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IN RE STOCK EXCHANGES OPTIONS TRADING ANTITRUST LITIGATION

July 8, 2005.

In Re: STOCK EXCHANGES OPTIONS TRADING ANTITRUST LITIGATION. This Document Relates To: ALL ACTIONS.


The opinion of the court was delivered by: RICHARD CASEY, District Judge

MEMORANDUM & ORDER

Plaintiffs brought these consolidated putative class actions against five national stock exchanges and other defendants alleging violations of the antitrust laws regarding the listing and trading of equity options. Plaintiffs have submitted three settlement agreements for the Court's preliminary approval pursuant to Federal Rule of Civil Procedure 23(e). Some of the defendants have raised objections to such approval. For the following reasons, Plaintiffs' motion for preliminary approval of the settlement agreements is DENIED IN PART and GRANTED IN PART.

I. BACKGROUND

  A. History of the Class Actions*fn1

  Plaintiffs, a putative class of equity-options purchasers, brought more than twenty class actions in district courts throughout the country alleging that the defendants conspired to confine the listing and trading of certain options to only one stock exchange at a time, in violation of section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. Defendants in these suits originally were a group of stock exchanges — the American Stock Exchange ("AMEX"); the Chicago Board Options Exchange, Inc. ("CBOE"); the New York Stock Exchange ("NYSE"); the Pacific Stock Exchange, Inc. ("PCX"); and the Philadelphia Stock Exchange, Inc. ("PHLX") — and a group of twenty-eight market makers and options-trading specialists ("Market-Maker Defendants"). The Judicial Panel on Multidistrict Litigation transferred all the actions to this Court for consolidated pretrial proceedings, and Plaintiffs filed a consolidated complaint.

  In January 2000, Defendants moved to dismiss the consolidated complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that Congress had impliedly repealed the antitrust laws with respect to the listing and trading of options by giving the Securities and Exchange Commission the power to regulate the area in the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. The Court converted the motions to motions for summary judgment and so notified the parties, providing time for additional briefing. While the motions were pending, Plaintiffs entered into three separate settlement agreements with PCX, PHLX, and a group of defendants including AMEX, CBOE, and eighteen of the Market-Maker Defendants, which were submitted for the Court's approval pursuant to Federal Rule of Civil Procedure 23(e). The Court deferred ruling on the motions for preliminary approval of the three settlement agreements until after it had ruled on the converted motions for summary judgment. On February 14, 2001, the Court granted the motions for summary judgment on the ground of implied repeal of the antitrust laws. See In re Stock Exchs. Options Trading Antitrust Litig., MDL No. 1283, M-21-79 (RCC), 99 Civ. 962 (RCC), 2001 WL 128325 (S.D.N.Y. Feb. 15, 2001). The Court then entered a final judgment dismissing the consolidated complaint.

  In March 2001, Plaintiffs moved pursuant to Federal Rule of Civil Procedure 59(e), to amend the judgment so that it would not apply to those defendants that had entered into settlement agreements prior to the Court granting summary judgment, and moved for preliminary approval of the settlements. In a decision dated April 24, 2001, the Court denied the motion to amend the judgment and denied preliminary approval of the settlements, concluding that it lacked subject matter jurisdiction to approve the settlement agreements because, when the Court granted summary judgment in the defendants' favor, "there was no longer any cause of action over which the Court could exercise jurisdiction." In re Stock Exchs. Options Trading Antitrust Litig., 171 F. Supp. 2d 174, 178 (S.D.N.Y. 2001). The Court stated, "[P]laintiffs' motions for preliminary approval of their settlement agreements and to alter or amend the Court's judgment . . . are hereby denied." Id. at 179.

  Plaintiffs appealed the Court's summary-judgment decision and its decision that it lacked subject matter jurisdiction to approve the settlement agreements. The Second Circuit affirmed dismissal of the complaint, agreeing that the Sherman Act had been impliedly repealed with regard to the listing and trading of equity options. See In re Stock Exchs. Options Trading Antitrust Litig., 317 F.3d 134, 148 (2d Cir. 2003). However, the Second Circuit reversed this Court's determination that it lacked subject matter jurisdiction to approve the settlements, holding:
Since the parties sought approval of their settlement agreements before the court had adjudicated the immunity defense [conveyed by implied repeal of the antitrust laws], and since such a defense may be waived, the court had jurisdiction to entertain and rule on the motions for approval of the proposed settlements. Having entered a final judgment without dealing with those pending motions, the court should have entertained them in conjunction with the subsequent motion to alter or amend the final judgment, and it should have granted the latter motion if it approved the proposed settlements.
Id. at 153. The Second Circuit also noted that LETCO, one of the Market-Maker Defendants, had raised the argument that the settlement agreement to which it was a party became void by its own terms upon this Court's denial of the motion to preliminarily approve it in April 2001. Id. The court stated, "We express no view as to the correctness of LETCO's contention. . . . That question may be considered by the district court on remand." Id.

  Plaintiffs once against seek preliminary approval of the settlement agreement with PCX ("PCX Settlement"); the agreement with PHLX ("PHLX Settlement"); and the agreement with AMEX, CBOE, and the Market-Maker Defendants, which Plaintiffs refer to as the "Global Settlement." Along with the agreements, Plaintiffs seek preliminary approval of a Proposed Plan of Distribution ("Distribution Plan") for the settlement payments ("Settlement Fund"), a Notice of Pendency of the class action ("Notice"), a Proof of Claim and Release form ("Proof of Claim"), a Summary Notice of the class action ("Summary Notice"), and an Order Preliminarily Approving the Proposed Settlement ("Preliminary-Approval Order"). Multiple defendants and one third-party intervenor have raised various objections to approval of the agreements and the other documents.

  B. Objections to the Global Settlement

  Some defendants and a third-party intervenor raise objections to approval of the Global Settlement. Market-Maker Defendants LETCO, Omega Options LLC ("Omega"), Cranmer & Cranmer, Inc. ("Cranmer"), Kalb Voorhis & Co. ("Kalb"), and AGS Specialist Partners ("AGS"), and third-party Susquehanna International Group, LLP ("Susquehanna") (collectively, "Objecting Market Makers") raise the argument that LETCO made on appeal.*fn2 They maintain that the Global Settlement was rendered void upon entry of this Court's April 2001 decision denying the motions for preliminary approval under a provision of the Global Settlement that states, "In the event . . . the Court denies the motion for preliminary or final approval of this Settlement Agreement or any material part of it . . . the settlement provided for by this Settlement Agreement shall be rescinded and be null and void. . . ." (Global Settlement ¶ 22, Ex. C to Compendium of Settlement Documents Supp. Pls.' Mot. Preliminary Approval of the Proposed Class Action Settlement ("Settlement Compendium").) The Objecting Market Makers therefore oppose preliminary approval of the Global Settlement and cross-move for an order that the payments they already made should be returned to them with interest under paragraph 23 of the Global Agreement: "In the event the settlement is terminated, rescinded, or is null and void for any reason, within five (5) business days of such an event the Settlement Fund . . ., including interest, shall be dispersed to such Settling Parties in proportion to their contributions. . . ." (Id. ¶ 23.)

  CBOE maintains that the Global Settlement cannot be approved because Plaintiffs breached the agreement when Plaintiffs' lead counsel commenced a suit in the Northern District of Illinois, Last Atlantis LLC v. Chicago Bd. Options Exch., Inc., No. 04 C 0397, asserting claims that purportedly fall within the scope of a release and covenant not to sue in the Global Agreement (see Global Agreement ¶ 25). CBOE contends that Plaintiffs have asserted that the release and covenant not to sue would be impermissible under National Super Spuds, Inc. v. New York Mercantile Exchange, Inc., 660 F.2d 9 (2d Cir. 1981), if given its plain meaning and therefore cannot be read as broadly as its terms. CBOE disagrees with Plaintiffs' purported interpretation of the release and covenant not to sue.*fn3 It is CBOE's position that the provision protects it from any potential claims that have any connection to the allegations in Plaintiffs' consolidated complaint. CBOE essentially asks the Court for a ruling on the scope of the release and covenant, and, if its meaning brings it into conflict with the Second Circuit's decision in Super Spuds, then requests that the Court deny preliminary approval of the settlement agreement. CBOE also argues that when Plaintiffs' lead counsel filed the Lost Atlantis suit in the Northern District of Illinois, Plaintiffs breached their covenant of good faith and fair dealing that is implied in the Global Settlement and a contractual provision that requires Plaintiffs to use their best efforts to effectuate the settlement.

  In addition, CBOE objects to (1) a provision of the Notice that would require it to post copies of the Summary Notice on its website with a link to a website created and maintained by Plaintiffs; (2) a provision of the Preliminary-Approval Order also requiring it to post a link on its website to Plaintiffs' website and a statement announcing the settlement; and (3) a provision of the Distribution Plan providing for a "Supplemental Notice Program" if a significant number of class members do not submit claim forms, and a method of distribution of excess funds after such supplemental notice. Finally, CBOE does not join the Objecting Market Makers' argument that the Global Settlement is void, but, like AMEX, contends that if the Court accepts this argument, the agreement should be rendered void as to CBOE as well.

  AMEX does not oppose preliminary approval of the Global Settlement, but states that should the Court determine the scope of the release and covenant not to sue is less extensive than the plain language provides, then AMEX would object to approval. AMEX also submits that if the Court sustains the objection of the Objecting Market Makers that the Global Agreement was rescinded upon this Court's denial of preliminary approval in April 2001, then that ruling should render the agreement void as to all settling defendants and not just the Objecting Market Makers. C. Objections to the PCX Settlement

  PCX argues that it has already paid all of the settlement funds that the PCX Settlement requires, and seeks an order from the Court to that effect. The PCX Settlement contains a provision that Plaintiffs and PCX agree entitles PCX to a 50% reduction in the amount that PCX must pay because the Court granted the motions for summary judgment. PCX has already made one payment under the agreement, of which Plaintiffs returned a portion. PCX argues that Plaintiffs should be ordered to recalculate the amount to be returned, as the amount returned was not a full 50% of the payment made. PCX also argues that the agreement does not require it to pay anything further. PCX also objects to the Notice and Preliminary-Approval Order provisions that would require it to post a copy of the Summary Notice and a link on its website to Plaintiffs' website, and to the provision of the Distribution Plan addressing excess funds in the Settlement Fund and the Supplemental Notice Program.

  D. Objections to the PHLX Settlement

  PHLX raises a number of objections to preliminary approval of its agreement with Plaintiffs. First, it joins in CBOE's request that the Court define the scope of the release and covenant not to sue in the Global Agreement, which is substantially the same as to the release and covenant in the PHLX Settlement. Second, PHLX seeks an equitable recoupment or set off regarding the payment it made under the PHLX Settlement based on Plaintiffs' failure to secure releases from the other settling defendants for any claims the other settling defendants might have against PHLX relating to the subject matter of these actions. Third, PHLX objects to the Notice and Preliminary-Approval Order because they do not require opting-out class members to provide sufficient information about themselves and their claims; PHLX seeks the addition of language requiring information and language in the Preliminary-Approval Order that requires Plaintiffs to comply with their obligations to the settling defendants to provide information about the opting-out class members. Fourth, PHLX maintains that it should get the benefit of any ruling that PCX need not make any additional payment under the PCX Settlement. Fifth, it requests additional language in the Proof of Claim and Release and the Notice to explain the scope of the release contained in the PHLX Settlement. Finally, PHLX claims that, if the Global Settlement is null and void, so too is the PHLX Settlement because the latter contains an identical clause to paragraph 22 of the Global Settlement.

  II. DISCUSSION

  A. Standard for Preliminary Approval of a ...


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