Value Recovery Fund LLC v. JPMorgan Chase & Co. et al

Filing 265

OPINION & ORDER.....For the reasons stated herein and during the Fairness Hearing, Class Counsels petition for approval of the Settlement and Plan of Distribution was granted, with the Court retaining jurisdiction to hear any disputes arising from th e claims administration process. Class Counsels application for attorneys fees and expenses for the Settlement was also granted. Class Counsels application for incentive awards for Class representatives LACERA and Salix was denied. (Signed by Judge Denise L. Cote on 4/25/2016) Filed In Associated Cases: 1:13-md-02476-DLC et al.(gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
IN RE CREDIT DEFAULT SWAPS ANTITRUST
:
LITIGATION
:
:
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OPINION & ORDER
13md2476 (DLC)

APPEARANCES
For plaintiffs:
Daniel L. Brockett
Steig D. Olson
Sascha N. Rand
Jonathan Oblak
QUINN EMANUEL URQUHART & SULLIVAN, LLP
51 Madison Avenue, 22nd Floor
New York, NY 10010
Jeremy D. Andersen
QUINN EMANUEL URQUHART & SULLIVAN, LLP
865 S. Figueroa St., 10th Floor
Los Angeles, CA 90017
Bruce L. Simon
Clifford Pearson
George S. Trevor
PEARSON, SIMON & WARSHAW, LLP
44 Montgomery Street, Suite 2450
San Francisco, CA 94104
For defendants Bank of America Corp. and Bank of America, N.A.:
Robert F. Wise, Jr.
Arthur J. Burke
James I. McClammy
DAVIS POLK & WARDWELL LLP
450 Lexington Avenue
New York, NY 10017

1

For defendant Barclays Bank PLC:
David G. Januszewski
Herbert S. Washer
CAHILL GORDON & REINDEL LLP
80 Pine Street
New York, NY 10005
For defendant BNP Paribas:
David Esseks
ALLEN & OVERY LLP
1221 Avenue of the Americas
New York, NY 10020
John Terzaken
ALLEN & OVERY LLP
1101 New York Avenue, N.W.
Washington, DC 20005
For defendants Citigroup Inc., Citibank, N.A., and Citigroup
Global Markets Inc.:
David F. Graham
SIDLEY AUSTIN LLP
1 South Dearborn Street
Chicago, IL 60603
Benjamin R. Nagin
SIDLEY AUSTIN LLP
787 Seventh Avenue
New York, NY 10019
For defendant Credit Suisse AG:
Frank L. Hunter, Jr.
David Lesser
WILMER CUTLER PICKERING HALE & DORR LLP
7 World Trade Center
New York, NY 10007
J. Robert Robertson
Benjamin Holt
HOGAN LOVELLS US LLP
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004
2

For defendant Deutsche Bank AG:
Paula W. Render
Alex P. Middleton
JONES DAY
77 West Wacker Drive
Chicago, IL 60601
David P. Wales
JONES DAY
51 Louisiana Avenue, N.W.
Washington, D.C. 20006
Tracy V. Schaffer
Eric P. Stephens
JONES DAY
222 East 41st Street
New York, NY 10017
For defendant Goldman, Sachs & Co.:
Robert Y. Sperling
WINSTON & STRAWN LLP
35 West Wacker Drive
Chicago, IL 60601
Elizabeth P. Papez
WINSTON & STRAWN LLP
1700 K Street, N.W.
Washington, DC 20006
Richard C. Pepperman II
Bradley P. Smith
John McCarthy
Mark S. Geiger
SULLIVAN & CROMWELL LLP
125 Broad Street
New York, NY 10004
For defendants HSBC Bank plc and HSBC Bank USA, N.A.:
Richard A. Spehr
Michael O. Ware
MAYER BROWN LLP
1675 Broadway
New York, NY 10019

3

Andrew S. Marovitz
Britt M. Miller
MAYER BROWN LLP
71 South Wacker Drive
Chicago, IL 60606
For defendants JPMorgan Chase & Co. and JPMorgan Chase Bank,
N.A.:
Peter E. Greene
Boris Bershteyn
Peter S. Julian
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Four Times Square
New York, NY 10036
Patrick J. Fitzgerald
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
155 N. Wacker Drive
Suite 2700
Chicago, IL 60606
For defendant Morgan Stanley & Co. LLC:
Evan R. Chesler
Daniel Slifkin
Michael A. Paskin
Vanessa A. Lavely
CRAVATH, SWAINE & MOORE LLP
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
For defendants Royal Bank of Scotland PLC and Royal Bank of
Scotland N.V.:
Charles F. Rule
Joseph J. Bial
Amy W. Ray
CADWALADER, WICKERSHAM & TAFT LLP
700 6th Street, N.W.
Washington, DC 20001

4

For defendants UBS AG and UBS Securities LLC:
David C. Bohan
Gil M. Soffer
KATTEN MUCHIN ROSENMAN LLP
525 W. Monroe St.
Chicago, IL 60661
James J. Calder
KATTEN MUCHIN ROSENMAN LLP
575 Madison Avenue
New York, NY 10022
For defendant International Swaps and Derivatives Association:
Matthew J. Reilly
Abram J. Ellis
SIMPSON THACHER & BARTLETT LLP
900 G Street, NW
Washington, D.C. 20001
Michael J. Garvey
SIMPSON THACHER & BARTLETT LLP
425 Lexington Avenue
New York, NY 10017
For defendant Markit Group Ltd. and Markit Group Holdings Ltd.:
Colin R. Kass
Stephen Chuk
PROSKAUER ROSE LLP
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004
For objectors MF Global Capital LLC and Saba Capital Management,
L.P.:
George A. Zelcs
KOREIN TILLERY, LLC
205 North Michigan Avenue
Suite 1950
Chicago, IL 60601

5

For objectors Silver Point Capital, L.P., Silver Point Capital
Fund, L.P., Silver Point Capital Offshore Master Fund, L.P., and
Silver Point Capital Offshore, Ltd.:
J. Benjamin King
REID COLLINS & TSAI LLP
1601 Elm Street, Suite 4250
Dallas, TX 75201
For objectors Anchorage MTR Offshore Master Fund, L.P.,
Anchorage Capital Master Offshore Ltd., Anchorage Crossover
Credit Offshore Master Fund, Ltd., Anchorage Short Credit
Offshore Master Fund, Ltd., Anchorage Quantitative Credit
Offshore Master Fund, L.P., and Anchorage Short Credit Offshore
Master Fund II, L.P.:
Gregory P. Joseph
Douglas J. Pepe
Jeffrey H. Zaiger
JOSEPH HAGE AARONSON LLC
485 Lexington Ave
New York, NY 10017
For objectors FFI Fund Ltd, FYI Ltd., Olifant Fund Ltd., and
Asset-Backed Recovery Fund, Ltd.:
Robert A. Skinner
ROPES & GRAY LLP
Prudential Tower
800 Boylston St
Boston, MA 02199
Lee S. Gayer
ROPES & GRAY, LLP
1211 Avenue of the Americas
New York, NY 10036
DENISE COTE, District Judge:
This Opinion addresses the fairness of an almost $2 billion
settlement (the “Settlement”) reached in antitrust class action
litigation arising from the purchase and sale of credit default

6

swaps (“CDS”). 1

Plaintiffs bring this antitrust action

individually and on behalf of all persons who, during the period
from January 1, 2008 through September 25, 2015 (the “Class
Period”), bought CDS from, or sold CDS to, certain banks in the
United States (the “Class”).

The defendants are those banks

(the “Dealer Defendants”), 2 as well as the International Swaps
and Derivatives Association (“ISDA”), and both Markit Group
Holdings Limited and its subsidiary Markit Group Ltd.
(collectively, “Markit”).
In less than two years following the appointment of lead
counsel, the Class achieved a remarkable settlement.

The

Settlement will make a common fund of $1,864,650,000 available
to Class members (the “Settlement Fund”), and require ISDA to
take steps designed to increase transparency and competition in
the CDS market.

This Settlement was approved at the Fairness

Hearing held on April 15, 2016.

This Opinion further describes

the basis for that approval, the rejection of the limited
objections made to the Plan of Distribution that will govern the
The abbreviation “CDS” refers both to the singular, “credit
default swap,” and to the plural, “credit default swaps.”
1

Dealer Defendants are Bank of America Corp., Bank of America,
N.A., Barclays Bank PLC, BNP Paribas, Citigroup Inc., Citibank,
N.A., Citigroup Global Markets Inc., Credit Suisse AG, Deutsche
Bank AG, Goldman, Sachs & Co., HSBC Bank plc, HSBC Bank USA,
N.A., JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., Morgan
Stanley & Co. LLC, Royal Bank of Scotland PLC, Royal Bank of
Scotland N.V., UBS AG, and UBS Securities LLC.
2

7

distribution of the Settlement Fund, the award of attorneys’
fees and expenses, the rejection of the request for incentive
awards for Class representatives, and the standard that may be
applied to any request by class counsel for a bond pending an
appeal by an objector.
BACKGROUND
The allegations in this litigation are described in detail
in the Court’s September 4, 2014 Opinion granting in part the
defendants’ motions to dismiss.

See In re Credit Default Swaps

Antitrust Litig., No. 13md2476 (DLC), 2014 WL 4379112 (S.D.N.Y.
Sept. 4, 2014).

In brief, a CDS is a derivative whose value

depends on the value of an underlying debt instrument.
*1.

Id. at

The buyer of the CDS purchases the seller’s promise to pay

on the occasion of a “credit event,” such as a default on the
debt instrument by a third party known as the “reference
entity.”

Id.

Market makers -- also referred to as “dealers” -

- sell CDS to buyers, buy CDS from sellers, and hold CDS
inventory until a match emerges.

Id.

A dealer offers a “bid”

price at which the dealer will purchase and an “ask” price at
which the dealer will sell.

Id.

By keeping their bid lower

than their ask, dealers can capture the difference, known as the
“bid/ask spread.”

Id.

The complaint alleges that, in and around 2008 to 2009, the
defendants conspired to suppress price transparency and
8

competition in the trading market for CDS and boycott the
exchange trading of CDS, thereby maintaining supracompetitive
bid/ask spreads.

Among other things, the complaint alleges that

the defendants conspired to block “CMDX,” a proposed CDS
electronic exchange platform that the Chicago Mercantile
Exchange and Citadel Investment Group partnered to launch in the
fall of 2008.

Id. at *4-5.

The first complaint in this litigation was filed on May 3,
2013 in the Northern District of Illinois, and other related
actions were filed in this district and elsewhere soon after.
On October 22, the U.S. Judicial Panel on Multidistrict
Litigation transferred all related class actions to this
district.

At a conference on December 5, 2013, the Court

appointed Quinn Emanuel Urquhart & Sullivan, LLP (“Quinn
Emanuel”) as Lead Counsel.

Shortly thereafter, Pearson, Simon &

Warshaw, LLP (“Pearson Simon”) was appointed Co-Lead Counsel
(collectively, “Class Counsel”), and Salix Capital U.S., Inc.
(“Salix”) and the Los Angeles County Employee Retirement
Association (“LACERA”) were appointed Lead Plaintiffs for the
Class.

Plaintiffs filed the operative complaint on April 14,

2014, which brought claims under Sections 1 and 2 of the Sherman
Antitrust Act (“Sherman Act”), 15 U.S.C. §§ 1-2, and under state
unjust enrichment law.

9

At the time this case was filed, both the U.S. Department
of Justice (“DOJ”) and the European Commission (“EC”) were
conducting ongoing investigations of the defendants for
collusion regarding the CDS market.

The DOJ investigation is

reported to have closed sometime in 2013; the EC investigation
closed at least as to the Dealer Defendants in December 2015,
just months after the Settlement was reached.
I.

Discovery and Mediation
On September 4, 2014, the Court dismissed the complaint’s

claims under Section 2 of the Sherman Act, but allowed its other
claims to proceed.

Id. at *18.

The parties proceeded to

discovery immediately thereafter.
Class Counsel worked with lightning speed.

Class Counsel

obtained over fifty million pages of documents from the
defendants and millions more from third parties.

They developed

and utilized research tools that allowed them to quickly locate
critical documents, prepare a draft narrative of key events, and
identify key witnesses.

By July 29, 2015, they had taken

twenty-seven of the forty-six depositions noticed by that date.
During the initial discovery period, Class Counsel also obtained
data for millions of CDS transactions from the Depository Trust
& Clearing Corporation (“DTCC”) and engaged experts to analyze
this data and build a model capable of calculating damages for
Class members.
10

In December 2014, and in parallel with ongoing discovery,
the parties engaged the services of a renowned mediator, Daniel
Weinstein.

Under his supervision, the parties began mediation

sessions on January 22, 2015.

The mediator worked with the

parties for nine months and invested over 400 hours of his own
time in the mediation.

Plaintiffs presented a detailed

mediation brief and PowerPoint presentation on liability at the
first mediation session and a preliminary damages model at the
March 31 mediation session.

At the urging of the mediator,

plaintiffs produced a copy of their damages model, as well as
the dataset used to calculate damages, to the defendants.

The

defendants presented a detailed critique of the plaintiffs’
damages model during a June 8 mediation session.
Plaintiffs reached agreements in principle with all
defendants to settle the case by mid-August, just prior to the
August 31 deadline for the motion for class certification.
Plaintiffs filed their motion for preliminary approval of the
Settlement on October 16.

The Court preliminarily approved the

Settlement on October 29.
II.

Terms of the Settlements
The separate Settlement agreements executed by each Dealer

Defendant and Markit are virtually identical, except for the
amount of money each has agreed to pay into the Settlement Fund.
The total amount to be paid into that fund is $1,864,650,000.
11

ISDA has also agreed to injunctive relief to bring greater
transparency and competition to the CDS market.

Among other

things, ISDA agreed to create a new independent Licensing SubCommittee consisting of equal buy- and sell-side members, and to
make meetings of that Sub-Committee open to the public.
The Class agreed to the following release (the “Release”):
The Class Plaintiffs and all Settlement Class Members
shall release and shall be deemed to have released all
Released Claims against all the Released
Parties. . . . “Released Claims” means any and all
manner of claims . . . (i) occurring prior to June 30,
2014, that are alleged or that could have been alleged
in the Action relating in any way to any CDS
Transactions or Potential CDS Transactions; . . . and
(ii) occurring prior to the Preliminary Approval
Order, relating in any way to the litigation or
settlement of this Action, including, without
limitation, relating in any way to any settlement
discussions, the negotiation of, and agreement to,
this Agreement by the Defendants, or any terms or
effect of this Agreement (other than claims to enforce
the Agreement).
(Emphasis added.)

The agreements define “CDS Transactions” as

(i) any purchase, sale, trade, assignment, novation,
unwind, termination, or other exercise of rights or
options with respect to any CDS, whether executed
over-the-counter (“OTC”) or via inter-dealer brokers,
a centralized clearinghouse, a central limit order
book (“CLOB”), an exchange, a swap execution facility
(SEF), or any other platform or trading facility; or
(ii) any decision to withhold a bid or offer on, or to
decline to purchase, sell, trade, assign, novate,
unwind, terminate or otherwise exercise any rights or
options with respect to any CDS.
The agreements define “Potential CDS Transactions” as “any CDS
Transaction for which an offer or quote was obtained or sought,

12

regardless of whether such transaction was actually entered into
or executed with the party from which such offer was obtained or
sought.”
Excluded from the Release are claims by Class members not
“domiciled or located in the United States at the relevant
time”; claims based on transactions that “were not in or would
not have been in United States commerce”; and claims based on
transactions that “are or would have been subject only to
foreign law.”
III. Plan of Distribution
Because there have been four objections to the allocation
of the Settlement Fund among Class members pursuant to the Plan
of Distribution, the construction and structure of that Plan
must be described in some detail.

The Plan rests on the work

Class Counsel performed with its experts to prepare a damages
model.
A.

Plan of Distribution Datasets

Class Counsel collected data on CDS transactions occurring
from January 2008 to September 2015 in each of the major
categories of CDS transactions: single-name, index, tranche
index, structured credit, and CDS options.

The data spans

thousands of CDS contracts and millions of CDS transactions,
with corresponding data on the bid/ask spreads quoted in these
instruments each day or virtually every day.
13

Class Counsel

created its dataset by combining data from two sources: the
DTCC’s Trade Information Warehouse, which is a global repository
for data concerning executed CDS transactions, and a Markit
database that provides quote data.
DTCC provided over 159 million transaction records spanning
nearly eight years, capturing over 90 percent of all CDS
transactions.
entities.

These include data on 3,500 distinct reference

For each transaction record, the DTCC data provides

details about the transaction, including the trade date, the
contract expiration date, and the key characteristics of the
traded products.
While the DTCC data captures payment information, it does
not capture the bid and ask prices quoted by the dealer pursuant
to which the transaction was executed.

To infer the bid/ask

spreads incurred on a given CDS transaction, Class Counsel
obtained data from Markit, which is a leading source of such
data.

Markit gathers information on the bid/ask spreads quoted

by dealers during the course of a trading day by parsing
electronic messages conveyed by dealers to market participants
and extracting the relevant quote information from the messages.
The Markit database produced in this litigation contained almost
3.2 billion records of bid/ask spreads.

14

B.

The Mechanics of the Plan

The Plan determines the amount to be paid on each Class
member’s claim through three main steps: (1) identifying
qualifying Covered Transactions; (2) estimating the amount of
bid/ask spread inflation resulting from the Dealer Defendants’
alleged conduct with respect to each Covered Transaction; and
(3) calculating each claimant’s recovery based on its pro rata
share of the available Settlement Funds in relation to the
recoveries to which all claimants who have submitted a valid
claim are entitled.
Class Counsel and their consulting experts, led by Dr.
Sanjay Unni of the Berkeley Research Group, 3 used the DTCC
dataset to identify Covered Transactions using the criteria
specified in the Settlement agreements.

The total notional

volume of Covered Transactions from the DTCC dataset is
approximately $69 trillion.
Under the Plan, the bid/ask spread paid on a given Covered
Transaction is determined as the average spread quoted for the
CDS contract actually involved in the transaction on the day of
the transaction.
the day.

Bid/ask spreads for a CDS can fluctuate during

While, in principle, the spread charged on a

transaction should be measured as the spread prevailing at the
The Court commends Dr. Unni and his team for his submissions to
the Court in support of the Settlement, which have been detailed
and clear.
3

15

time of the transaction’s execution, the DTCC data only provides
the day that a given transaction occurred, not the time within
the day.

As such, Class Counsel chose to associate each CDS

transaction with the average daily bid/ask spread prevailing for
that CDS on the day the transaction occurred.
In order to determine that average bid/ask spread, Class
Counsel used the Markit dataset to identify the bid/ask spreads
for the associated CDS during each hour of the date of the
transaction. 4

Class Counsel took the “inside spread,” which was

the smallest or tightest spread, during each trading hour to
calculate an average spread for each day. 5

Accordingly, the Plan

measures the applicable bid/ask spread for an instrument on a
given day as the average of the tightest bid/ask spreads
prevailing in each hour of trading for that instrument.

The

average bid/ask spread is then reduced by half, as each CDS
transaction is a buy or a sell transaction that only incurs half
of the cost of the spread.
For one type of linked transaction, the Plan makes a
further adjustment.

This linked transaction is an “index roll.”

In March and September each year, index CDS are updated to
The Markit data captured bid/ask quotes provided by the Dealer
Defendants, which are time-stamped. The plaintiffs’ expert took
steps to ensure that only high-quality Markit quotes were used.
4

Plaintiffs used the inside spread because it was likely to have
attracted the greatest trading volumes at any point in time.
5

16

reflect changes in the credit conditions of their constituent
instruments.

The updated index is assigned a new series number.

When this happens, investors may “roll” over their exposure from
the old position to the new series, thereby updating their risk
exposure in the market segment covered by that index CDS.

These

investors do this through a two-legged transaction: selling one
index series and buying the subsequent index series.

Based on

industry custom, the Plan exempts one leg of the roll from its
spread calculations.

To apply this adjustment conservatively,

the Plan identifies the rolls as occurring when the trade and
termination happen on the same day in different series of the
same index.
Next, the Plan applies a spread compression percentage (the
“Compression Rate”) to reflect how the spread that historically
prevailed in the CDS market would have tightened but for the
defendants’ actions.

Based upon a review of empirical evidence

on spread compression experienced in other markets, Class
Counsel applied a Compression Rate of 20%.
IV.

Notice to Class Members
Because of their access to trading records, Class Counsel

were able to identify and reach most potential Class members.
On January 11, 2016, Class Counsel mailed notice packets to each
of 13,923 identified Class members.

While some of the mailings

were returned as undeliverable, reasonable efforts were made to
17

locate every identified Class member, including identifying
alternative mailing addresses.

Ultimately, notice was

successfully mailed to all but 548 of the Class members.

In

addition, given its magnitude, the Settlement received
widespread publicity.

See, e.g., Katy Burne, Big Banks Agree to

Settle Swaps Lawsuit, Wall St. J. (Sept. 12, 2015); Jesse
Druker, Wall Street Banks to Settle CDS Lawsuit for $1.87
Billion, Bloomberg (Sept. 11, 2015).

The Summary Notice was

also published on January 11 in several important business
publications.
The Garden City Group (the “Claims Administrator”) launched
a website for the Settlement which posted the Settlement
agreements, notices, court documents, and other information
relevant to the Settlement.

On January 11, a description of the

Plan of Distribution was also posted on the website for Class
members to review.

Since January 28, each Class member has been

able to log into a “Claimant Portal” on the Settlement website
to review the Covered Transactions identified by Class Counsel
as applicable to that Class member.

Each Class member can

review how the Plan of Distribution applies to each of its
identified transactions.

It may also challenge the accuracy of

the information regarding posted Covered Transactions and submit
additional transactions to the Claims Administrator for
consideration as Covered Transactions.
18

Since going live, close to 10,000 distinct visitors have
visited the website.

In addition, the Claims Administrator

received, as of April 15, approximately 700 claims.

The last

date for submission of claims is May 27, 2016.
Against this backdrop, only twenty-one requests for
exclusion were timely submitted by February 29. 6

Five entities

are responsible for these twenty-one requests. 7
There are effectively four objectors who submitted timely
objections by February 29. 8

The objectors are MF Global Capital

These 21 requests were submitted by: (1) Fairfax (Barbados)
International Corporation; (2) Itau BBA International plc; (3)
Itau Unibanco SA Nassau Branch; (4) NexPoint Credit Strategies
Fund (Highland Credit Strategies Fund); (5) Highland CDO
Opportunity Master Fund, L.P.; (6) Highland Multi-Strategy
Credit Fund, L.P. (Highland Credit opportunities CDO LP); (7)
Highland Credit Strategies Master Fund, L.P.; (8) Highland
Special Opportunities Holding Company; (9) Granite Bay
Long/Short Credit Master Fund, L.P.; (10) Tunstall Opportunities
Master Fund, L.P.; (11) Highland Crusader Offshore Partners,
L.P.; (12) Highland Long Short Equity Fund; (13) Highland
Offshore Partners, L.P.; (14) Brigade Credit Fund II LTD; (15)
Brigade Opportunistic Credit LBG Fund LTD; (16) Brigade Energy
Opportunities Fund LP; (17) Brigade Structured Credit Fund LTD;
(18) Tasman Fund LP; (19) Brigade Distressed Value Master Fund
LTD; (20) Brigade Leveraged Capital Structures Fund LTD; and
(21) Banco Safra SA - Cayman Islands Branch.
6

Fairfax, Itau, Brigade, Highland, and Banco Safra appear to be
the five groups opting out of the Settlement.
7

A fifth potential objector, FFI Fund Ltd. and related entities,
provided notice on February 29 that it was working with Class
Counsel to gather the information necessary to determine whether
it would be making an objection to the Plan of Distribution. On
April 14, it wrote that it no longer intended to appear at the
Fairness Hearing, but wished to preserve a right to object if
any of the other objectors’ suggested modifications to the Plan
8

19

LLC (“MF Global”); Silver Point Capital, L.P. (“Silver Point”); 9
Saba Capital Management (“Saba”); and Anchorage MTR Offshore
Master Fund, L.P. (“Anchorage”). 10

Class Counsel have allowed

the objectors to speak with their experts, and have had their
experts conduct complex analyses of the damages dataset to
analyze and respond to the objectors’ critiques and proposals.
V.

Fairness Hearing
The Fairness Hearing was held on April 15, 2016.

Class

Counsel and Michael Herrera, Senior Staff Counsel for LACERA,
appeared at the hearing, as well as counsel for all defendants.
Also present was counsel for a non-objecting Class member,
BlueMountain Capital Management LLC. 11

Of the objectors, only MF

Global, Saba, and Silver Point were represented by counsel at
of Distribution were adopted, since such modifications could
materially affect its interests.
Silver Point’s objection is also brought on behalf of the
following related entities: Silver Point Capital Fund, L.P.,
Silver Point Capital Offshore Master Fund, L.P., and Silver
Point Capital Offshore, Ltd.
9

Anchorage’s objection is also brought on behalf of the
following related entities: Anchorage Capital Master Offshore
Ltd., Anchorage Crossover Credit Offshore Master Fund, Ltd.,
Anchorage Short Credit Offshore Master Fund, Ltd., Anchorage
Quantitative Credit Offshore Master Fund, L.P., and Anchorage
Short Credit Offshore Master Fund II, L.P.
10

The press has identified two Class members, BlueMountain
Capital Management LLC and Blue Crest Capital Management LLC, as
among the biggest beneficiaries of the Settlement Fund. Katy
Burne, Swaps Payout is a Windfall for Funds, Wall St. J. (Jan.
10, 2016).
11

20

the Fairness Hearing. 12

The objectors were given an opportunity

to be heard, but only Silver Point’s counsel spoke.
DISCUSSION
I.

Judicial Approval of Class Action Settlement
Pursuant to Rule 23(e), Fed. R. Civ. P., any settlement of

a class action must be approved by the court.

In determining

whether to approve a class action settlement, the district court
must “carefully scrutinize the settlement to ensure its
fairness, adequacy and reasonableness, and that it was not a
product of collusion.”

D’Amato v. Deutsche Bank, 236 F.3d 78,

85 (2d Cir. 2001) (citation omitted).

In doing so, the court

must “eschew any rubber stamp approval” yet simultaneously “stop
short of the detailed and thorough investigation that it would
undertake if it were actually trying the case.”

City of Detroit

v. Grinnell Corp., 495 F.2d 448, 462 (2d Cir. 1974).
In making its determination, a district court should
“review the negotiating process leading up to the settlement for
procedural fairness.”
Cir. 2013).

Charron v. Wiener, 731 F.3d 241, 247 (2d

A court should assess whether the settlement

resulted from “an arm’s-length, good faith negotiation between
experienced and skilled litigators,” id., and whether
plaintiffs’ counsel engaged in discovery “necessary to the
MF Global and Saba are currently represented by the same
counsel.
12

21

effective representation of the class’s interests.”

D’Amato,

236 F.3d at 85.
The court must also evaluate the substantive fairness of a
settlement by considering the nine factors set forth in Detroit
v. Grinnell Corp.:
(1) the complexity, expense and likely duration of the
litigation; (2) the reaction of the class to the
settlement; (3) the stage of the proceedings and the
amount of discovery completed; (4) the risks of
establishing liability; (5) the risks of establishing
damages; (6) the risks of maintaining the class action
through the trial; (7) the ability of the defendants
to withstand a greater judgment; (8) the range of
reasonableness of the settlement fund in light of the
best possible recovery; [and] (9) the range of
reasonableness of the settlement fund to a possible
recovery in light of all the attendant risks of
litigation.
Charron, 731 F.3d at 247 (citation omitted).
Finally, the determination should recognize that there is a
“strong judicial policy in favor of settlements, particularly in
the class action context.”

Wal-Mart Stores, Inc. v. Visa

U.S.A., Inc., 396 F.3d 96, 116 (2d Cir. 2005) (citation
omitted).

Similarly, “[t]he compromise of complex litigation is

encouraged by the courts and favored by public policy.”

Id. at

117 (citation omitted).
A.

Procedural Fairness

This Settlement was achieved after intense, lengthy
negotiations among well-represented adversaries who were
assisted by an able mediator.

The existence and size of this
22

Settlement is attributable in no small measure to the skill of
Class Counsel and the litigation strategy it employed.
Discovery was extensive and swiftly conducted.

The opposing

parties were able to assess quickly, in detail, and with care,
the strength of the plaintiffs’ theories of liability and
damages.
The mediator has praised the work of Class Counsel as “one
of the finest examples of efficient and effective lawyering by
plaintiffs’ counsel that” he has ever witnessed.

In making this

judgment, he took note of the complexity and size of the
litigation, and the speed with which Class Counsel achieved a
result of this magnitude.

He also reports that the settlement

negotiations were “conducted at arm’s-length by sophisticated,
knowledgeable, and fully-informed counsel who consulted directly
with senior client representatives throughout the process.”
B.

Substantive Fairness

In addition, consideration of the Grinnell factors strongly
favors approval of the Settlement.
1. Complexity, Expense, and Likely Duration of the
Litigation
This is highly complex litigation.

Antitrust cases are

often challenging to investigate and litigate, and this
litigation is no exception.
expensive to litigate.

It has also been extremely

The Settlement was preceded by a period

23

of intensive fact discovery, involving the production and
examination of many millions of pages of documents.

Twenty-

seven depositions were conducted and more had been scheduled to
occur.

Only five months remained in the fact discovery period.

The litigation, had it not been resolved through settlement,
would have been very expensive to complete and may very well
have required a trial of the plaintiffs’ claims.
2. The Reaction of the Settlement Class
The Class has received effective and sufficient notice of
the Settlement and the reaction of the Class has been
overwhelmingly positive.

While the reaction of a class to a

settlement is always important, it is an especially telling here
since the Class is composed of sophisticated parties who
participate in buy-side trading of CDS.

Out of almost 14,000

Class members, only twenty-one requests for exclusion were
timely submitted.

Only four objections have been pursued.

This

very low number of objections and requests for exclusion
supports a finding that the Settlement is fair.

See Grinnell,

495 F.2d at 462.
3. Stage of the Proceedings and Amount of Discovery
As noted above, the Settlement was achieved in the midst of
the period assigned for fact discovery.

The parties reached an

agreement in principle on the eve of the date on which the
plaintiffs’ motion for class certification was due.
24

4. Risk Regarding Liability, Damages, and Class
Certification Through Trial
The risk of establishing liability is somewhat difficult to
assess in this case since the Settlement occurred before the
filing of summary judgment motions or trial, and in the absence
of the filing of any government charges arising from the alleged
misconduct.

The defendants intended to argue that they had not

conspired with each other to violate our antitrust laws, that
the CDMX would not have been a viable exchange platform, and
that the plaintiffs’ theory of damages was seriously flawed,
among other things.

Moreover, both the DOJ and EC

investigations were closed without the filing of any charges
against the Dealer Defendants.

On the other hand, the size of

the Settlement suggests that the plaintiffs’ analysis of the
document production and development of evidence through
depositions of the defendants’ witnesses held promise for the
plaintiffs’ success at trial and placed the defendants at risk
of a substantial adverse verdict.

Given the commonality of

issues in the plaintiffs’ theory of its case, it is likely that
a class would have been certified and, if certified, maintained
through the conclusion of the litigation.
The issues related to damages would have been hotly
contested at each stage of the proceedings.

25

Causation and the

methodology for establishing damages would have been litigated
extensively.
5. Ability of Defendants to Withstand Greater Judgment
and the Range of Reasonableness of the Settlement
Fund and Recovery
The defendants are generally large financial institutions
and have the ability to withstand a greater judgment than the
amount they each contributed to the Settlement.

Nevertheless,

the Settlement Fund, at nearly $1.9 billion, is a very
substantial amount.
In fact, no one disputes that the Settlement is reasonable,
both in light of the best possible recovery and in light of all
the attendant risks of litigation.
Settlement as “exceptional.”

The mediator has praised the

In his opinion, the Settlement is

not just fair and adequate, but “exceedingly favorable” to the
Class, reflecting a recovery “well beyond” what he expected
could be achieved.
To place the mediator’s assessment in context, the
plaintiffs’ preliminary damages estimate forecast damages at
roughly $8 to $12 billion.

The recovery here, therefore,

reflects 15 to 23% of the amount which plaintiffs may have
sought at trial.

Class Counsel estimate that over 1,300 Class

members will each receive payments from the Settlement Fund
exceeding $100,000, and over 230 of these will each receive more
than $1,000,000.

Given this significant recovery for the Class,
26

it is unsurprising that no Class member has objected to the
amount or fairness of the Settlement.
II.

Objections by Class Members
Four sets of objection have been brought by Class members.

The objections address the Plan of Distribution and the terms of
the Release.

None of the objections requires an alteration of

the Plan or the Release.
A.

Plan of Distribution

A district court “has broad supervisory powers with respect
to the . . . allocation of settlement funds.”

In re Holocaust

Victim Assets Litig., 424 F.3d 132, 146 (2d Cir. 2005) (citation
omitted).

The plan of allocation must “meet the standards by

which the settlement [is] scrutinized -- namely, it must be fair
and adequate.”

Hart v. RCI Hosp. Holdings, Inc., No. 09cv3043

(PAE), 2015 WL 5577713, at *12 (S.D.N.Y. Sept. 22, 2015)
(quoting In re WorldCom, Inc. Sec. Litig., 388 F. Supp. 2d 319,
344 (S.D.N.Y. 2005)).

A plan “need only have a reasonable,

rational basis, particularly if recommended by experienced and
competent class counsel.”
388 F. Supp. 2d at 344).

Id. (quoting In re WorldCom, Inc.,
A principal goal of a plan of

distribution must be the equitable and timely distribution of a
settlement fund without burdening the process in a way that will
unduly waste the fund.

27

“[I]n the case of a large class action the apportionment of
a settlement can never be tailored to the rights of each
plaintiff with mathematical precision.”

In re PaineWebber Ltd.

P’ships Litig., 171 F.R.D. 104, 133 (S.D.N.Y.), aff’d In re
PaineWebber Inc. Ltd. P’ships Litig., 117 F.3d 721 (2d Cir.
1997).

The challenge of precisely apportioning damages to

victims is often magnified in antitrust cases, as “damage issues
in [antitrust] cases are rarely susceptible of the kind of
concrete, detailed proof of injury which is available in other
contexts.”

J. Truett Payne Co., Inc. v. Chrysler Motors Corp.,

451 U.S. 557, 565 (1981) (citation omitted)); see also In re
Elec. Books Antitrust Litig., No. 11md2293 (DLC), 2014 WL
1282293, at *16 (S.D.N.Y. Mar. 28, 2014).
This sophisticated Class is in an excellent position to
swiftly and competently assess whether the Plan, and the model
upon which it is based, achieves a fair distribution of this
very sizeable Settlement Fund.

It has spoken.

No Class member

has objected that the Settlement Fund is inadequate.
already filed claims.

Very few have opted out.

of objections to the Plan have been filed.

Many have

Only four sets

This record is an

overwhelming endorsement of the Plan and the fairness with which
it will measure each member’s entitlement to a distribution.
The Notice required any objections to the Settlement to be
filed by February 29, 2106.

Four sets of Class members objected
28

to different elements of the Plan of Distribution.

None of

their objections provide a basis to alter the conclusion that
the Plan is fair and entitled to adoption.

Taken together, the

four objectors make essentially three different types of
arguments about the Plan.

They complain that categories of

linked or packaged trades are being over-compensated, that
certain categories of investors will receive a disproportionate
amount of the Settlement Fund, and that the 20% Compression Rate
should not apply after December 31, 2012, when certain reforms
in the Dodd-Frank Wall Street Reform and Consumer Protection
Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank
Act”), that affect the CDS market took effect.
1. Overcompensation of Packaged Trades
MF Global, Silver Point, Saba, and Anchorage each contend
that certain transactions were conducted as linked trades and
enjoyed a zero or de minimis bid/ask spread on one leg of the
trade.

They object that, because the Plan does not treat the

transactions as linked, it overcompensates Class members who
engaged in the packaged trades.
MF Global lists types of packaged trades 13 and proposes a
methodology for more fairly calculating the spread for six types
MF Global identifies packaged trades as including index
arbitrage and reverse arbitrage trades; correlation/tranche
trading and associated index/single-name delta hedging;
convexity/curve trading; single-name rolls; single-name
13

29

of packaged transactions.

It describes these proposals as “non-

controversial” adjustments.

Silver Point contends that the full

bid/ask spread is not charged on both legs of an index
arbitrage.

Saba contends that a “significant” number of trades

undertaken by the Class were index arbitrage packages or
correlation trade packages, and that the Dealer Defendants
“significantly” mark down the spreads for such trades.

It

suggests that “off market trades” be included in any compilation
of such trades and that additional information be obtained from
the Dealer Defendants regarding these trades.

Anchorage

explains that a spread was generally paid on only one leg of a
multi-leg CDS index related trade.

It suggests three sets of

adjustments.
As described above, the Plan identifies a type of linked
trade -- index rolls -- and makes adjustments for that category
of linked trade through the application of an objective,
conservative test.

The request to make adjustments to the Plan

to identify more linked trades must be rejected.
As a practical matter, it is almost impossible to identify
linked trades.

To be a true package, linked trades have to be

executed simultaneously.

Only with simultaneous execution will

the investor avoid the risk that the market will move against it
Payer/Receiver CDS Options and associated single-name CDS
hedges; and index Payer/Receiver CDS Options and associated
index CDS hedges.
30

in the interval between the trades.

But, the data currently

available to the Class does not permit the identification of
simultaneous trades.

The DTCC data does not identify the time

of day when a CDS transaction occurs, only the trade date.

No

objector has identified a feasible way, much less a quick and
inexpensive one, to obtain data for all CDS trades that
identifies the precise time of the trades.
Beyond that problem, CDS are complex instruments and they
are associated with many different complex trading strategies.
Linkage of trades and arbitrage of a portfolio’s investments can
occur in many different ways, through the combination of many
different instruments. 14

Therefore, any attempt to construct a

process to identify truly linked trades will necessarily be
under-inclusive, and will almost certainly be over-inclusive as
well.
Each of the potentially packaged trades identified by the
objectors presents its own unique hurdles.
suffice.

One example will

The packaged trades on which the objectors focus most

intently is the index arbitrage.

In an index arbitrage, an

investor makes offsetting buys and sells of an index CDS and of
its constituent single-name CDS.

But, it is highly unlikely

Indeed, linkage occurs not just with linked trades within the
CDS space, but also by linking trades in the CDS space with
trades in other markets.
14

31

that an investor could execute an arbitrage of an index CDS with
offsetting purchases or sales of all the index’s constituents
through a single dealer.

As Dr. Unni explains, if a dealer’s

quotes for the index CDS are misaligned with the dealer’s quotes
for the many single-name CDS that form the constituents of the
underlying index, and the investor seeks to execute simultaneous
offsetting transactions with both the index and its constituents
through this dealer, the dealer has an opportunity to move its
quotes to tighten the spread or eliminate the arbitrage. 15

Thus,

the likelihood is that any investor who actually wishes to
engage in an index arbitrage will try to execute the arbitrage
through multiple dealers in order to mask its strategy.

But,

such a multi-dealer arbitrage strategy presents its own separate
challenges, including how to calculate any appropriate
discounted spread.

The need to combine trades conducted through

multiple dealers also makes it exceedingly difficult to apply an
objective, neutral standard to identify a true arbitrage even
when, as a theoretical matter, an opportunity for a reduced
It is not surprising therefore that Dr. Unni was unable to
locate trades occurring through same-day trading and the same
dealer that might have been intended to put in place an index
arbitrage. Using these parameters and looking at a few of the
most-liquid standard index CDS, Dr. Unni was only able to locate
offsetting buys and sells of an index and a few of its scores of
constituents. For instance, for one index with 125
constituents, he reports that the most common potentially
offsetting trade involved only one constituent, and the maximum
number of constituents traded on the same day was twenty-one of
the 125 constituents.
15

32

spread might have existed.

Because such a multi-dealer

arbitrage is complex and risky, it is also likely to be rare.
Indeed, once an arbitrage is fragmented in this way, there is a
real question as to whether it even qualifies as a packaged
trade.
The objectors’ varying proposals for identifying this type
of packaged trade underscore this very problem.

They use

different tests to identify the packages to which the Plan
should apply some yet-to-be-determined discounted spread.

Saba

opines that an index arbitrage should be identified as one in
which there was the simultaneous trade of the index and all of
the single-name entities making up that index.

Anchorage

asserts that the index arbitrage should be identified as one in
which an index was traded on the same day as at least 75% of its
constituents.

MF Global contends that the index arbitrage

should be identified as one in which the index was traded on the
same day as at least 60% of its constituents. 16

These competing

and contradictory proposals themselves reflect the absence of
any reliable, conservative, and fair standard for identifying an

In an April 12 submission, MF Global alters its proposal to
suggest that the index arbitrage trades can occur as far apart
as two days of each other. This suggestion vividly illustrates
the arbitrariness, uncertainty, and unfairness inherent in MF
Global’s suggested alteration of the Plan to identify index
arbitrage trades and adjust their spreads.
16

33

index arbitrage for purposes of distributing the Settlement Fund
fairly to all members of the Class.
In anticipation of the April 15, 2016 Fairness Hearing,
Class Counsel submitted its motion for final approval of the
Settlement on April 1.

This April 1 submission fully addressed

each of the objections and explained in convincing fashion why
the Plan should not be altered to account for more packaged
trades.

Then, in the days immediately preceding the Fairness

Hearing, the objectors made additional submissions that included
entirely new objections.

To the extent that the objectors

presented new objections in their April submissions, those
objections are untimely and must be rejected on that basis
alone. 17

In any event, none of the eve-of-Hearing objections,

whether new or renewed, provides a ground for altering the Plan.
On April 12, MF Global made a submission that added several
new objections. 18

That submission was supported by a declaration

The new objections largely relate to alleged packaged trades
and the contention that some of the Class members may be
overcompensated because they may have engaged in such trades
with a discounted bid/ask spread. For the reasons explained in
Dr. Unni’s April 14 submission, these untimely objections are no
more meritorious than the timely objections.
17

Among MF Global’s new objections are the following. MF Global
contends that the Plan has undercounted the volume of index
rolls and should apply a larger discount to such rolls. It
makes this objection even though it does not take issue with the
test the Plan uses to identify the index rolls. MF Global also
suggests using dates from the DTCC data for Upfront Fee Payment
18

34

from a CDS trader adding personal observations based on his
experience in the industry, but no analysis, study, or citation
to research that would provide a basis to reject the detailed
analysis presented by Class Counsel and its experts.
The MF Global submission also reflects a fundamental
misunderstanding of the goal of any plan of distribution.

A

plan of distribution is not defective simply because it does not
account for every individual trading strategy that may exist in
a marketplace.

As described above, a plan must fairly

distribute the settlement funds across the entire class.

No one

denies that there are a variety of trading strategies that were
used by many CDS market participants that are not accounted for
in the Plan.

But, unless there is reliable and fair way to both

identify linked trades and adjust the spread associated with
those trades, then that trading strategy should not and cannot
be a component of a plan of distribution that seeks to treat all
class members fairly.

It is telling in this regard that none of

the objectors has demonstrated that any unfairness will accrue
to any specific group of investors if the Plan does not
incorporate recognition of and adjustments for the particular
kinds of linked trades on which they focus attention, much less
that adoption of any of their proposals (assuming it were
Date and Trade Settlement Date instead of the Trade Date field
utilized by the Plan.
35

feasible to adopt any of them) would improve the fairness of the
distribution to that group or to the Class generally.

Finally,

there has been no demonstration that the various idiosyncratic
trading strategies discussed by the objectors account for any
material portion of CDS trading. 19
Silver Point also made a supplemental submission on April
12.

While its timely objection made only a brief reference to

the need to discount the spread for index arbitrage trading, its
April 12 submission not only elaborates on that objection but
also makes many new objections in a broad-based attack on the
Plan. 20

The Silver Point presentation does not come to grips

with the detailed explanations of the Plan provided by Class
Counsel and its experts.

Nor does it provide any proposal for

adjustments to the Plan that would make it more complete,
reliable, or fair.
The trader upon which MF Global relies in its April 12
submission acknowledges that the “total number of packaged
trades relative to all covered trades in the database may be
small.” He argues nonetheless those trades could result in a
material misallocation of the Settlement Fund.
19

The April 12 Silver Point submission is accompanied by
declarations from a Silver Point investment analyst and a former
Citigroup fixed income credit trader. Among the new Silver
Point objections are that the Plan applies round tenor spreads
to non-round tenor CDS. A tenor is the duration of coverage in
which a CDS is active and Silver Point admits that most CDS
trades are done on round-tenor positions. Silver Point also
objects that single-name rolls are not accounted for in the
Plan, and that the Plan must be undercounting the number of
index rolls and that their spread should be further reduced.
20

36

At the Fairness Hearing, Silver Point chose to make two
points in oral argument.

It asserted first that the DTCC

dataset was populated with incorrect Trade Dates.

Silver Point

believes that a large number of Trade Date errors that it
recently identified are associated with its assigning its rights
in a CDS to another trader, although it did not believe that the
errors affected the identification of its Covered Transactions
or the calculation of its damages.

It speculated that such

error might overcompensate others in the Class by failing to
identify a large number of index rolls.

Second, Silver Point

chose to emphasize that the Plan should use a wider spread for
non-round tenors than the more liquid and therefore cheaper
round tenors.

Silver Point acknowledges that little or no data

exists to identify the appropriate spread for non-round tenors
and it has not offered a feasible way to do so.

Neither of

these points were made in any timely objection.
Since Silver Point had not provided Class Counsel with any
data about incorrect Trade Dates, the Court invited Silver Point
to do so.

Silver Point submitted data to Class Counsel on April

18 and a suggestion that its experts evaluate using a Novation
Date instead of the Trade Date.

As explained in his April 22

submission, Dr. Unni determined that the transactions challenged
by Silver Point consist almost entirely of assignments.

Under

the Plan, index rolls do not include assignment transactions.
37

Even if the methodology for identifying index rolls were
expanded to include assignment transactions as suggested by
Silver Point, the pro rata share of the Settlement Fund
attributable to each Class member would remain largely
unchanged.

Indeed, Silver Point’s own spread inflation would

decrease slightly.

Silver Point’s suggestions during the

Fairness Hearing do not provide a reason to find that the Plan
should be altered.
Saba made an additional submission on April 13.

It

acknowledges that Class Counsel provided Saba with the data from
the model that was used to calculate Saba’s potential recovery,
but adds two new suggestions for altering the model in an effort
to identify more packaged trades. 21

These new suggestions would

require a massive reworking of the entire Plan, would
substantially delay any distribution, would cause an uproar from
other Class members, and reflect a flawed understanding of the
DTCC data.
Anchorage filed a brief letter on April 14 maintaining its
objection to the Plan, but not addressing any of the analysis of

Saba now asserts that “many trades” are done on assignment,
and therefore the entire model should be reworked using the DTCC
data field reflecting Transferee Name. It also suggests that
the model should have used the DTCC data field for Payment Date
instead of the Trade Date to obtain “an indication” of which
trades are components of an arbitrage.
21

38

that objection in the April 1 filings by Class Counsel. 22

For

the reasons explained in this Opinion, at the Fairness Hearing,
and in Class Counsel’s submissions, its single remaining
objection does not require any change to the Plan.
There is one new request by an objector that deserves
discussion, even though it is untimely.

Silver Point now

requests that it be given access to the entire database and an
opportunity to work to try to improve the Plan.
to no legal authority to support this request.

It has pointed
In January,

Silver Point was given detailed information showing how the
Plan’s model applied to 6,400 of Silver Point’s own
transactions.

It has not shown that additional access to its

competitors’ trading data is necessary for it to understand how
the Plan works, how the Plan’s implementation will impact it, or
how the Plan’s design might be improved.
There are several reasons to deny Silver Point’s April 12
request.

Given the access it has already had to the plaintiffs’

experts and to the mechanics underlying the Plan, there is no
reason to find that either more time or more data will permit
Silver Point to develop for the first time a meritorious
suggestion for improving the Plan.

Moreover, giving Silver

Point the access it requests risks substantial injury to other
In this letter, Anchorage withdrew its objection to the
omission of some of its CDS transactions from the list of
Covered Transactions.
22

39

Class members if its competitors’ data is used improperly.
Finally, Silver Point’s request would substantially delay the
distribution of the Settlement Funds to the Class.
In sum, Class Counsel were responsive to each of the issues
raised by the objectors and to questions posed by all Class
members.

Class Counsel spoke with the objectors frequently and

let the objectors speak directly to the expert consultants
retained by the Class.

Class counsel also, at considerable

expense, asked their experts to perform analyses of the dataset
to respond to the objectors’ proposals.

None of that work,

which is reported in detail in Dr. Unni’s submissions of April
1, 14, and 22, suggests that there is a reliable way to
correctly identify any of the proposed packaged trades to which
one or more of the objectors contends a discounted spread should
be applied, or that it would materially improve the fairness of
the distribution to do so.

As significantly, the objectors have

not presented a model that would improve the Plan.

Nor have

they provided a reliable basis to find that the use of the
Plan’s current model treats any particular Class member or group
of Class members unfairly.
2. Overcompensation of Categories of Class Members
MF Global and Silver Point complain that the Plan treats
all transactions and therefore all traders equally when, in
fact, the defendants treated categories of traders differently.
40

While these two objectors contend that the Dealer Defendants
offered certain classes of traders tighter spreads, they
disagree as to whom the Dealer Defendants discriminated against.
MF Global contends that the Dealer Defendants “generally”
treated Class members differently depending on whether they
viewed the account as a “fast” money versus a “real” money
account.

According to MF Global, the Dealer Defendants offered

wider bid/ask spreads to potential competitors, and active or
speculative traders (that is, “fast” money), but tighter spreads
to the remaining 75% of the Class members (“real” money).

MF

Global opines that “real” money accounts enjoyed an
approximately 25% lower bid/ask spread “on average” and that
this is correctly captured by the Plan’s calculation of a
trading day’s average spread, which is built upon the narrowest
observed spread each hour.

It suggests that those Class members

who can demonstrate that they were only offered the opportunity
to trade with the Dealer Defendants “at consistently” wider
bid/ask spreads “should be able to recover damages based on
applying the bid/ask spread inflation to the actual spreads at
which they entered into [a] Covered Transaction.”
In contrast, Silver Point believes that the Dealer
Defendants offered discounted bid/ask spreads to their “most
active” clients, and discriminated against smaller traders.

It

does not make any proposal for how to identify the disadvantaged
41

or advantaged group or for the size and system of applying any
adjustment.
The objectors have not shown that adjustments should be
made based on the identity of the buyer.

As reflected in

empirical studies, bid/ask spreads in the CDS market are driven
by the nature of the particular instrument being traded and
market conditions more generally.

Specifically, it is driven by

the types of product (e.g., whether an index or single-name
CDS), the terms of the CDS contract at issue, the company or
companies to which the product applies, and market conditions
more generally.

The Plan is so specific to each CDS contract

and the prevailing spread for that product that the model
properly accounts for each of the major forces that should be
taken into account here.
It is noteworthy that in discussing discrimination against
classes of traders, the objectors disagree as to who precisely
was advantaged and disadvantaged in their negotiations with the
Dealer Defendants.

In addition, they have not pointed to

empirical research supporting their premise that a buyer’s
identity had any effect on the spreads.

Nor have they presented

any fair and efficient process for identifying which traders
belong within an advantaged or disadvantaged class.

Despite

these limitations, Class Counsel took the objection seriously.
Dr. Unni did an analysis of some of MF Global’s and Silver
42

Point’s most heavily traded CDS products during 2010 and 2011
and found no unfavorable bias against them or evidence of
systematic bias in the market.

These objections, which these

two objectors have now essentially abandoned, provide no ground
for rejecting or revising the Plan.
3. Uniform Compression Rate After Dodd-Frank Reforms
In its April 12 submission, Silver Point argues for the
first time that the Plan’s 20% Compression Rate should not be
applied across the entire Class period.

Silver Point argues

that reforms in the Dodd-Frank Act led to greater transparency
and dissemination of information in the CDS market.

These

reforms went into effect on December 31, 2012, and Silver Point
contends that some unidentified but different compression rate
should be applied after that date.

Silver Point and Class

Counsel presented oral argument on this issue at the Fairness
Hearing. 23
This objection does not require a change to the Plan of
Distribution.

As Class Counsel argued during the Fairness

Hearing, the CDS spreads themselves are the most effective
barometer of market efficiency.

To the extent that spreads

tightened generally after the implementation of the Dodd-Frank
Act, then the 20% Compression Rate will be applied to that
An Order of April 14 advised the parties that the Court wished
for this issue to be addressed at the Fairness Hearing.
23

43

narrower set of spreads.

Because the CDS market is so complex,

with the multiple factors described above affecting the movement
of bid/ask spreads, any attempt to tinker with the Compression
Rate is an exercise in pure speculation.

Applying different

Compression Rates to two different periods would ultimately be
arbitrary and less data-driven than the Plan’s approach.
B.

The Scope of the Release

Silver Point and MF Global both make objections related to
the scope of the Release.

MF Global argues that its claims

arising from the defendants’ efforts to prevent MF Global from
launching its own clearing and market-making business may be
barred by the scope of the Release.

Silver Point objects to the

release of any claims against the defendants “based on postSeptember 2015 trades.”
Parties may “reach broad settlement agreements encompassing
claims not presented in the complaint in order to achieve
comprehensive settlement of class actions, particularly when a
defendant’s ability to limit his future liability is an
important factor in his willingness to settle.”

In re Literary

Works in Elec. Databases Copyright Litig., 654 F.3d 242, 247-48
(2d Cir. 2011).

Accordingly, “class action releases may include

claims not presented and even those which could not have been
presented as long as the released conduct arises out of the
‘identical factual predicate’ as the settled conduct.”
44

In re

Am. Exp. Fin. Advisors Sec. Litig., 672 F.3d 113, 135 (2d Cir.
2011).

The determination of whether a claim pleaded in a

separate lawsuit is predicated on sufficiently similar facts as
the class action claim to be barred by a class action settlement
release “is inherently an individualized, fact-specific one.”
In re WorldCom, Inc., 388 F. Supp. 2d at 342 n.36.
The scope of a release is also limited by the adequacy of
representation doctrine.

“[A]dequate representation of a

particular claim is determined by the alignment of interests of
class members, not proof of vigorous pursuit of that claim.”
Wal–Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 113 (2d
Cir. 2005).

Because a settlement may bar future claims, “it is

essential . . . that there be adequate notice of the effect of
the release and compensation for released claims.”

In re

WorldCom, Inc. Sec. Litig., No. 02cv3288 (DLC), 2004 WL 2591402,
at *12 (S.D.N.Y. Nov. 12, 2004).
The Court has examined the Release with care.

It is

precise, reasonable, and appropriate to the circumstances of
this case.

Class members were given adequate notice of the

terms of the Release on January 11, 2016, and were in a position
to make an informed decision to opt out by February 29 if they
were unhappy with the breadth or effect of the Release on any
lawsuit they were contemplating.

45

Beyond these observations, it is premature to rule on
whether any claim that might be brought in the future by some
party would or would not be barred by the terms of the Release.
If another lawsuit is brought and an application is made to this
Court to enforce the Release, the application will be considered
at that time.
C.

Appealability of Claims Administrator Determinations

Several of the objectors had initially objected that the
Settlement website failed to include some of their Covered
Transactions.

There is a process in place for Class members to

bring additional trades to the attention of the Claims
Administrator.

Silver Point had complained that it has no

appeal right should the Claims Administrator reject their
proposed CDS transactions.

Through an Order issued on April 18,

it is now clear that any Class member has a right to appeal an
adverse determination of the Claims Administrator to this Court.
This includes a determination of the Claims Administrator
regarding additional Covered Transactions.
III. Attorneys’ Fees, Costs, and Incentive Awards
Class Counsel also sought approval for an award of
$253,758,000 in attorneys’ fees, $10,181,190.76 in expenses, and
incentive awards of $200,000 and $193,700 for Class
representatives LACERA and Salix, respectively.
objected to those applications.
46

No Class member

A.

Attorneys’ Fees

“Attorneys whose work created a common fund for the benefit
of a group of plaintiffs” may receive “reasonable” attorneys’
fees from the fund.

Victor v. Argent Classic Convertible

Arbitrage Fund L.P., 623 F.3d 82, 86 (2d Cir. 2010).

Courts

“may award attorneys’ fees in common fund cases under either the
‘lodestar’ method or the ‘percentage of the fund’ method,”
although “the trend in this Circuit is toward the percentage
method.”

McDaniel v. Cty. of Schenectady, 595 F.3d 411, 417 (2d

Cir. 2010) (citation omitted).

The six Goldberger factors “are

applicable to the court’s reasonableness determination whether a
percentage-of-fund or lodestar approach is used.”

Id. at 423.

They are:
(1) the time and labor expended by counsel; (2) the
magnitude and complexities of the litigation; (3)
the risk of the litigation . . . ; (4) the quality
of representation; (5) the requested fee in relation
to the settlement; and (6) public policy
considerations.
In re World Trade Ctr. Disaster Site Litig., 754 F.3d 114, 126
(2d Cir. 2014) (quoting Goldberger v. Integrated Resources,
Inc., 209 F.3d 43, 50 (2d Cir. 2000)).
Under the Private Securities Litigation Reform Act, there
is a well-recognized rebuttable “presumption of correctness”
given to the terms of an ex ante fee agreement between class
counsel and lead plaintiff.

See Flanagan, Lieberman, Hoffman &

47

Swaim v. Ohio Pub. Employees Ret. Sys., 814 F.3d 652, 659 (2d
Cir. 2016); see also In re Cendant Corp. Litig., 264 F.3d 201,
282 (3d Cir. 2001).

But, the district court “must be mindful

that it must act as a guardian of the rights of absent class
members in assessing whether a presumption of correctness has
been properly refuted and then, if indeed it has, determining on
its own the appropriate fee allocation.”
659 (citation omitted).

Flanagan, 814 F.3d at

There is no reason not to apply such a

rebuttable presumption to the examination of an ex ante fee
arrangement in a common fund antitrust case, at least where it
has been negotiated with a sophisticated benefits fund with
fiduciary obligations to its members and where that fund has a
sizable stake in the litigation.
The requested attorneys’ fees are calculated directly from
the retainer agreement that Lead Plaintiff LACERA and Pearson
Simon, its original counsel, negotiated in advance of LACERA
joining this litigation.

LACERA, with investment assets of over

$48 billion, is one of the largest county retirement systems in
the United States.

At the Fairness Hearing, LACERA’s Senior

Staff Counsel, who was responsible for negotiating this
agreement, obtaining board approval of it, and supervising the
litigation, explained the process for arriving at the agreement.
In response to LACERA’s request for representation proposals, it
received sixty-seven separate bids from counsel.
48

LACERA

evaluated those bids, considering both their terms and the
quality of counsel.

It then selected and negotiated a fee

agreement with Pearson Simon.

The agreement was reviewed and

approved by LACERA’s board.
The retainer agreement between LACERA and Pearson Simon
provides for the following fee structure in the event the
litigation is settled during the discovery period. 24
Portion of Settlement
$0 - $200 million

Percentage Applied to
that Portion
18%

>$200 - $400 million

17%

>$400 - $600 million

15%

>$600 - $800 million

13%

>$800 million

12%

The fee requested by Class Counsel is derived from this
agreement.

LACERA fully supports the fees requested by Class

Counsel, and as noted, no Class member has objected.
The $253,758,000 in attorneys’ fees which Class Counsel has
sought is approximately 13.61% of the monetary value of the
Settlement Fund.

The loadstar calculation submitted by Class

Counsel totals over $41 million as of April 1, reflecting over

There are three other columns in the grid with different fee
percentages. One column applies to the period before discovery,
and the other two apply to periods after discovery.
24

49

93,000 hours of work by Class Counsel.

This amount is

equivalent to a loadstar multiple of just over 6.
While LACERA does not have the largest stake in the
Settlement Fund, it has a very substantial one. 25

This

substantial stake gave LACERA a strong incentive to negotiate
the retainer agreement with care when selecting counsel, as well
as a strong incentive to examine the Settlement and the
performance of Class Counsel with care.
The Goldberger factors weigh in favor of approval of Class
Counsel’s fee request.

Although the requested fee is enormous,

as just described, Class Counsel poured enormous resources into
the litigation of this action, all on a contingency basis.

It

invested over 93,000 hours of time in this litigation, most of
it over less than one year.

The magnitude and complexity of

this case have already been described, as has the risk of
litigation.

The quality of work performed on behalf of the

Class by its counsel has been superb, as evidenced by Class
Counsel’s efficient and aggressive discovery work, the lack of
objections to the large fee request, 26 and the highly favorable
At the time Pearson Simon applied to be appointed Class
Counsel, LACERA reported that it had purchased and sold over
$2.8 billion of CDS between January 1, 2008, and the filing of
its initial complaint on October 28, 2013.
26 The Notice informed Class members that Class Counsel’s fees
would not “exceed fourteen percent of the Settlement Fund’s
total value,” which it has not.
25

50

outcome achieved for the Class in record-setting time.

This

success was obtained against a backdrop of government
investigations that produced no charges against the Dealer
Defendants.
The fee grid which LACERA negotiated with its counsel is
generous. 27

But, there is no reason to doubt that LACERA

negotiated the best fee structure that it could given the
difficulties it anticipated facing in this litigation and its
desire to have excellent representation if it were to pursue a
complex antitrust claim against many of the largest financial
institutions in the nation.

Indeed, the 13.61% in fees

requested by Class Counsel is consistent with fees awarded in
other large antitrust cases.

See Brian T. Fitzpatrick, An

Empirical Study of Class Action Settlements and Their Fee
Awards, 7 J. Empirical Legal Stud. 811, 831 tbl. 7, 839 tbl. 11
(2010).

In this context, then, the requested fee is reasonable

in comparison to the size of the recovery for the Class.
Finally, there are significant public policy considerations
that weigh in favor of approval.

It is important to encourage

top-tier litigators to pursue challenging antitrust cases such
Compare the less generous litigation fee grid negotiated in
the WorldCom, Inc. securities litigation, which resulted in an
even larger recovery for its class and a larger fee award to
class counsel. In re WorldCom, Inc., 388 F. Supp. 2d at 353-60;
see also Retainer Agreement, WorldCom Sec. Litig.,
http://www.worldcomlitigation.com/courtdox/retainer.pdf (July
30, 2003), at 2.
27

51

as this one.

Our antitrust laws address issues that go to the

heart of our economy.

Our economic health, and indeed our

stability as a nation, depend upon adherence to the rule of law
and our citizenry’s trust in the fairness and transparency of
our marketplace.

See F.T.C. v. Phoebe Putney Health Sys., Inc.,

133 S. Ct. 1003, 1010 (2013) (noting the “fundamental national
values of free enterprise and economic competition that are
embodied in the federal antitrust laws”).
B.

Costs and Expenses

Class Counsel also sought reimbursement for over $10
million in expenses incurred.

Most of these expenses were

incurred in connection with retention of experts.

The expert

work was essential to the litigation and invaluable to the
Class.

There were no objections to this application and it was

approved.
C.

Incentive Fees

Class Counsel also sought an incentive award of $200,000
and $193,700 for Class representatives LACERA and Salix,
respectively.

The Salix incentive award request is brought on

behalf of three individuals who have contributed significantly
to Class Counsel’s efforts in this litigation. 28

These requests

have been denied.
Salix is an assignee of the claims of the FrontPoint Funds,
which wound down its business in roughly 2009.
28

52

While class representatives should be compensated for out
of pocket expenses and lost wages, incentive payments should not
ordinarily be given.

They “raise grave problems of collusion.”

Reed v. Continental Guest Servs. Corp., No. 10cv5642 (DLC), 2011
WL 1311886, at *4 (S.D.N.Y. Apr. 4, 2011).

After all,

representative plaintiffs “undertake to represent not only
themselves, but all members of the class, in a fiduciary
capacity, and are obligated to do so fairly and adequately, and
with due regard for the rights of those class members not
present to negotiate for themselves.”

Id. (citation omitted).

When the settlement provides for incentive awards to the named
plaintiffs not shared by the other class members, “a serious
question arises as to whether the interests of the class have
been relegated to the back seat.”

Id. (citation omitted).

While there is no basis to find that Class representatives here
have been tempted to receive high incentive awards in exchange
for accepting suboptimal settlements for absent Class members,
such an award would nonetheless inappropriately reward the
representative Class members over absent ones.
IV.

Rule 7 Bond Request
Class Counsel has stated that it will likely request that

the Court require any objector who files an appeal from this
Settlement to post a bond under Rule 7, Fed. R. App. P.

Should

such a request be made, the parties will be given an opportunity
53

to address the following standard and the appropriateness of any
bond.
Rule 7 provides that “the district court may require an
appellant to file a bond or provide other security in any form
and amount necessary to ensure payment of costs on appeal.”

A

Rule 7 bond is prospective in its focus and “relates to the
potential expenses of litigating an appeal.”

Adsani v. Miller,

139 F.3d 67, 70 n.2 (2d Cir. 1998) (citation omitted).

The term

“costs” in Rule 7 refers to “all costs properly awardable under
the relevant substantive statute or other authority.

In other

words, all costs properly awardable in an action are to be
considered within the scope of [the] Rule.”
omitted).

Id. at 72 (citation

The Adsani court explicitly rejected a definition of

costs that would limit it to those costs enumerated in Rule 39,
Fed. R. App. P.

Id. at 74–75.

As explained in In re Gen. Elec. Co. Sec. Litig., 998 F.
Supp. 2d 145 (S.D.N.Y. 2014), Rule 38 of the Federal Rules of
Appellate Procedure allows the Court of Appeals to award damages
to appellees who are confronted with frivolous appeals.
151.

Id. at

An appeal is frivolous for the purpose of Rule 38 when it

is “totally lacking in merit, framed with no relevant supporting
law, conclusory in nature, and utterly unsupported by the
evidence.”

Id. at 153 (citation omitted).

Accordingly, “when

an objector lodges a frivolous appeal to a class action
54

settlement, a district court may impose a Rule 7 Bond in the
amount of the additional administrative expenses that are
reasonably anticipated from the pendency of the appeal.”

Id.

A

Rule 7 bond may also include attorneys’ fees where the district
court concludes that the court of appeals might award attorneys’
fees as costs under Fed. R. App. P. 38 because the appeal is
frivolous. 29

Sckolnick v. Harlow, 820 F.2d 13, 15 (1st Cir.

1987); see also In re 60 E. 80th St. Equities, Inc., 218 F.3d
109, 118-19 (2d Cir. 2000) (“Rule 38 sanctions may include the
granting of reasonable attorneys’ fees to the party forced to
defend the frivolous appeal.”).
In setting the Rule 7 Bond, “a district court must not
create an impermissible barrier to appeal.”
Co. Sec. Litig., 998 F. Supp. 2d at 151.

In re Gen. Elec.

As such, there are

at least three factors that are relevant in
assessing whether a Rule 7 Bond should be imposed.
They are: (1) the appellant’s financial ability to
post the bond; (2) whether the appeal is frivolous;
and (3) whether the appellant has engaged in any bad
faith or vexatious conduct. Of these, the first two
are of the greatest importance.
Id. at 153 (citing Adsani, 139 F.3d at 76-79).

As the Court of

Appeals explained in Adsani, the “purpose of Rule 7 appears to
Since the Clayton Act provides for recovery of a reasonable
attorneys’ fee only against a losing defendant, 15 U.S.C.
§ 15(a), the Rule 7 bond in an antitrust action may include
Clayton Act fees only where the appeal is filed by a losing
defendant. See Azizian v. Federated Dep’t Stores, Inc., 499
F.3d 950, 955-58 (9th Cir. 2007); Blessing v. Sirius XM Radio
Inc., 2011 WL 5873383, at *1 (S.D.N.Y. Nov. 22, 2011).
29

55

be to protect the rights of appellees brought into appeals
courts.”

Adsani, 139 F.3d at 75.

In setting the amount of a

Rule 7 Bond, a district court may “prejudge[ ]” the case’s
chances on appeal.

Id. at 79.

It is neither “bizarre [n]or

anomalous for the amount of the bond to track the amount the
appellee stands to have reimbursed.”

Id. at 75.

CONCLUSION
For the reasons stated herein and during the Fairness
Hearing, Class Counsel’s petition for approval of the Settlement
and Plan of Distribution was granted, with the Court retaining
jurisdiction to hear any disputes arising from the claims
administration process.

Class Counsel’s application for

attorneys’ fees and expenses for the Settlement was also
granted.

Class Counsel’s application for incentive awards for

Class representatives LACERA and Salix was denied.
SO ORDERED:
Dated:

New York, New York
April 25, 2016
________________________________
DENISE COTE
United States District Judge

56