EquiLend, Prime Brokers Settle Sec Lending Antitrust Lawsuit

E-trading platform for securities lending EquLend has agreed to pay pension funds and others part of a whopping $500 million and to revamp its governance policy to settle an antitrust class-action lawsuit which includes prime brokers Goldman Sachs, Morgan Stanley, JP Morgan Chase and UBS.

The plaintiffs in the case led by the Iowa Public Employees Retirement System just asked Judge Kathleen Polk Failla of the US District Court for the Southern District of New York to approve of the settlement instead of proceeding with a jury trial. In exchange, EquLend and the other four prime brokers have agreed to help the plaintiffs win their case against Bank of America on a similar charge– a violation of the US Sherman Antitrust Act– and the plaintiffs will accept a payment of 75.4 percent less than what a jury decides. That could come to less than US$100 million. EquiLend also said it would change its policies concerning its board of directors to reassure the plaintiffs it could not engage in anti-competitive behavior in the future. However, EquiLend and the other defendants deny any wrongdoing. All of the plaintiffs settled with Credit Suisse for US$81 million last year. The plaintiffs, which are waiting for the class of affected plaintiffs to be officially certified, include the Los Angeles County Employees Retirement Association, Orange County Employees Retirement System, the Sonoma County Employees Retirement Assocition and Torus Capital. The trading firm borrowed stock through Goldman Sachs and Bank of America.

In their lawsuit filed in 2017 in the New York federal court, the plaintifs accused the prime brokers of conspiring to prevent their clients using more cost effective competing platforms– the US’ AQS and Europe’s SL-x– which would allow for the matching of requests for securities to be lent and borrowed without using any intermediaries; the platforms relied on a central clearing model and real-time pricing data. The banks, said the plaintiffs, colluded through their ownership of EquiLend and participation on EquiLend’s board to boycott AQS and SL-x. As a result, their jobs as prime broker middlemen would be preserved, allowing them to earn higher fees at the expense of pension plans and other asset owners. EquiLend bought SL-x’s intellectual property in 2015 and purchased AQS in 2016 in a fire sale for less than US$5 million, after the defendants torpedoed AQS’ takeover by OCC. EquiLend never used SL-x’s patents and shut down AQS.

Pension plans often  use custodian banks to lend out securities in their portfolios to broker-dealers who borrow them on behalf of their clients– typically hedge funds engaged in short selling. EquiLend was launched in 2002 and the conspiracy to sabotage potential rivals began as early as 2009 with Goldman Sachs and Morgan Stanley as the masterminds, said the plaintiffs. As an example of illegal conduct, the plaintiffs pointed to a threat Goldman Sachs made against BNY Mellon in 2012 to not do business with BNY Mellon if BNY Mellon used  AQS’s platform; BNY Mellon acquiesced. The defendants also refused to link any of their hedge fund clients to AQS and would not  use SL-x.  The prime brokers threatened to cut off services to their hedge fund clients, including Renaissance Technologies, D.E. Shaw, Millenium Management and SAC Capital if those clients did business on AQS. EquiLend’s deal to purchase AQS was allegedly orchestrated by Goldman Sachs and Morgan Stanley using the name Project Gateway.

The new provisions for EquiLend in the plaintiffs’ settlement with the defendants include imposing a maximum number of seats on its board of directors which a member can hold; a rotation of EquiLend board members and outside antitrust counsel, and recordkeeping of board meetings. All of EquiLend’s board members and alternative board members will also be required to certify annually that they will comply with an antitrust code of conduct. “Plaintiffs believe the reforms should materially decrease the likelihood of future collusion in the stock lending market and plaintiffs, thus believe, the reforms thereby increase the chances the industry would transition into a more competitive trading environment,” say the plaintiffs in their recent court filing.

In their filing seeking Judge Failla’s approval of their settlement, the plaintiffs claimed that they had strong enough evidence against the defendants to win a jury trial but decided against it to reduce the cost of litigation and prevent the possibility of not winning any damages. Based on court documentation, quantifying damages would have been difficult to do and the plaintiffs consistently argued that their actions were reasonable and no one was damaged. Lawsuits filed by AQS’s parent  and SL-x’s parent against the defendants for violations of US antitrust law were previously dismissed by the federal court in New York on technicalities. Because AQS was owned by EquiLend at the time of its lawsuit, it had already transferred its right to litigation to EquiLend; AQS’ parent should have sued the defendants before 2016. SL-x could not sue, because it did not own the relevant intellectual property or operate the boycotted business; the real parties with standing to sue did not exist at the time of the lawsuit. The plaintiffs lost their appeals of both federal court rulings.