History has shown that large class action cases often follow government investigations the way that the lamb followed Mary to school that day.  Sometimes, however, those investigations die and Mary gets lost and brings her little lamb to the slaughterhouse. 

The Second Circuit recently affirmed the dismissal of a class action in which investors claimed that J.P. Morgan manipulated the price of silver in violation of the Commodity Exchange Act (“CEA”) and the Sherman Antitrust Act.  In In re Commodity Exchange, Inc. Silver Futures & Options Trading Litigationthe putative class of investors in COMEX silver futures and options contracts had alleged that  J.P. Morgan artificially deflated silver prices in order to profit from the massive short position it held in the market.  The plaintiffs also accused JP Morgan of improper “late day trading.”

More than a year ago, on March 15, 2013, the district court dismissed the suit because the plaintiffs didn’t support their claims with sufficient factual allegations.  The district court also denied the plaintiffs’ request to file an amended complaint.  So the plaintiffs were off to the Second Circuit! 

But the Second Circuit summarily affirmed.  The plaintiffs had simply failed to plead the facts needed to state a CEA market manipulation claim:  1) the defendant had the ability to influence prices; 2) the defendant had the intent to do so; 3) the manipulation resulted in an artificial price; and 4) the defendant, in fact, caused the artificial price.  The Second Circuit also affirmed the district court’s denial of the plaintiffs’ request to file an amended complaint.

The court rejected the plaintiffs’ argument that an intent to defraud could be inferred simply from J.P. Morgan’s market power, noting that “this ‘incentive’ could be imputed to any company with a large market presence in any commodity market.”  We agree.  Such reasoning would, in essence, eliminate this pleading requirement and allow a plaintiff to satisfy it by simply suing companies with a large presence in a market.   

The court also nixed the plaintiffs’ “vague allegations” of “uneconomic conduct, ” finding that the plaintiffs offered no specific factual allegations to support their argument that J.P. Morgan’s trading behavior was “inconsistent with trying to obtain the best sales price execution, but consistent with trying to move prices down by aggressively selling in a compressed period to receive less on the sales transactions.”  Once again, the court refused to infer intent from the, shall we say, less-than-compelling supporting allegations.

Finally, the Second Circuit scrapped the plaintiffs’ Sherman Act conspiracy claims, noting that “Plaintiffs failed to plausibly allege even a tacit agreement to manipulate prices,” offering only conclusory allegations of the type that Twombly and Iqbal have (supposedly) eradiated. 

In a wonderful  coincidence (if you happen to be J.P. Morgan), the day that Sullivan & Cromwell (Daryl Libow and Amanda Davidoff) filed its responsive brief in the Second Circuit on behalf of J.P. Morgan, the Commodity Futures Trading Commission announced that it was closing its five-year investigation into the alleged improper manipulation of the silver market.  This allowed J.P. Morgan to end the first paragraph of its preliminary statement with this nugget: “Indeed, the CFTC today closed the investigation that prompted this lawsuit, determining that there was “not a viable basis” to support any claims of manipulation.”  That’s a litigator’s dream.  Though, to be fair, it’s a nightmare if you happen to be on the other side.