On October 18, 2022, the United States Court of Appeals for the Second Circuit affirmed the dismissal by the United States District Court for the Southern District of New York of a putative class action against more than twenty banks and certain brokers alleging a conspiracy to manipulate Yen-LIBOR (“LIBOR”) and Euroyen TIBOR (“TIBOR”) rates.  Laydon v. Coöperatieve Rabobank U.A., et al., No. 20-3626 (2d Cir. Oct. 18, 2022).  Plaintiff brought claims under the Commodity Exchange Act (“CEA”), 7 U.S.C. § 1 et seq., and the Sherman Antitrust Act, 15 U.S.C. § 1 et seq., and sought leave to assert claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962, 1964(c).  The Court affirmed the district court’s order dismissing the CEA and antitrust claims and denying leave to add the RICO claims, holding that the alleged conduct was impermissibly extraterritorial under the CEA, plaintiff lacked antitrust standing because he would not be an efficient enforcer of the antitrust laws, and plaintiff failed to allege proximate causation for a RICO claim.

The complaint alleged that defendants conspired to manipulate benchmark LIBOR and TIBOR rates, which reflected the interest rates at which banks could lend Japanese Yen outside of Japan.  LIBOR and TIBOR rates differ in two key respects.  First, TIBOR rates are set by the Japanese Bankers Association (“JBA”), while LIBOR rates are set by the British Bankers’ Association (“BBA”).  Second, TIBOR rates are set at 11:00 a.m. Tokyo time each business day, while LIBOR rates are set at 11:00 a.m. London time each business day.  According to the complaint, defendant banks served as panel banks for the BBA in setting Yen-LIBOR rates, and the brokers allegedly helped manipulate the Yen-LIBOR and Euroyen TIBOR rates.

Plaintiff is a U.S. resident who allegedly traded three-month TIBOR futures contracts between January 1, 2006 and June 30, 2011.  According to the complaint, these contracts were “agreement[s] to buy or sell a Euroyen time deposit having a principal value of 100,000,000 Japanese Yen with a three-month maturity commencing on a specific future date.”  Plaintiff allegedly initiated short positions on the Chicago Mercantile Exchange (“CME”), a U.S. based futures exchange, and allegedly incurred a loss as a result of defendants’ purported manipulative behavior.  Specifically, plaintiff alleged that defendants presented false Yen-Libor submissions to the BBA, which in turn allegedly affected the TIBOR rates (and consequently the value of plaintiff’s three-month TIBOR futures) because the LIBOR rates were set earlier in the day.  Plaintiff also alleged that certain conflicts of interest drove defendants’ purported manipulation, including that defendants held their own Euroyen-based derivatives positions and that their traders’ compensation was based in part on the profit and loss calculation of defendants’ trading books.  Plaintiff attempted to support his allegations with information purportedly revealed in various domestic and foreign enforcement proceedings, which generally consisted of allegations that foreign-based employees submitted false rates to the BBA, and that traders allegedly asked other employees responsible for sending submissions to the BBA to move the benchmark rate in a direction that would benefit the traders’ position.

The Second Circuit first addressed plaintiff’s CEA claims, affirming that plaintiff failed to state a claim under the CEA because the alleged conduct occurred predominantly outside the U.S.  The Court noted that under Section 22 of the CEA, a claim must involve both a domestic application of the statute and sufficiently domestic conduct.  The Court found that the derivative the plaintiff traded was tied to the value of a foreign asset because the value of the futures was determined by interest rates set by foreign entities in foreign countries (the JBA and BBA).  The Court also rejected plaintiff’s argument that the conduct at issue was sufficiently domestic because the CME is a domestic exchange and some communications in furtherance of the conspiracy were sent while employees were traveling in the U.S.  Separately, the Court determined that the subjects of the alleged manipulation—LIBOR and TIBOR rates—were not “commodities traded on a domestic exchange” under the CEA.  In this regard, the Court reasoned that the benchmark-based futures in this case were a “time deposit,” and while the rates affect the value of the time deposit, “that does not make the Euroyen TIBOR itself a commodity.”  The Court also noted that, “unlike commodities, benchmark rates do not themselves have any value,” and “the purchaser of a Euroyen TIBOR future does not receive ‘rights’ or ‘interest’ in Euroyen TIBOR itself, but in the product based on that rate,” which was the underlying Japanese Yen deposit.

In so holding, the Second Circuit relied on Prime Int’l Trading, 25 Ltd. v. BP P.L.C., 937 F.3d 94 (2d Cir. 2019), in which plaintiffs traded futures on a U.S.-based exchange that were tied to a benchmark rate dependent on the value of crude traded in Northern Europe.  There, the Court held that plaintiffs’ claims were impermissibly extraterritorial because “the derivatives at issue were ‘pegged to the value of’ foreign assets” and plaintiffs made “no claim that any manipulative oil trading occurred in the United States.”  The Court noted that in the present case, as in Prime, plaintiff “purchased a futures contract on a domestic market that incorporated an index tied to a foreign market, with that index being set by a foreign entity.”  As such, the Court affirmed the dismissal of plaintiff’s CEA claims as being impermissibly extraterritorial.

The Second Circuit also affirmed the dismissal of plaintiff’s Sherman Act claims because plaintiff failed to plead antitrust standing.  To establish antitrust standing, a plaintiff must show that it has suffered an antitrust injury and that is it an “efficient enforcer” of the antitrust laws.  Courts generally look to four factors to determine whether a plaintiff is an efficient enforcer, including (1) how direct or indirect the plaintiff’s injury is in the chain of causation between the defendants’ conduct and the injury; (2) whether there are more direct victims of the defendants’ conduct; (3) the extent to which the plaintiff’s claim for damages is speculative, and (4) whether the plaintiff’s claims will result in either duplicate recoveries or complex apportionment of damages.  The Second Circuit agreed that plaintiff lacked antitrust standing because (1) plaintiff did not transact directly with any of the named defendants and therefore his injury was not proximately caused by them; (2) his theory of liability depended on a long series of causal steps between the defendants’ alleged conduct and his purported injury; and (3) he was only an indirect victim of the alleged conspiracy and not a direct victim.  Additionally, the Court noted that because plaintiff’s theory of liability was “indirect and imprecise,” it would be difficult to apportion damages and there was a risk of duplicative recovery.

Finally, the Court found that plaintiff failed to establish proximate causation for his proposed RICO claims.  The Court reiterated that plaintiff’s alleged injury (a change in the value of his TIBOR futures contract) was “several steps removed” from defendants’ alleged conduct (sending fraudulent LIBOR submission to the BBA).