Price fixing claims brought by purchasers of aluminum against several major banks and aluminum warehouses were recently allowed to proceed to discovery following the denial of motions to dismiss filed by the defendants. This is of major importance to all aluminum purchasers because the alleged price fixing scheme may have caused them to suffer significant damages both in the United States and the rest of the world. The decision also sets forth important pleading standards for price fixing claims and claims involving collusion to inflate or manipulate a pricing benchmark, and may have wider implications for purchasers of any metals that are stored in London Metal Exchange (“LME”) warehouses and that are bought on the basis of an LME price. This decision is an important development in potential claims against LME warehouse owners, which at the time were mainly major international investment banks.
Cases alleging price fixing of aluminum are consolidated in the multidistrict litigation In re Aluminum Warehousing Antitrust Litigation, No. 13-md-2481 (KBF), in the Southern District of New York. The defendants are Goldman Sachs, JPMorgan, and Glencore, and bank-owned aluminum warehouses certified by the LME. The plaintiffs allege that the defendants conspired to increase aluminum stockpiles and load-out delays in order to inflate the Platts Midwest Premium, a key component of aluminum contracts, and thereby drive up aluminum prices. Following the dismissal of plaintiffs’ claims last year and the filing of amended complaints, the Court has decided that the newly pleaded allegations of aluminum price fixing are viable and discovery will proceed immediately.
The Alleged Conspiracy To Fix Aluminum Prices
The defendants consist of (1) banks with commodities units that trade in financial instruments, called “warrants,” whose prices are tied to the price of physical aluminum; and (2) LME warehouses that store aluminum and are owned by the banks. The banks and warehouses allegedly conspired to increase aluminum prices and, in doing so, increase the banks’ commodities trading profits and the warehouses’ storage revenues. This practice could equally apply to other metals traded on the LME, such as lead, zinc, cobalt, molybdenum, nickel, steel billet, tin, and copper.
The price of aluminum sold to commercial purchasers has two standard components: the LME price; and a regional premium, such as the Platts Midwest Premium. The LME price for aluminum is based on the value of LME contracts for aluminum bought and sold from LME warehouses. The LME price is a global price that does not include delivery costs, which are covered through a regional premium. The regional premiums reflect current offers for aluminum immediately available for delivery from aluminum holders, such as LME warehouses.
Most aluminum is purchased by industrial users, including transportation, container, and construction companies. Aluminum purchased in this way typically is not stored in LME warehouses, but its pricing is determined by the LME price plus the regional premium. Aluminum prices therefore should reflect the supply and demand for aluminum in LME warehouses, and the immediate availability of aluminum for delivery out of the warehouses. This assumes that the LME warehouses represent a genuine seller of last resort for physical purchasers of aluminum and there is not manipulation of the benchmark.
The plaintiffs allege that from 1989 to 2008-2009, LME warehouses provided price-neutral storage of last resort for commercial aluminum buyers, and the LME price was practically equal to the price of physical aluminum. The aluminum supply in LME warehouses began to soar during the recession of 2008-2009. But even though supplies were increasing, contrary to expectations, the Platts Midwest Premium also increased. The plaintiffs allege that this was the result of the defendants’ conspiracy.
The conspiracy allegedly came together in 2010 and 2011. First, in 2010, the three defendant banks each acquired LME warehouses: Goldman Sachs acquired Metro, JPMorgan acquired Henry Bath, and Glencore acquired Pacorini. The banks and warehouses then allegedly conspired to maintain aluminum stockpiles in LME warehouses at unusually high levels, by delaying load-outs of aluminum from LME warehouses, increasing the amount of aluminum stored at LME warehouses, and shuffling aluminum between LME warehouses so as to meet daily load-out requirements but with no legitimate business purpose of actually delivering aluminum. The banks allegedly further assisted in the stockpiling by obtaining large numbers of aluminum warrants, cancelling warrants for the purpose of delaying aluminum load-outs, and pressuring the LME not to alter its load-out requirements.
According to the Court, the newly amended complaints “have now added sufficient factual detail” and “sharpened their story and substantive claims.” The added factual detail includes “a number of emails and documents” based on which the plaintiffs allege that “the conspiracy relied on give-and-take between the trading arms of several financial institutions and their affiliated warehouse companies in different parts of the country.” The plaintiffs allege, for example, that Metro “discussed an arrangement to ‘lock’ Mobile and Long Beach with JPMorgan, with the anticipated result of higher premiums,” and that JPMorgan “stored aluminum with Metro when to do so was contrary to its economic self-interest.” In addition, “Metro is alleged to have discussed a large warrant cancellation with JPMorgan and Henry Bath,” and “Metro discussed with Goldman personnel giving all or substantially all of its aluminum stored in Mobile to JPMorgan.”
Pleading Standing And Collusion Across Markets Related To Aluminum
The Court first examined the plaintiff aluminum purchasers’ standing to sue the defendant banks and warehouses for price fixing physical aluminum. Antitrust standing requires plaintiffs to allege injury in fact, antitrust injury, and that they are efficient enforcers of the antitrust laws. The Court held that the plaintiffs sufficiently alleged injury because they allege that they paid prices for aluminum that were higher than they would have paid in the absence of the alleged collusion.
Turning to whether the plaintiffs were suitable to enforce the alleged antitrust violation, the Court noted that the plaintiffs are purchasers of physical aluminum sold by aluminum producers, and that they neither directly consume the defendant banks’ trading products, nor do they directly purchase the defendant warehouses’ services or products. In this context, according to the Court, the question of standing turns on whether the injury the plaintiffs allegedly suffered was “inextricably intertwined with the injury the conspirators sought to inflict.” The Court held that the plaintiffs satisfied this standard because (1) they bought aluminum directly from a producer, and the contracts between the plaintiffs and the producers tied the contract prices to the Platts Midwest Premium that the defendants allegedly conspired to fix; (2) no buyer of aluminum other than the defendants is more direct than the plaintiffs, as the plaintiffs are the first parties to buy aluminum at a price that incorporates, and is affected by increases in, the Platts Midwest Premium; and (3) plaintiffs’ alleged damages are non-speculative, because they are defined by the amount by which the Platts Midwest Premium was inflated.
The Court also examined plaintiffs’ allegations of concerted action among affiliated entities – the banks and the bank-owned warehouses. While the Court observed that “each financial-firm co-conspirator cannot conspire with its agents or with the warehousing entities with which they are affiliated,” the Court held that the plaintiffs “have alleged sufficient facts to support an agreement between separate entities.” This agreement allegedly consisted of “a web of alleged agreements or understandings” between the bank and warehouse pairs Goldman Sachs/Metro, JPMorgan/Henry Bath, and Glencore/Pacorini.
The Court further scrutinized the plaintiffs’ two defined markets: a primary aluminum market (the plaintiff buyers), and a market for LME warehouse services (the defendant sellers). In response to the defendants’ argument that the markets were inadequately defined, the Court stated that these arguments were “better suited to a motion for summary judgment or class certification.” The Court held that the plaintiffs “have, in effect, checked the minimum boxes necessary to meet the required standard at the motion to dismiss stage,” by describing the markets and alleging that “the market for LME-certified warehouse services for aluminum (including, inter alia, delays in load-out services) necessarily caused dysfunction in the price setting of aluminum.”
Finally, the Court reviewed the plaintiffs’ conspiracy allegations and held that they were plausible and sufficient to state a claim. These allegations consisted of “a number of emails and documents from which [plaintiffs] assert support an inference of an existing conspiracy,” including “documents which [plaintiffs] assert show that Metro was at the heart of the alleged conspiracy and to have been more active than any other participant,” as well as “documents [plaintiffs] argue support an inference that Metro understood and intended that load-out delays would result in an increase in the Midwest Premium,” and “that JPMorgan’s commodities unit understood that as well.”
The Court narrowed the case in some respects, by dismissing certain foreign and corporate parent entities, the Sherman Act Section 2 claims, other theories proposed by the plaintiffs, and certain state law claims. But the Court allowed the plaintiffs’ core Section 1 price fixing theory to proceed, in addition to state law antitrust and unjust enrichment claims, against the primary bank and warehouse defendants. The Court ordered discovery to “proceed immediately.”
Implications For Aluminum Purchasers And Beyond
This decision is of potentially great significance for purchasers of aluminum sold in the United States and other parts of the world. Any aluminum purchaser whose prices were affected by the defendants’ alleged conspiracy to inflate the Platts Midwest Premium and increase aluminum prices may have considerable potential recoveries. With the Court deciding that the price fixing claims will move forward and discovery shall proceed immediately, aluminum purchasers should evaluate their potential claims now and ensure that their rights are protected in the litigation. While the decision may create pressure on some defendants to settle, for those defendants that do not settle, the case will proceed to a motion for class certification in the class action case, and likely motions for summary judgment by the defendants and possibly trial in both cases.
Any unlawful conduct by LME warehouses and any inflation of LME benchmark prices will likely have been global conduct affecting all LME warehouses. The English courts are the preferred place in which to litigate these benchmark manipulation claims in Europe, not only because of the quality of the English courts, but also the ability to get disclosure from defendants and the risks associated with the loser pays costs regime. England will also have an opt-out collective action regime from (likely) October 2015, following Royal assent being given to the Consumer Rights Act 2015, which will allow claims in respect of LME benchmark manipulation to be brought by a class representative.
More broadly, the decision is significant to any litigant or potential litigant pleading antitrust claims, particularly claims involving price fixing or manipulation of an LME benchmark, as the decision sets forth important pleading guidelines for alleging standing, relevant markets, and collusion in these types of cases. All purchases of LME traded metals (which include aluminum, lead, zinc, cobalt, molybdenum, nickel, steel billet, tin, and copper) should be considering whether they have suffered loss as a result of anticompetitive conduct by warehouse owners – the size of the claims could be very significant.
For further information, please contact:
51 Madison Ave | New York, NY 10010 United States
Phone: +1 212-849-7000
One Fleet Place | London EC4M 7RA |
Phone: +44 29 7653 2090