Fund administrator SEI Global Services has lost a legal battle against SS&C Technologies for violating US antitrust regulations, but it appears to have won the critical legal war necessary to ensure the fund administrator can continue using SS&C’s Advent Geneva portfolio accounting system to service its alternative fund clients.
On October 23, 2020, Judge Chad Kenney of the US District Court for the Eastern District of Pennsylvania in SEI’s backyard dismissed only the charge of violating the Sherman Antitrust Act — one of several charges SEI filed in its lawsuit against the Windsor, Connecticut-headquartered software giant and its subsidiary SS&C Advent in April 2020. The federal statute prohibits activities that prevent competition. Judge Kenney did not dismiss SEI’s remaining charges that relate to whether SS&C breached its contract with SEI by unilaterally terminating their agreement for SEI to use SS&C’s Advent Geneva platform. According to SEI, SS&C gave SEI a reprieve until January 20, 2021 to sign a new agreement with higher fees or access to Geneva would be denied. Unwilling to sign a new contract, SEI filed the lawsuit worried about being left in the cold without a portfolio accounting platform to service its clients. SEI amended its lawsuit twice with Judge Kenney ruling on the second amended lawsuit.
Neither SEI nor SS&C would comment on what Judge Jenney’s decision meant to their contract involving the use of the SS&C’s Geneva platform. However, chances are that if the judge didn’t dismiss SEI’s claim that SS&C breached its contract with SS&C, SEI’s core claims for the contract to be enforced remain intact. Therefore, it is a safe bet to presume that SEI can still use the Geneva platform it licenses from SS&C past January 20, 2020. However, it is unclear whether the terms of SEI’s contract will remain the same. Several SEI clients contacted by FinOps Report say they have not been informed of any change in service conditions. If Judge Kenney had dismissed SEI’s charges involving breach of contract, SS&C would have immediately won the upper hand and SEI would have been forced to pay higher fees or find a new portfolio accounting provider when SS&C denied access to Geneva. SEI has claimed that SS&C demanded a 40 percent higher fee and it would take SEI at least three years if it had to adjust to a new system, during which time it could be financially harmed by the potential loss of disgruntled clients. SEI refused SS&C’s required fee hike because, according to SEI, their contract stipulated that SS&C could not raise its fee by no more than three percent.
Both SEI and the Windsor, Connecticut-headquartered SS&C provide outsourced fund administration and portfolio accounting services. Of the two service providers SS&C’s GlobeOp unit is by far the larger player. SEI uses the Geneva platform from SS&C Advent to process transactions, dividend and interest accruals, and calculate performance returns. SEI also uses SS&C’s Moxy, a portfolio and trade order management system it has integrated with Geneva. The relationship between SEI and SS&C started back in 2015 when SS&C purchased San Francisco-based Advent Software and took over SEI’s contract with Advent to use the Geneva system. That original contract was signed in 2010. The relationship between SEI and SS&C Advent appeared to be going well, by SEI’s account, until October 2019 when SS&C notified SEI that it wanted SEI to agree to new terms or it would end the licensing agreement. By SEI’s interpretation, the contract was perennial and could only be terminated if SEI did not perform a material obligation and failed to correct its conduct within 30 days. SEI claimed that it did not understand the cause of SS&C’s demand for a new contract until November 2020 when SS&C further explained that SEI had violated the terms of their agreement by soliciting its SS&C’s employees. SEI never denied soliciting the employees, but said that its action wasn’t sufficient reason to terminate its contract with SS&C as it did not quality as a material factor.
Proving a violation of the Sherman Act isn’t easy. In dismissing the allegations of breaching the US Sherman Act, Judge Kenney ruled that SEI didn’t meet the litmus test of showing monopolization of trade. SEI argued that if SS&C succeeded in ending its contract with SEI and other users of the Geneva platform it would illegally control the market for outsourced portfolio accounting services. SEI and its competitors would need years to switch over to new platforms and could suffer financial harm. However, Judge Jenney countered that SEI failed to prove the market is not competitive and SEI did not made a good case that SS&C has market power. “SEI’s allegations do not make the inference plausible that SS&C will be able to drive out competitors from the relevant market. And if SS&C were able to raise it prices as SEI alleges other rivals would be encouraged to enter the market to battle SS&C through price competition,” wrote Judge Kenney in his ruling.
SEI also couldn’t prove that SSC’s termination of the contract violated the Sherman Act, because of SS&C’s refusal to deal — or do business– and SS&C’s denial of an essential facility. Judge Kenney said that a firm is under no obligation to deal with its competitors; therefore, SEI cannot shoehorn a case of an alleged breach of contract to supply software into a full-blown anti-trust case. SS&C also didn’t threaten to deny SEI access to its Geneva platform under all circumstances. SS&C only said it would deny access based on the contract’s suboptimal rates for SS&C, wrote Judge Kenney. SEI didn’t prove that SS&C breached its contract, because it wanted to drive SEI out of business or discipline it for competing with SS&C. SS&C just wanted to earn more money through higher licensing fees. By SEI’s own account, SS&C had been asking other clients for higher fees to license the Geneva platform and they appeared willing to pay more.
Judge Kenney ruled that even if SEI could prove that SS&C’s actions were designed to promote a monopoly, SS&C still couldn’t prove a violation of the Sherman Act because SEI doesn’t have “anti-trust standing.” That means that the injury that SEI claims SS&C is inflicting through its actions is not the type that qualifies under the anti-trust laws. “SEI must prove that the challenged conduct affected the prices, quantity or quality of goods and services, not just [its] own welfare,” wrote Judge Kenney in his ruling. The purpose on the antitrust law is to protect competition, not competitors, and all SEI showed is that it will be harmed as an individual competitor. By SEI’s own admission, thirty percent of the top 20 service providers for outsourced portfolio accounting don’t use Geneva, so they either rely on their own proprietary software or use another system. Therefore, Judge Kenney reasoned, SEI was never forced to continue its relationship with SS&C. It could have found an alternative, such as building its own software or relying on another third-party system. Alternative fund management firms surveyed by FinOps Report cited platforms offered by FIS Global and Linedata as among Geneva’s main competitors.
While not entirely favorable to SEI, Judge Kenney’s ruling at the very least should provide some comfort to SEI and its clients a sigh of relief as SEI won’t have to change portfolio accounting platforms. SS&C would not comment on the Judge Kenney’s ruling beyond saying that the judge dismissed the antitrust case with prejudice. That means that SEI cannot resubmit its case using a different argument or facts. However, based on a statement FinOps Report received from SEI, it appears that the fund administrator is appealing Judge Kenney’s dismissal of the charge of violating anti-trust regulation. “We are confident that our complaint which is proceeding in state court represents serious claims and speaks for itself. We look forward to our day in court and justice,” wrote SEI’s spokesperson.