a false LIBOR rate, a distorted LIBOR rate, right?

22 MR. FINEMAN: LIBOR was suppressed when we bought it,

23 that's right.

24 THE COURT: Right. So --

25 MR. FINEMAN: But we didn't -- but the notes -- but to


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1 the extent we bought floating rate notes, Schwab bought

2 floating rate notes that specifically said LIBOR plus or minus.

3 There's nothing in that purchase agreement that's other than

4 it's LIBOR. There's no misrepresentation being made in that

5 instance, for example, by Bank of America to Schwab. The

6 misrepresentation came earlier. There's the Sixth Circuit

7 case --

8 THE COURT: But if there's no misrepresentation in

9 that, then isn't there a problem on the damage side, that you

10 have the same situation, when you buy and when you sell?

11 MR. RICE: I think number one, the misrepresentation,

12 as I said before, that they're effectively alleging is an

13 omission of telling them that this rate is pursuant to, you

14 know, a manipulative scheme, and then as your Honor pointed

15 out, even if -- even if he didn't have sort of the showing of

16 reliance, it couldn't be clearer, you know, in the Second

17 Circuit's decision in the -- I've got to get the letters

18 straight -- MLSMK case, that as long as someone could bring

19 that claim -- and the someone includes the SEC specifically in

20 that case, because that's the case where the underlying

21 securities fraud was an aiding and abetting claim, where there

22 is no civil claim at all, but the Second Circuit made

23 absolutely clear that the RICO amendment applies there because

24 someone -- and that someone being the SEC -- could have brought

25 that claim.


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1 THE COURT: And the SEC doesn't have to prove

2 reliance. That's the whole point.

3 MR. FINEMAN: Right. The SEC has a much easier hurdle

4 than we do as a private plaintiff, but my points are, when the

5 SEC hasn't filed a case, we have no reason to think they aren't

6 going to file a case.

7 THE COURT: But that doesn't matter.

8 MR. FINEMAN: It also matters because the --

9 THE COURT: Intellectual exercise is not a real world,

10 are they going to file. It's could they.

11 MR. FINEMAN: Well, your Honor, I suppose -- I don't

12 see how the SEC can apply here. The SEC -- this is an

13 amendment to the Private Securities Litigation Reform Act.

14 There is actually caselaw that says it doesn't apply to the

15 SEC. I don't -- I'm not sure I understand how what the SEC

16 does has anything to do -- the whole purpose of the amendment

17 was to prevent plaintiffs' lawyers from bootstrapping

18 securities cases into RICO cases.

19 THE COURT: Right.

20 MR. FINEMAN: Yes, your Honor, something we did not

21 do.

22 MR. RICE: Respectfully, your Honor, the RICO

23 amendment bars their claim. The RICO amendment doesn't prevent

24 the SEC from bringing a claim. The Second Circuit in the MLSMK

25 cases said, in exactly this kind of situation, the RICO


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1 amendment applies based on the ability of the SEC to bring a

2 claim. Some of these issues may be difficult. This is not a

3 difficult issue, your Honor. This is easy. This RICO claim is

4 barred by the RICO amendment.

5 THE COURT: So let me ask you this, Mr. Rice: Do you

6 agree that the plaintiff Schwab traded in certain instruments

7 that would not be classified as securities?

8 MR. RICE: We're not contesting, your Honor, that --

9 that they have alleged that they have purchased certificates of

10 deposit or commercial paper that would not qualify as

11 securities, yes.

12 THE COURT: So what if I accepted, you know, your

13 position on the PSLRA and sort of excised from the plaintiffs'

14 complaint any reliance on securities and only permitted them to

15 seek damages for instruments which are not considered

16 securities within the Exchange Act? Would the RICO amendment

17 still bar this?

18 MR. RICE: Yes, it would, your Honor.

19 THE COURT: And why?

20 MR. RICE: And it would because that kind of analysis

21 mistakes the claim for the conduct. Here the conduct that's

22 alleged is that the defendants manipulated LIBOR so that they

23 could sell LIBOR-based financial instruments to the public,

24 including to Schwab. Some of those were securities, some of

25 those were not securities. Even if, to take an extreme


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1 example, Schwab itself had not bought anything that was a

2 security, the conduct here was conduct that is actionable, that

3 would have been actionable as fraud in connection with the

4 purchase or sale of securities by someone, SEC or perhaps by

5 private plaintiffs, so the RICO amendment still applies,

6 clearly.

7 MR. FINEMAN: The standard is whether or not an

8 actionable securities fraud claim could be brought on the

9 predicate acts, on the conduct alleged in the complaint. The

10 first question one has to ask is: Is there a security? If

11 there's no security, you can't bring a securities fraud claim.

12 So our position is, as we wrote in our briefs, your Honor, that

13 to the extent that Schwab purchased instruments that are not

14 securities, they, and anybody else holding similar instruments,

15 could not assert a securities fraud case in any context. And

16 therefore those should be excised should your Honor --

17 THE COURT: What the point was, if it's not a

18 security, it can't be a securities case, therefore it could be

19 a RICO case. It's a good argument for you, not a good argument

20 for the defendant, right?

21 MR. FINEMAN: That's the position, yes.

22 MR. RICE: Your Honor, but the response here is we're

23 not talking about --

24 THE COURT: No. I understand. And you're saying that

25 that parsing is wrong because, as you put it, it mistakes the


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1 claim for the conduct.

2 MR. RICE: Right.

3 THE COURT: And the conduct is fundamentally a

4 securities fraud, doesn't apply.

5 MR. RICE: Exactly, and the reason it's fundamentally

6 a securities fraud is because it wasn't directed at commercial

7 paper, it was directed at, as alleged, all LIBOR-based

8 instruments, many of which are securities.

9 THE COURT: Are you also the fellow who's up on the

10 extraterritoriality enterprise issue?

11 MR. FINEMAN: I would characterize it slightly

12 differently, but yes, that's me.

13 THE COURT: Okay. I just want to make sure who I'm

14 talking to.

15 MR. FINEMAN: You are. Thank you, your Honor.

16 THE COURT: Okay. Assume that I disagree with the

17 position taken in the brief that the location of the enterprise

18 should be determined by a focus on predicate acts rather than

19 by a reference to a nerve center test. What location would

20 that be? Or, to put it another way, if there would be only one

21 place where the enterprise could be located, what would that

22 one place be?

23 MR. FINEMAN: If I might just make sure I'm -- one

24 thing I want to be clear about is that there are two tests that

25 emerge in determining extraterritoriality on RICO. One is the


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1 enterprise test and one is the predicate acts test. And what

2 we've argued in the briefs and what I'm prepared to argue is

3 that the predicate acts test is really the test that should

4 apply.

5 THE COURT: My question is assume I don't agree with

6 you.

7 MR. FINEMAN: There is no centralized place for this

8 enterprise, your Honor.

9 THE COURT: Well, let's assume that under the nerve

10 center test, you have to pick a place. If I have to pick a

11 place, what would that place be? Let's assume I conclude I

12 need to pick a place.

13 MR. FINEMAN: Well, I'm --

14 THE COURT: Put it another way, can it be any place

15 other than England?

16 MR. FINEMAN: The answer is more factors can weigh in

17 favor of England, London, and other places, but it shouldn't

18 determine the answer to the extraterritoriality question. The

19 defendants here -- remember, your Honor, that the

20 submissions -- the wrongful act here is the alleged --

21 THE COURT: It's more an enterprise question than an

22 extraterritoriality question.

23 MR. FINEMAN: Yes, I'm going to answer it. I

24 understand. Well, it's the enterprise -- I'm sorry, your

25 Honor. If I understood where you were heading with this is the


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1 question has to do with extraterritoriality.

2 THE COURT: Well, it has to do with your pleading

3 RICO, and you therefore need to plead an enterprise.

4 MR. FINEMAN: We do. The enterprise is the

5 association in fact of the panel member banks who were the ones

6 who submitted false LIBOR quotes. They are located all over

7 the world. Five of them are in the UK, three of them are here,

8 two of them are in Germany, two are in Japan, one is in Norway,

9 and two are in Switzerland.

10 THE COURT: But isn't the pure analysis that the

11 enterprise here is the British Banking Association which has

12 been corrupted, according to you? And just to quote your brief

13 at page 9, "Here, the defendants' misrepresentations were

14 directed not at buyers of specific securities but at the BBA,"

15 and therefore you allege that you did not rely on those

16 misrepresentations but rather the BBA did. So isn't that a

17 pretty good statement to support a conclusion that it is the

18 British Banking Association which has been corrupted, taken

19 over, by these allegedly false bids?

20 MR. FINEMAN: Well, I'm not trying to quibble, Judge.

21 It's just that the BBA is broader than just the LIBOR-based --

22 THE COURT: Okay. In RICO, you can have a corporation

23 that operates, you know, in some respects like a regular

24 business but in other respects is taken over by the mob.

25 MR. FINEMAN: Yeah. Our view is that there is no


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1 central location of this enterprise. The BBA is in London and

2 the --

3 THE COURT: But all the bids go in there --

4 MR. FINEMAN: Right.

5 THE COURT: -- and the LIBOR rate comes out of there

6 and --

7 MR. FINEMAN: Yes.

8 THE COURT: Right?

9 MR. FINEMAN: Yes.

10 THE COURT: And so the conspiratorial conduct that you

11 are relying on is directed at the British Bankers Association

12 once that LIBOR rate pops out. Don't the banks then return to

13 sort of being independent actors as they go about selling the

14 products? Because isn't it sensible that the enterprise has to

15 focus on the cooperative aspect, the conspiratorial aspect of

16 the alleged wrongful conduct? That is totally directed to the

17 British Bankers Association, is it not?

18 MR. FINEMAN: I think the facts you've stated are

19 accurate. I think characterizing it as being the centralized

20 place being in London I'm having trouble with, because the

21 theory of the case is that the wrongful submissions by these

22 member banks who are the participants in the enterprise, who

23 are all over the world but it was for the purpose of fixing,

24 suppressing US dollar LIBOR, which --

25 THE COURT: No. This is not the only country in which


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1 trading occurred, in reference to US dollar LIBOR, so it is not

2 a conspiracy in England solely directed to the United States.

3 MR. FINEMAN: The case here, though, the Schwab case,

4 we're the only ones who have brought the RICO claim --

5 THE COURT: Doesn't matter. You have to ask the legal

6 question. The answer can't change by who the plaintiff is.

7 MR. FINEMAN: I think the answer here, though, is that

8 all of the plaintiffs in this case are in the US. The target

9 here is the US market for investments that were based on US

10 LIBOR.

11 THE COURT: Only because you're the ones suing. I

12 mean, US dollar LIBOR, the US dollar is, you know, the

13 reference point. It is still -- we hope it stays that way --

14 you know, the most important world currency, and it is the

15 reference point around the world.

16 MR. FINEMAN: It is a reference point around the

17 world, but we're the ones who brought the case. Nobody else

18 brought the case here. We're the ones who are the plaintiff

19 here.

20 THE COURT: But you still have to deal with the issues

21 of whether your RICO claim can succeed, and that's an issue if

22 the enterprise, which is the fundamental part of your RICO

23 claim, exists not here but in England.

24 MR. FINEMAN: Well, your Honor, I suppose I could

25 argue this with you, but the real point I'd like to make is, if


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1 we're talking about extraterritoriality, I think the better

2 standard and the standard the courts are gravitating to is the

3 predicate acts standard, not the enterprise standard. That's

4 what Judge Kaplan did in Chevron. Judge Kaplan's decision --

5 THE COURT: You know, I have the highest regard for

6 Judge Kaplan. He's among our brightest judges. But, you know,

7 Judge Rakoff came out the other way and he is sort of

8 "Mr. RICO." He is the one that authored the book, and I think

9 teaches it at Columbia, but I'm not positive.

10 So they are two of our most finest judges in the

11 court, but it's kind of hard to dismiss the conclusion that

12 Judge Rakoff makes on RICO claims.

13 MR. FINEMAN: The thing I was going to say is that

14 Judge Kaplan's analysis, which obviously I find more persuasive

15 than Judge Rakoff's analysis --

16 THE COURT: I understand that.

17 MR. FINEMAN: -- notwithstanding Judge Rakoff's

18 expertise, that analysis was recently adopted by the Ninth

19 Circuit, which also applies the pattern test, which is the only

20 circuit I'm aware of that's actually adopted one of the other

21 tests to this point.

22 MR. RICE: Your Honor, if I could just briefly.

23 In applying the nerve center test, we think your Honor

24 is doing exactly the right thing, which is to, you know --

25 which is to try to find a single location and not to accept the


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1 plaintiff's view, which is really disregard the idea of an

2 enterprise altogether and look to kind of disparate locations

3 or headquarters of the different banks. And while the -- that

4 nerve center test sometimes, you know, asks courts to make hard

5 choices, as your Honor is pointing out, it's not a hard choice

6 here. All the financial -- everything points to London, and I

7 can go through them, but we can start with what LIBOR is.

8 Yeah, we talked about US dollar LIBOR, but LIBOR is the London

9 Interbank Offered Rate. That is the rate at which banks can

10 borrow money from each other or believe they can borrow money

11 from each other in the London Interbank market. Everything

12 points to London.

13 Just briefly on the predicate act test, if -- that

14 doesn't make us nervous either. I think we agree that the

15 nerve center test is the better test. But the Second Circuit

16 in the Cede�o case, which, you know, affirmed Judge Rakoff's

17 decision and said, we don't have to make this decision, they

18 talk a little bit about, you know, what it takes for predicate

19 acts to be -- what are the -- to be domestic, and there the

20 Second Circuit said that's what necessary is that the

21 domestic -- well, the question is whether the domestic

22 predicate acts proximately caused plaintiff's injury. The only

23 domestic predicate acts here are simple, alleged -- not even

24 alleged to be fraudulent acts of selling securities under the

25 LIBOR-based injuries. They didn't proximately cause any injury


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1 at all. The injury here was only proximately caused by the

2 extraterritorial alleged act of false suppressed submissions of

3 LIBOR to the British Bankers Association. So under that test

4 as well, we think it's not a hard question; it's an easy one.

5 THE COURT: Did you want to answer that?

6 MR. FINEMAN: The only thing I was going to say, the

7 Department of Justice antitrust -- the US Department of Justice

8 Antitrust Division, the United States CFTC, and if defendants

9 should believe the SEC, all American institutions, have found

10 the conduct here appropriate for investigation and possible

11 prosecution, at least settlement, in the United States, and I

12 find it extraordinary under these circumstances, where you're

13 talking about an alleged conspiracy, an alleged enterprise that

14 resulted in the suppression of LIBOR that affected trillions of

15 dollars' worth of financial products, billions of dollars which

16 were bought by my client, that we're going to put sort of the

17 semantics of L for LIBOR and B for BBA and we're going to say

18 that extraterritoriality discussion stops and ends with that,

19 to me that's not a rational outcome, and that's what Judge

20 Kaplan was getting at when he said enterprise analysis leads

21 you to some very awkward outcomes.

22 MR. RICE: Your Honor, just very briefly on the

23 government investigations. None of those government

24 investigations focused on the question of the RICO analysis.

25 There, when you talk -- you talked earlier today to my


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1 colleagues about the Commodity Exchange Act and the position

2 that the CFTC took with respect to the settlement with respect

3 to the two, whether LIBOR is a domestic or foreign commodity.

4 That doesn't have any application here. We're talking about

5 the RICO statute, which focuses on the enterprise, and perhaps,

6 you know, with the exception of Judge Kaplan, the predicate

7 acts. None of those -- none of those are, you know -- have any

8 domestic focus at all. They're all -- the focus is clearly in

9 London, England.

10 MR. FINEMAN: Except for the US member banks, of

11 course.

12 THE COURT: Well, but there are a lot of other banks

13 that are involved, and I appreciate that you want to emphasize

14 the US banks, but they're only part of this.

15 Let's turn to state law claims.

16 Actually, you might stay there. Because let's just

17 assume for argument's sake that the RICO claim was dismissed.

18 The Schwab cases are here only under the MDL.

19 MR. GLACKIN: Correct. They were all filed in the

20 Northern District of California.

21 THE COURT: So if the federal claim, the RICO claim,

22 is dismissed and the other claims are all under California

23 state law, does the case go back?

24 MR. FINEMAN: The principal theory of our case is

25 antitrust, your Honor. So our antitrust theory is the first


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1 part of our complaint and it is -- I mean, we didn't really get

2 that much into it today, but that's -- we have the same

3 antitrust issues. And we're somewhat different, we're somewhat

4 on -- we're across the board here on all the classes because

5 we're a -- we purchased directly from the defendants, a bunch

6 of us -- our stuff, and then we also purchased a lot from

7 subsidiaries of the defendants, and then we bought from

8 nonparties as well. So if you're getting to the question of

9 supplemental jurisdiction, you would have to dismiss our

10 antitrust claim and our RICO claim.

11 THE COURT: It wasn't so much in my mind supplemental

12 jurisdiction. It's just this is the most complex MDL I've ever

13 dealt with, and there's very limited guidance about kind of

14 procedurally how you handle this particularly, because so many

15 of the cases are not MDL here, they're related cases filed in

16 the Southern District in the first place.

17 But on the state claims, to Schwab, I don't think I

18 follow your interference with economic advantage argument

19 because I'm not sure that I understand what the interference is

20 and what is the loss. Interference with contract, these facts

21 don't seem to fit within my experience on tortious

22 interference.

23 MR. GLACKIN: Right, and that might be because New

24 York I don't believe recognizes the tort of tortious --

25 tortious interference with respect to economic advantage.


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1 THE COURT: I think it does.

2 MR. RICE: It does. I think there's a more specific

3 intent requirement in New York than there is in California, but

4 the tort is there.

5 THE COURT: Yeah, I've definitely heard of that one.

6 MR. GLACKIN: Excellent. In California there's

7 tortious interference with contract. That is not the claim

8 that we are bringing here. We are bringing tortious

9 interference with prospective economic advantage. And the

10 economic advantage that was interfered with -- well, there's --

11 there are actually several possible examples, but let me give

12 you one easy, concrete, real world example, which is fixed rate

13 notes that are tied to LIBOR. Our client bought LIBOR

14 instruments that are -- that pay a rate of return, where the

15 rate of return is LIBOR plus a spread. And to the extent LIBOR

16 was suppressed, our client received less money on those

17 instruments than it would have absent the suppression. And

18 that's a -- I mean, it's our basic theory of damages, but that

19 is how -- that is the economic advantage in the context of this

20 claim that was interfered with.

21 THE COURT: Just another way of saying damages? And

22 is it in any way distinct from your implied covenant of good

23 faith argument?

24 MR. GLACKIN: Well, they're different, your Honor.

25 There's a lot of overlap, but they could conceivably apply to


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1 different claims -- or to different transactions. Excuse me.

2 So for example -- and again, here, I mean, Schwab has

3 thousands upon thousands of transactions. So there's many

4 different flavors in which these transactions can arise. But

5 with respect to the breach of the implied covenant, that would

6 only arise on a transaction, we concede, where Schwab has

7 entered into a contract with a defendant or one of its

8 broker-dealer subsidiaries. So the tortious interference claim

9 might capture -- we would allege does capture -- transactions

10 that are not captured under the implied covenant of good faith,

11 because the defendants can tortiously interfere with an

12 economic advantage that we were expecting to receive on a -- on

13 an instrument that they did not sell. They can tortiously

14 interfere with it.

15 THE COURT: And would this interference with economic

16 advantage be of any benefit to you if you prevailed on any of

17 the federal law claims?

18 MR. GLACKIN: Well, for one thing, it does require

19 concerted action. Tortious interference with our -- I mean, if

20 we -- if we pled and proved that suppression by one defendant

21 moved the LIBOR rate in such a way that it caused damages to

22 us -- and again, given the magnitude of the transactions here,

23 even a small amount of suppression has a very large effect on

24 my client -- that is actionable. There is no requirement under

25 this cause of action that we show concerted activity of the


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1 defendants. So --

2 THE COURT: If you can't show concerted activity, how

3 are you going to get any place? I mean, if the reference point

4 is the result of, you know, concerted activity, legitimate or

5 not, it's always the result of an averaging of quotes, you're

6 not suggesting that you had a side deal with one particular

7 bank, right?

8 MR. GLACKIN: Not at all. For example, I mean, let's

9 suppose the defense theory here is that all the banks -- and I

10 think they've suggested this possibility in their pleadings.

11 Their theory is that all the banks independently decided,

12 without ever talking to anybody, that they were going to --

13 they were going to submit lowball LIBOR, for whatever reason.

14 We would, if they -- if that turned out to be the proof -- I

15 won't say who has to prove it, but if that turned out to be the

16 proof and it was only unilateral conduct, there was no tacit

17 collusion, there was no express collusion, then the antitrust

18 claim would fail, but the tortious interference claim would not

19 fail, because the tortious interference claim does not require

20 us to prove concerted activity. It only requires us to prove

21 an act that caused us to receive less return or less of our

22 economic advantage than we otherwise would have expected to,

23 and that's why it's an important claim to us.

24 MR. RICE: Your Honor, I'm hearing the theory of

25 this -- and it's really not pled in the complaint, you know --


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1 for the first time. But just kind of reacting, so the

2 allegation, I take it, or the -- or the claim now, as we

3 understand it, is my client, JPMorgan, independently, right,

4 lowered its rate below what it should have been and somehow

5 that interfered with the contract that the plaintiffs had with

6 someone else that was LIBOR based in some way.

7 Number one, that to me doesn't sound like

8 interference. It's not preventing them from entering into a

9 contract or from getting, you know, all of the advantages of

10 that contract, you know, as, you know, as the parties agreed.

11 Number two, if we're talking about this is something

12 to protect unilateral action, it's completely unknowable what

13 effect, if any, the unilateral action of one -- of one LIBOR

14 submitter, you know, could have with respect to any interest

15 rate in the case.

16 So I think there's problems with their theory.

17 They're kind of -- it's a little convoluted, but there are

18 other parts of it that are easier, your Honor, and bases upon

19 which your Honor can and should dismiss the claim, and that is,

20 you know, it's clear under California law, they have to

21 identify the relationship, the prospective relationship, and

22 number two, they have to -- they have to plead knowledge by the

23 interferer, and here, despite what they pled in the complaint,

24 they've now agreed that the only relationship they've

25 identified, and the only ones on which their claim can proceed,


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1 are relationships with affiliates of the LIBOR panel banks. So

2 in the case of JPMorgan, it would be JPMorgan securities from

3 whom they say they purchased some LIBOR-based financial

4 instruments.

5 So number one, they've limited it to that extent in

6 their answer papers.

7 Number two, even with respect to those entities, they

8 haven't pled any basis at all except for a corporate

9 affiliation to say that JPMorgan Chase knows what contracts

10 JPMorgan Securities has with -- with Schwab in this case, and

11 there's no basis I think in the caselaw, certainly no basis in

12 fact when we're talking about, you know, global entities

13 involving, you know, thousands of relationships and hundreds of

14 thousands of employees, from which you could infer that kind of

15 knowledge.

16 So I think even on those first two elements, there's

17 no basis for the claim.

18 Thirdly, your Honor, two-year statute of limitations.

19 It's clear, under the Fox case that we cited, inquiry notice

20 statute, the same May document you talked to counsel about

21 before, we think, you know, acts to start the statute of

22 limitations and bar their claim.

23 MR. GLACKIN: I'll answer any questions you want to

24 have for me, your Honor. I just do want to make clear that I

25 did not just conceive that the factual scenario I outlined is


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1 the only possible way in which we can recover. I gave it as I

2 think a pretty easy-to-understand, concrete example, but if you

3 have questions for me, I'd be happy to answer them.

4 THE COURT: Well, I'm just listening to you. I don't

5 quite know how you prove anything. I mean, you have an action

6 that's not the result of concerted action. I don't know how

7 you could possibly link something a single bank did with a

8 Schwab decision to make a deal with a third party when nobody

9 is ever forcing any of the plaintiffs to deal in LIBOR-based

10 instruments. I mean, you have, you know, sort of freedom to

11 contract using any reference points you want. I just don't

12 know how you could possibly make the link.

13 MR. GLACKIN: Well, your Honor, respectfully -- I'm

14 sorry.

15 THE COURT: No. Go ahead.

16 MR. GLACKIN: I don't think we -- I think that

17 we're -- so first of all, I don't think that we have to prove

18 that -- in fact I'm certain we don't have to prove that

19 anybody -- that some of the banks did affect our contracting

20 behavior. The basic theory here, and much of the theory of our

21 damages, is that what the banks -- well, some of the theory is

22 that it did affect our contract behavior, actually, but with

23 respect to floating rate instruments, the theory is that

24 regardless of the contracting behavior, what the banks did and

25 what they -- what they did was to cause us to receive a lower


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1 return, and that that is something that they --

2 THE COURT: But that's based on your concerted action

3 argument, and so here you were focusing on individual banks.

4 You're saying this is meaningful if you can't prevail on an

5 antitrust theory, and then you'd have to then get to

6 nonconcerted action and somehow make a link between one of the

7 16 banks and something that you did, and, you know, the proof

8 issues here are hard enough, but boy, that does make it sort of

9 exponential.

10 MR. GLACKIN: Again, your Honor, I mean, it's not that

11 we would -- I mean, in theory we could win under this claim.

12 We could demonstrate damages and prove the case based on --

13 THE COURT: But what's the knowledge? What single

14 bank has the knowledge of what contracts or relationships

15 you're about to enter into with some third party? That's part

16 of it. I mean, this is not some abstract conduct. This theory

17 is a very targeted action by a defendant, and I don't know

18 quite how you could establish that target and therefore

19 establish damages.

20 MR. GLACKIN: Well, if I may point out, in the Lee

21 Myles case, the allegation there was similar to our allegation,

22 that the tortfeasor knew or knew with substantial certainty

23 that his -- or its conduct was going to affect the categories

24 of the relationships of business relationships that the

25 plaintiff had. And so I don't think that we need to show that


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1 somebody at Bank X knew about the specific floating rate

2 instrument on which Schwab was going to be paid less money. I

3 don't think there's a case that says that we have to show that.

4 MR. RICE: I think there actually is, your Honor. I

5 think the law on -- it's black letter law that for an

6 interference claim like this, there needs to be relationship

7 and there needs to be knowledge of the relationship. Lee Myles

8 case doesn't touch that at all. It talks about what kind of

9 conduct can be actionable as opposed to the knowledge

10 requirement.

11 MR. GLACKIN: Well, the California Supreme Court in

12 the Korea Supply case observed that this kind of tort provides

13 a right of action where the alleged harm is remote or indirect.

14 THE COURT: Well, to go back to my original sort of

15 question of stemming from the fact that this case is here

16 solely because of the MDL, if we were ever at the point where

17 this became operative, it would mean, at least, that the

18 federal claims had bitten the dust.

19 MR. GLACKIN: I agree. I mean --

20 THE COURT: So at that point it is reasonable to

21 assume that it will never be the function of this court to rule

22 on the viability of all the state claims, except for one that

23 may be a case that's before me in any event. But your cases

24 aren't. They're only here connected to the MDL.

25 MR. GLACKIN: I agree. The gravamen of our case, as


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1 with the other plaintiff cases, are the federal claims. I

2 agree with that.

3 MR. RICE: Your Honor, I would say -- well, yes, if

4 your Honor were to dismiss all the federal claims, your Honor

5 doesn't have to keep, you know, this case, but I'd ask your

6 Honor to do that. In the interests of -- there are lots of

7 cases, and I think your Honor's decision --

8 THE COURT: No one should go off and say the judge is

9 dismissing all these cases. This is just, you know, just

10 trying to play through this in an intellectual way.

11 MR. GLACKIN: Well, certainly, if the case -- if our

12 case proceeds to trial, no matter what, we're going back to

13 California. I mean, that's the law. Our case goes back to

14 California for trial. And that's actually not even

15 discretionary.

16 THE COURT: Right.

17 MR. GLACKIN: In advance of that, under some

18 circumstances -- I apologize for not having researched this,

19 but my general sense is there might be circumstances where your

20 Honor would have discretion to seek to move the case back to

21 California. But definitely in the event of trial, this case

22 goes back to California.

23 THE COURT: Maybe you can help me. Maybe you've all

24 had more experience than I've had. Let's say I dismiss one or

25 two of the federal claims, one or two survive. And let's say


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1 that impacts you, okay? Where does the appeal go on that?

2 MR. GLACKIN: Your decision would be appealed to the

3 Second Circuit, your Honor. That's the reviewing court that

4 reviews what you do.

5 THE COURT: Okay. And so therefore, the rest of your

6 claims that would otherwise be tried in California get -- in

7 other words, just playing this out as I'm wont to do --

8 MR. RICE: Your Honor, again, I know this is purely

9 hypothetically.

10 THE COURT: Yeah, right.

11 MR. RICE: What you're left with in the Schwab case is

12 the state law claims, and your Honor is --

13 THE COURT: Let's say -- yeah.

14 MR. RICE: This case, your Honor, is before your Honor

15 for all pretrial purposes. That's sort of the starting point

16 here.

17 THE COURT: Yeah.

18 MR. RICE: It doesn't go anywhere unless the case is

19 ready for trial, in which case it goes back to the transferor

20 court, or it's my understanding your Honor decides to remand

21 the case to state court, which your Honor, you know -- my

22 typical experience in the MDL context is you remove something,

23 there's a remand motion, but the case gets MDL'd and the remand

24 motion is ultimately decided by the MDL judge. And exactly

25 procedurally how it works, but the remand would be back to the


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1 original court.

2 THE COURT: So it wouldn't be the meat unless there

3 was 54(b) certification to the circuit on any ground of a

4 motion to dismiss because otherwise you'd wind up having a live

5 case here, right?

6 MR. GLACKIN: Right.

7 THE COURT: But not necessarily a comprehensive case.

8 MR. GLACKIN: Correct, right, which we'd be waiting to

9 find out the ultimate result of possible --

10 THE COURT: You've answered the question.

11 MR. RICE: It would be the same 54(b) analysis you'd

12 do anyway, in any case. And to the extent your Honor thought

13 there was a good basis to, you know, have an interlocutory

14 appeal, that would happen -- that could happen. Otherwise, the

15 case could proceed as limited by the court on its decision on

16 the motion for summary judgment -- excuse me -- motion to

17 dismiss.

18 THE COURT: Would you also agree with me that

19 obviously you can't have both a breach of implied covenant of

20 good faith case and an unjust enrichment case, because one

21 assumes a contract and the other doesn't? And also, wouldn't

22 you also have to prevail, I would think, on one of the federal

23 claims in order to intellectually be entitled to any unjust

24 enrichment? Because you're not ever entitled to double

25 recovery, and you aren't a public sort of prosecutor or it's


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1 not under a statute which says that you recover, you know, both

2 your losses and the defendants' profits. You know, it's in the

3 alternative.

4 MR. GLACKIN: Just to take the issue of double

5 recovery first, right, we don't ever get double recovery. So

6 that's not something we'd work out on the pleadings. I mean,

7 that's a function of what the case -- how the case turns out at

8 trial, and usually, I can say from recent personal experience

9 that the issue of the one satisfaction rule is typically

10 addressed postverdict, and often postjudgment. So that's --

11 that's not a reason to do anything with any of our claims at

12 the pleading stage.

13 As to your initial question, can we main -- do I agree

14 we can't maintain both an unjust enrichment claim and the

15 breach of the implied covenant claim because -- as to a

16 transaction where there's a contract.

17 THE COURT: Right. Well --

18 MR. GLACKIN: Do I understand that to be --

19 THE COURT: Well, if there is, I mean, just the simple

20 point is, you can't have an implied covenant of good faith

21 unless there is a contract, and you can't make a claim for

22 unjust enrichment if you have a contract.

23 MR. GLACKIN: I -- I would -- okay. So on the legal

24 principle, I would just make one caveat, which is what the

25 caselaw really says is not that the presence of a contract


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1 means you don't have an unjust enrichment claim. What it says

2 is, if there is a contract that governs the rights of the party

3 that you are seeking to adjudicate, then that con -- then there

4 is no unjust enrichment claim. That's what the law says. I

5 would agree, I think, that if we're talking about a Schwab

6 transaction where there is -- where they've -- what's happened

7 is they've brought -- bought from, say, JPMorgan as broker,

8 they bought through JPMorgan as a broker a LIBOR-based

9 instrument on which they suffered damage, that their claim

10 against JPMorgan is a breach of the implied covenant claim and

11 is not an unjust enrichment claim. But the fact -- but both

12 kinds of claims can exist with respect to Schwab's portfolio

13 because Schwab has an unjust -- a unique unjust enrichment

14 claim as to a LIBOR-based instrument that is issued by one of

15 the defendants regardless of whether or not it is sold by or by

16 or through a defendant broker-dealer or another -- or a

17 nondefendant broker-dealer.

18 So for example, let's say that Schwab, through its

19 broker Goldman Sachs, acquires a LIBOR-based instrument that is

20 issued by UBS. There is no breach of the implied covenant

21 claim there because Schwab does not have a contract with UBS.

22 Schwab's contract was with Goldman Sachs. Schwab has an unjust

23 enrichment claim against UBS because UBS has unjustly obtained

24 the use of Schwab's money at a rate that was procured by fraud.

25 I mean, assuming we -- fraud in the sort of broad unjust


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1 enrichment sense, assuming we sort of prevail on proving all

2 other things. So there's room -- again, you know, all three of

3 these claims can come into play in different ways, depending on

4 which -- what kind of Schwab transaction we're talking about,

5 and that's why all three of them are properly in the complaint

6 at the pleading stage. None of them are mutually exclusive as

7 a matter of law.

8 MR. RICE: Your Honor, if I can, just on the unjust

9 enrichment example, UBS sells them the Goldman contract --

10 MR. GLACKIN: Other way around.

11 MR. RICE: Goldman sells a UBS contract?

12 MR. GLACKIN: A UBS instrument.

13 MR. RICE: Goldman sells a UBS instrument. And the

14 instrument is a debt instrument. So as between UBS and the

15 plaintiff in this case, there is a contract. It's a contract

16 to, you know -- it's commercial paper, it's a CD, so there's a

17 contract, not an unjust enrichment claim, with respect to UBS.

18 MR. GLACKIN: A debt instrument is not a contract;

19 it's a debt instrument.

20 MR. RICE: Debt instrument.

21 MR. GLACKIN: So here's the reason that it's not a

22 contract. A debt instrument has a liquid secondary market.

23 All these companies' bonds have liquid secondary markets. You

24 cannot have a liquid secondary markets on contracts because

25 contracts are unique to contracting parties. An instrument is


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1 an instrument. It's a -- it's a --

2 THE COURT: It's a promise to pay.

3 MR. RICE: Exactly.

4 THE COURT: Okay. My law clerk wants to know, and I'm

5 equally curious --

6 MR. GLACKIN: I'm sure.

7 THE COURT: -- are you claiming that these are

8 enforceable contracts or are you arguing that they're

9 fraudulently induced?

10 MR. GLACKIN: The contracts are for purchase of sale

11 with the brokers? Those are the contracts.

12 THE COURT: Whatever you're assuming.

13 MR. GLACKIN: We are -- I do not think we are arguing

14 they're fraudulently induced. We're saying we have an

15 enforceable contract -- we have an enforceable contract with an

16 implied covenant of good faith. So no, we're not saying it's

17 fraudulently induced.

18 THE COURT: I would like to bring this to an end

19 now --

20 MR. GLACKIN: But you might have one more question.

21 THE COURT: -- unless there's something that one of

22 you desperately needs to say.

23 MR. CARMODY: Your Honor, I have one thing, and I

24 think I can do it quick, and it gets back to what we talked

25 about earlier. I fear one of my answers to you wasn't


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1 complete. And this is kind of like a double clarification to

2 the question that you asked, which is a fair one, which

3 revolves around the competitive nature of the LIBOR submissions

4 themselves, whether that's a market in and of itself, I think

5 separate from the financial products market. And my first

6 quick response to you was no, it wasn't, because the defendants

7 are not directly competing with one another in that market.

8 And then what I did was clarified and said, but at the time

9 they're, of course, making their LIBOR submissions, they are

10 competitors in the financial products market involving

11 LIBOR-based instruments.

12 What I didn't say and what I'd like to say now, your

13 Honor, is that the markets that the defendants do compete in,

14 the market of LIBOR instruments, actually affects the LIBOR

15 price, and the way it affects the LIBOR fix, if you will, is

16 because these defendants in the underlying markets are supposed

17 to be competing against one another, which of course determines

18 their own financial creditworthiness, and if you take a look at

19 the definition of LIBOR, what that's geared to do is elicit

20 submissions from each and every defendant based upon their own

21 creditworthiness, because the definition of LIBOR says, if you

22 were to borrow money from another London Interbank and accept

23 one of their offers, signed before 11:00 in the morning London

24 time, what would that rate be? Of course the answer to that

25 question is based on the creditworthiness of each of the 16


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1 banks. And so when you have these banks colluding with one

2 another, the competition -- the competition they're in in the

3 financial markets is not reflected in that LIBOR setting, which

4 explains the injury to competition, because the injury to

5 competition we have here is these 16 panel banks absolutely

6 positively control the United States dollar LIBOR market. And

7 so for every LIBOR instrument there are several -- you're

8 starting out with an unlawfully suppressed fixed price because

9 LIBOR is a component of all those instruments. And I just

10 wanted to make that point clear, your Honor.

11 THE COURT: Mr. Wise?

12 MR. WISE: Your Honor, we're going over old ground.

13 LIBOR would be a component regardless of what the defendants

14 did in London. There's no allegation in the complaint that the

15 London Interbank markets in which the banks loaned money to

16 each other was fixed or that there was any price fixing in that

17 market. There's no allegation that there was any restraint on

18 competition in these product markets in which the plaintiff

19 purchased goods. The only allegation is that banks submitted

20 inaccurate reports. That is not a competitive process, as we

21 have discussed, I think at some length, and therefore was not a

22 limitation -- the allegations in the complaint do not make out

23 a restraint of trade.

24 MR. CARMODY: Paragraphs 217 to 223 in the over the

25 counter complaint absolutely allege an unreasonable restraint


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1 of trade in the underlying LIBOR instruments market, allege

2 harm to that market for which the plaintiffs themselves

3 suffered injuries in fact, your Honor.

4 THE COURT: Thank you all very much, and thanks to

5 everybody who's standing for not saying anything. I appreciate

6 that.

7 ALL COUNSEL: Thank you, your Honor.

8 o0o

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(212) 805-0300

in re: libor-based financial instruments antitrust litigation: transcript of march 5 argument

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