Buyers of Municipal Derivatives Adequately Allege Conspiracy to Fix Prices, Allocate Customers

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Municipalities and other purchasers of municipal derivatives adequately alleged a conspiracy to allocate customers and fix prices for municipal derivatives, the federal district court in New York City has ruled. A motion to dismiss a second consolidated class action complaint (SCAC) was denied.

The defending financial services companies sought dismissal on the ground that the SCAC failed “to allege any facts showing a single conspiracy among all the defendants, or among any subset of defendants regarding the entire municipal derivatives industry.” The SCAC provided more specific allegations regarding certain defendants' involvement in the conspiracy than was alleged in the original consolidated class action complaint.

The plaintiffs relied on information obtained “in the context of a settlement process” from a defendant that had entered into the antitrust corporate leniency program administered by the Department of Justice Antitrust Division, as well as information provided by a confidential witness who is cooperating with the Justice Department in its antitrust investigation.

The SCAC was viewed in light of developments in state and federal investigations into the municipal derivatives industry. Although pending government investigations might not, standing alone, satisfy an antitrust plaintiff’s pleading burden, government investigations could be used to bolster the plausibility of Sherman Act, Sec. 1 claims, the court explained.

Statute of Limitations

The original complaint was ultimately dismissed because the claims were based upon events that occurred outside of the applicable statute of limitations period. The SCAC, however, sufficiently alleged fraudulent concealment so as to toll the statute of limitations.

Because allegations of bid rigging and price fixing were self-concealing, the plaintiffs were not required to show that the defendants took independent affirmative steps to conceal their conduct. Rather, the named plaintiffs needed to plead only ignorance of the violation and due diligence, both with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure.

They alleged that they were put on notice of their antitrust claims only after one of the defendants participated in the Department of Justice Leniency Program, approximately one year before the complaint was filed. With respect to due diligence, the named plaintiffs pled with particularity the inquiries that were made, to whom they were made, regarding what, and with what response.

Preclusion of Claims

The claims were not precluded by “an extensive set of federal regulations governing the operation of the market for tax-exempt municipal debt,” the court decided. The defendants unsuccessfully argued that private antitrust enforcement was precluded because awarding damages to the named plaintiffs would conflict with Internal Revenue Service and Treasury Department regulations governing tax-exempt debt, including the reinvestment of municipal bond proceeds.

Implied preclusion analysis turned on four considerations:

(1) whether the underlying market activity lies squarely within the heartland of the IRS regulations;

(2) whether the IRS had the authority to regulate the activities in question, namely a conspiratorial agreement to rig bids and fix prices;

(3) whether the IRS has regularly exercised its legal authority to regulate the alleged price fixing and bid rigging practices; and

(4) whether application of the antitrust laws to the challenged conduct would conflict with application of the IRS regulations.

Only the first prong weighed in favor of implied preclusion. The investment of tax-exempt municipal bond proceeds—the underlying market activity—fell squarely within the heartland of IRS regulation. The other three considerations weighed against implied preclusion, in the court's view.

The text of the decision in Hinds County, Mississippi, v. Wachovia Bank, appears at 2010-1 Trade Cases ¶76,954.