Compliance: What traders should avoid. Red flags that may signal price fixing.

When identifying evidence of price fixing, regulators and the courts will look for use of:

1. Electronic communications.
2. Texts.
3. E-mails.
4. Chat rooms.
5. Newspaper articles shared among traders, brokers.
6. Inherently secretive interest rate submissions.
7. Agreements to manipulate currency or interest rates.
8. Trading strategies that impact other banks reference rate submissions.
9. Horizontal price-fixing scheme, i.e., collusion.
10. Unduly speculative damages.
11. Direct evidence that an agreement to collude was entered.
12. Circumstantial facts supporting an inference that collusion existed.

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In its analysis of the rule surrounding (now defunct) LIBOR price fixing, the court in Sonterra Capital Master Fund v Barclays Bank Plc, 366 F.Supp. 3d 516 (S.D. Ill. 2018) found the following:

“In evaluating whether damages are unduly speculative in price-fixing cases, considerations include (1) the extent to which the damages claim is conclusory in nature; (2) whether the injury is “so far down the chain of causation from defendants’ actions that it would be impossible to untangle the impact of the fixed price from the impact of intervening market decisions,” which relates to the causation factor; (3) whether external market factors affected the “relationship between the fixed price and the price that the plaintiffs ultimately paid;” and (4) whether “the non-fixed components of a transaction were heavily negotiated between the parties in relation to the fixed component.” 

The court went on to find that, “Section 1 of the Sherman Act makes unlawful ‘[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.’ 15 U.S.C. § 1.”

“Price-fixing conspiracies concentrate the power to set prices among the conspirators, including the power to control the market and to fix arbitrary and unreasonable prices.” [A]ny conspiracy ‘formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity is illegal per se,’ and the precise ‘machinery employed is immaterial.'”

“To establish a Section 1 conspiracy, ‘proof of joint or concerted action is required; proof of unilateral action does not suffice. Circumstances must reveal a unity of purpose or a common design and understanding, or a meeting of minds in an unlawful arrangement.’ 

Mere “parallel conduct” does not suffice. Because “conspiracies are rarely evidenced by explicit agreements,” however, a conspiracy “nearly always must be proven through inferences that may fairly be drawn from the behavior of the alleged conspirators.” The line separating conspiracy from parallelism is indistinct, but may be crossed with allegations of interdependent conduct, accompanied by circumstantial evidence and plus factors.” 

Those illustrative, non-exhaustive “plus factors” are “(1) a common motive to conspire; (2) evidence that shows that the parallel acts were against the apparent individual economic self-interest of the alleged conspirators; and (3) evidence of a high level of interfirm communications.” [A]t the motion-to-dismiss stage, appellants must only put forth sufficient factual matter to plausibly suggest an inference of conspiracy, even if the facts are susceptible to an equally likely interpretation.” 

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Where the twelve communications methods described above are used, plaintiffs will make the argument that those communications methods were used to transmit the conduct; that they were the conduits of illegal behavior spelled out in statutory and case law.

Traders and their counsel should be mindful of this behavior and the use of communications that hint at price fixing behavior. Strong compliance methods should be put in place to avoid liability.

Alton Drew

27 August 2023

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