Iowa Public Employees' Retirement System v. Lynch

Background

The plaintiffs— the Iowa Public Employees’ Retirement System, Los Angeles County Employees Retirement Association, Orange County Employees Retirement System, Sonoma County Employees’ Retirement Association, and Torus Capital, LLC—brought an antitrust class action against Merrill Lynch, Pierce, Fenner & Smith Inc.; Merrill Lynch L.P. Holdings, Inc.; and Merrill Lynch Professional Clearing Corp. They alleged that several banks conspired to prevent the U.S. stock-loan market from moving to a transparent, direct electronic exchange. The plaintiffs asserted a claim under Section 1 of the Sherman Act and a New York unjust-enrichment claim.

In a stock loan, an investor temporarily transfers stock to a borrower in exchange for collateral and a borrowing fee. The plaintiffs alleged that broker-dealers kept part of the transaction fees and that the market’s lack of a central marketplace prevented participants from comparing prices. They contended that the defendants’ conduct kept spreads and transaction costs higher than they would have been in a more transparent electronic market.

Report and Recommendation

Magistrate Judge Sarah L. Cave recommended granting the plaintiffs’ motion for class certification in part and denying it in part. She recommended certifying a class of persons and entities that, directly or through an agent, entered into at least 100 qualifying U.S. stock-loan transactions as borrowers or lenders with the U.S.-based entities of the prime-broker defendants. She also recommended borrower and beneficial-owner subclasses, appointment of the named plaintiffs as co-lead plaintiffs, and appointment of Cohen Milstein and Quinn Emanuel as class counsel.

Judge Cave recommended a class period from January 1, 2012, through August 16, 2017. She concluded that the plaintiffs had not shown good cause to reopen fact discovery to cover a longer period. Both sides objected to portions of the recommendation.

Court’s Analysis

The district court reviewed the objected-to portions of the recommendation independently and reviewed the unobjected-to portions for clear error. The court considered whether the proposed class satisfied Federal Rule of Civil Procedure 23, which requires, among other things, adequate representation, predominance of common issues, and superiority of a class action over other methods of resolving the dispute.

Adequacy and conflicts. The defendants argued that borrowers and lenders had fundamentally conflicting interests because they occupy opposite sides of the stock-loan market and might disagree about pricing, fees, and damages. The court rejected that argument. It found that both groups alleged harm from the same conspiracy and shared an interest in proving the conspiracy and maximizing the class’s overall recovery. Potential disagreements about allocating damages did not defeat adequate representation at the certification stage.

The court also rejected the argument that the subclasses required separate counsel. Because it found no fundamental conflict, it concluded that separate representation was not required. It further held that SCERA and Torus were adequate representatives of the borrower subclass. The court found that SCERA’s status as both a borrower and lender supported, rather than undermined, its ability to represent both sides. It found that Torus met the transaction threshold and qualified as a member of the borrower subclass despite the defendants’ arguments about its size and trading volume.

Predominance and common proof. The court concluded that common issues could predominate over individualized questions. It found that the plaintiffs’ experts had proposed methods capable of showing class-wide injury, including an economic search model and a yardstick analysis comparing the stock-loan market with other markets that adopted electronic, multilateral trading. The court emphasized that, at the certification stage, it was deciding whether the proposed methods could prove class-wide impact—not whether the plaintiffs would ultimately prove their claims.

The court also found that the plaintiffs’ damages model was sufficiently tied to their liability theory. The model compared actual prices with estimated prices in a market without the alleged conspiracy and was designed to estimate amounts allegedly overcharged to borrowers and underpaid to lenders. The court rejected the defendants’ challenges concerning data processing, trading costs, and whether damages should be calculated separately for days within an open loan.

The court further held that the Foreign Trade Antitrust Improvements Act did not bar certification. The class definition required qualifying transactions involving stocks listed on a U.S. exchange and the U.S.-based entities of the prime-broker defendants. The court concluded that the alleged conduct involved the U.S. stock-loan market and had a direct, substantial, and reasonably foreseeable effect on domestic commerce. It also concluded that the import exception would cover transactions involving foreign beneficial owners who transacted with domestic desks of the defendants.

Superiority and class period. The court found that a class action was superior to individual lawsuits because the proposed class included thousands of members and individual actions would be costly and inefficient. It also found no apparent management problems beyond those inherent in heavily contested litigation.

The court changed the class-period end date from August 16, 2017, to November 17, 2017, the date the amended complaint was filed. It chose that date because the amended complaint was the operative complaint and the plaintiffs’ evidence extended through that period. The court noted that class members might be able to seek provable future damages flowing from conduct during the certified period, but it did not decide whether supplemental transactional data could be required. Any request for such production would have to be made through a separate motion.

Disposition

The court overruled the defendants’ objections, overruled the plaintiffs’ objection concerning the class period in part, and granted in part and denied in part the plaintiffs’ motion for class certification. It certified the class and the recommended subclasses, with a class period running from January 1, 2012, through November 17, 2017. The order addressed class certification and did not decide whether the defendants actually violated antitrust law or owe damages.