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In re North Sea Brent Crude Oil Futures Litigation

United States District Court, S.D. New York

June 8, 2017

In re NORTH SEA BRENT CRUDE OIL FUTURES LITIGATION This document applies to ALL CASES

          OPINION AND ORDER ON MOTIONS TO DISMISS

          ANDREW L. CARTER, JR., United States District Judge.

         A putative class of futures and derivatives traders ("Trader Plaintiffs") and a putative class of the owners of landholding and lease-holding interests in United States oil-producing property ("Landowner Plaintiff, " together with Trader Plaintiffs, "Plaintiffs") have asserted claims against a number of Brent crude oil producers, traders, and their selected affiliates. Plaintiffs allege that Defendants conspired to intentionally manipulate Brent crude oil prices and the prices of Brent crude oil futures and derivatives contracts traded on the New York Mercantile Exchange ("NYMEX") and the Intercontinental Exchange ("ICE Futures Europe") in violation of the Commodity Exchange Act, the Sherman Act, and the laws of various states. Defendants have moved to dismiss both Complaints on a number of theories. For the reasons, and to the extent set forth below, Defendants' motions are granted and the Complaints are dismissed.

         BACKGROUND

         I. Factual Background

         The following facts are taken from the allegations in Plaintiffs' Second Amended Complaints, which are presumed to be true for purposes of this motion to dismiss.

         Plaintiffs allege that the Defendants, who are producers, refiners, and traders of Brent crude oil, or entities affiliated with these producers, refiners, and traders, "monopolized the Brent Crude Oil market and entered into unlawful combinations, agreements, and conspiracies to fix f and restrain trade in, and intentionally manipulate Brent Crude Oil prices and the prices of Brent Crude Oil futures and derivatives contracts." ECF No. 308 (Traders' Second Amended Complaint ("Trader SAC")), at ¶ 2; see also Landowner ECF No. 96 (Landowner's Second Amended Complaint ("Landowner SAC")), at ¶ 3.[1]

         The Trader Plaintiffs are United States individuals and entities who trade Brent futures and derivatives contracts on NYMEX and ICE Futures Europe. Trader SAC ¶¶ 24-34. The Landowner Plaintiff is a Louisiana resident who is a "landowner and/or leaseholder" of oil-producing lands, as well as the owner of multiple royalty and working interests in oil leases in the State of Louisiana. Landowner SAC ¶ 10.

         A. Brent Crude Oil

         Brent crude oil is a variety of light, sweet crude oil pulled from the North Sea region of Europe. Trader SAC ¶ 4; Landowner SAC ¶ 30. Although Brent is one of the four fields from which crude oil is pulled in the North Sea (the others are Forties, Oseberg, and Ekoflsk), reference to "Brent crude oil" encompasses oil from all four fields. Trader SAC ¶¶ 55, 76; Landowner SAC ¶ 30. Brent crude oil serves as a benchmark for two-thirds of the world's internationally-traded crude oil supplies. Trader SAC ¶ 4; Landowner SAC ¶ 30.

         The Brent crude oil benchmarking function is facilitated by a number of price reporting agencies, including Platts, a London-based division of the New York-based McGraw Hill Financial. Trader SAC ¶ 4; Landowner SAC ¶ 64. The Brent crude oil physical market consists primarily of private ("over-the-counter") trades in cargoes of crude oil in the North Sea. Trader SAC ¶ 85; Landowner SAC ¶ 67. Because the trades are based on over-the-counter contracts, oil prices are not directly visible to the public; instead, Platts and other price-reporting agencies collect information on transactions from market participants and report them. Id.

         Platts reports prices for a variety of submarkets in the Brent crude oil market, but the "primary benchmark" for Brent crude oil is "Dated Brent, " physical cargoes of crude oil in the North Sea that have been assigned specific delivery dates. Trader SAC ¶¶ 88-89; Landowner SAC ¶¶ 69-70. To assess pricing for Dated Brent, Platts uses the so-called Market-On-Close ("MOC") methodology. Trader SAC ¶ 92; Landowner SAC ¶ 74. This methodology limits the analysis of market-pricing data to transactions that occur during a half-hour window at the end of the trading day (4:00 p.m. to 4:30 p.m. London time). Id. Platts collects information regarding trades in, and bids and offers for, contracts for crude oil from the Brent, Forties, Oseberg, and Ekofisk ("BFOE") fields during this period, known as the MOC window. Trader SAC ¶¶ 95-96; Landowner SAC ¶¶ 77-78. It then "carefully analyses transactional data to determine its fitness for an assessment of market value . . . appl[ying] judgment to the data it gathers" before publishing it. Trader SAC ¶ 99; Landowner SAC ¶ 82. In applying its independent judgment, Platts has, on occasion, declined to consider transactions reported to it by certain Defendants as not reflective of the market or otherwise anomalous. See, e.g., Trader SAC ¶¶ 267, 285, 325-26.

         B. Brent Crude Oil Futures and Derivatives

         Plaintiffs contend that Platts' and other price-reporting agencies' pricing assessments "are directly linked" to Brent crude oil futures and other derivative contract prices. Trader SAC ¶ 127; Landowner SAC ¶ 143. As a result, manipulation of Platts' Dated Brent assessment "has effects that ripple throughout the Brent Crude Oil and futures market." Trader SAC ¶ 126; Landowner SAC ¶ 142.

         Plaintiffs focus specifically on futures and derivatives trading on NYMEX and ICE Futures Europe. Trader SAC ¶ 2; Landowner SAC ¶ 3. ICE Futures Europe is an electronic derivatives exchange headquartered in London that also conducts business out of offices in the United States. Trader SAC ¶ 141; Landowner SAC ¶ 156. Trades on ICE Futures Europe are placed through member entities and are cleared through ICE Clear Europe, an entity wholly-owned by the same entity that owns ICE Futures Europe. Trader SAC ¶¶ 150-63; Landowner SAC ¶ 157. As the name implies, ICE Futures Europe is not a CFTC-designated contract market, but, since 1999, U.S. traders have been permitted to trade there due to a no-action letter the exchange received from the CFTC. Trader SAC ¶¶ 143-44; Landowner SAC ¶¶ 158-59. NYMEX is a U.S.-based physical commodity futures exchange. Trader SAC ¶ 133; Landowner SAC ¶ 148.

         A variety of Brent crude oil futures and derivatives contracts trade on NYMEX and ICE Futures Europe. Trader SAC ¶¶ 136, 175-223; Landowner SAC ¶ 151. The Brent futures contracts on NYMEX settle to the price of ICE Brent futures, which, in turn, have a settlement price based on the ICE Brent Index. Trader SAC ¶ 123, 128, 179; Landowner SAC ¶ 139, 144. ICE calculates its Brent Index as an average of (1) the weighted average of the 25-day BFOE market for cargoes due for delivery one month out (that is, forward contracts); (2) the weighted average of the 25-day BFOE market for cargoes due for delivery two months out plus a straight average of the spread between the first and second month cargo trades; and (3) an average of certain designated published assessments. Trader SAC ¶¶ 128 n.3, 179. While Platts maybe one of the sources for ICE Futures Europe's published assessments, Platts' Dated Brent assessment, a spot price, is not one of those considered. Id. Nevertheless, Plaintiffs allege a correlation of 85% or more between Platts' Dated Brent assessment and ICE Brent crude oil futures prices. Trader SAC ¶ 129; Landowner SAC ¶ 146.

         While Dated Brent does not factor into the ICE Brent Index, Platts' Dated Brent assessment is incorporated as a pricing element for a limited number of derivatives contracts traded on NYMEX and ICE Futures Europe. Trader SAC ¶¶ 136, 205-11. For instance, the Brent CFD (contract for difference) traded on NYMEX is a short-term swap agreement that represents the difference between Dated Brent and a forward month BFOE cash contract. Id. ¶ 136. Similarly, ICE Futures Europe offers a variety of dated-to-frontline contracts which capture the difference between Dated Brent and short-term ICE futures contracts. Id. ¶¶ 205-10.

         C. U.S. Crude Oil

         The United States produces a variety of crude oils. Like Brent crude oil, West Texas Intermediate ("WTI") and Light Louisiana Sweet ("LLS") are light, sweet crude oils. Trader SAC ¶ 79; Landowner SAC ¶¶ 28-29, 33-39. WTI and Brent are the two major benchmarks for the world's oil prices. Landowner SAC ¶ 29. The crude oil produced and sold in the United States in which the Landowner Plaintiff has an interest is priced to WTI. Id. ¶ 62. Although WTI and LLS are crude oil benchmarks distinct from Brent, the Landowner Plaintiff alleges that there is a close correlation between the prices of these three light, sweet crude oil varieties. Id. ¶¶ 40-41. With respect to WTI, specifically, the Landowner Plaintiff contends that the correlation is, in fact, causation, with Brent crude oil influencing the price of WTI crude, not vice versa. Id. ¶ 41 -51. The Landowner Plaintiff does not contemplate the possibility of an independent factor affecting the price for both WTI and Brent crude oil in the same manner.

         D. Alleged Manipulations

         Plaintiffs allege that Defendants conspired to manipulate the Brent crude oil market, including the market for Brent futures and derivatives contracts, by engaging in manipulative conduct and fraudulent physical trades and then deliberately and systematically submitting information about those trades to Platts during the MOC window. Trader SAC ¶ 224; Landowner SAC ¶ 90. Plaintiffs do not allege that any of the Defendants engaged in manipulative trading on NYMEX or ICE Futures Europe; rather, they allege that the manipulation of Platts' Dated Brent assessment, through manipulative physical trades and reporting, "has effects that ripple throughout the Brent Crude Oil and futures market, impacting a wide variety of derivative and futures contracts on NYMEX and ICE." Trader SAC ¶ 126; Landowner SAC ¶ 142.

         Plaintiffs describe in great detail a number of specific transactions and transaction chains occurring between June 2010 and September 2012 alleged to be manipulative. Trader SAC ¶¶ 251-419; Landowner SAC ¶¶ 96-136. For purposes of these motions to dismiss, however, it suffices to say that, generally speaking, Defendants allegedly "selectively reported bids, offers, 'spoof orders and transactions with aberrant pricing" and engaged in "prohibited wash sale transactions" during the MOC window. Trader SAC ¶ 8; Landowner SAC ¶ 92. Plaintiffs explain that much of the conduct identified does not make economic sense for the Defendants participating in the transactions and can only be explained as part of a conspiracy to drive the price of Brent crude oil in a particular direction. See, e.g., Trader SAC ¶¶ 380-81, 397; Landowner SAC ¶¶ 130, 133.

         By way of example, both the Trader Plaintiffs and the Landowner Plaintiff identify two transactions involving Phibro Commodities in September 2012. Trader SAC ¶¶ 395-97; Landowner SAC ¶¶ 129-30. On September 17, 2012, Phibro Commodities purchased a Forties cargo from BP at a $0.05 premium, allegedly creating upward pressure on Forties prices. Then, the following day, Phibro Commodities offered for sale that same Forties cargo at a price $0.30 per barrel lower. Id. Plaintiffs allege that Phibro Commodities intended this artificially low offer, effectively a spoof offer, [2] to signal to the market that the price was heading lower, and that this offer was part of a scheme with other Defendants, including Shell International Trading and Shipping Company Limited, Trafigura, and Vitol, to move the price of Dated Brent downward at the end of September. Trader SAC ¶ 369; Landowner SAC ¶ 135.

         II. Procedural History

         After the various cases in this litigation were centralized and transferred to this Court in October 2013, ECF No. 1, the Trader Plaintiffs filed an Amended Complaint on July 3, 2014. ECF No. 166. The Landowner Plaintiff, proceeding in a related case, filed an Amended Complaint on April 28, 2014. Landowner ECF No. 40.[3] Thereafter, all Defendants jointly filed three motions to dismiss: (1) a motion to dismiss the Trader Complaint (ECF Nos. 204 (Motion), 211, ("Defs.' Trader Memo."), 212 (Declaration of Daryl A. Libow)); (2) a motion to dismiss the Landowner Complaint (ECF Nos. 218 (Motion), 219 ("Defs.' Landowner Memo.")); and (3) a motion to dismiss both the Trader Complaint and the Landowner Complaint on the grounds that they exceeded the extraterritorial reach of United States law (ECF Nos. 200 (Motion), 201 ("Defs.' Extraterritoriality Memo."), 202 (Declaration of Douglas F. Curtis)).[4] Defendants also individually filed supplemental motions to dismiss advancing arguments specific to them, which are not addressed in this opinion.

         Plaintiffs opposed the motions, although, with respect Defendants' extraterritoriality arguments, the Landowner Plaintiff merely incorporated by reference the Trader Plaintiffs' arguments. ECF Nos. 243 ("Trader Extraterritoriality Memo"), 252 ("Landowner Omnibus Memo."), 253 ("Trader Memo."). Defendants submitted reply briefs, and the Court considers the motions fully submitted. ECF Nos. 285 ("Defs.' Landowner Reply"), 286 ("Defs.' Extraterritoriality Reply"), 288 ("Defs.' Trader Reply").

         LEGAL STANDARD

         To survive a motion to dismiss pursuant to Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroftv. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible "when the plaintiff pleads factual content that allows the Court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). The plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully, " and accordingly, where the plaintiff alleges facts that are '"merely consistent with' a defendant's liability, it 'stops short of the line between possibility and plausibility of entitlement to relief" Id. (quoting Twombly, 550 U.S. at 557).

         In considering a motion to dismiss, the court accepts as true all factual allegations in the complaint and draws all reasonable inferences in the plaintiffs favor. See Goldstein v. Pataki,516 F.3d 50, 56 (2d Cir. 2008). However, the court need not credit "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555). Instead, the complaint must provide factual allegations sufficient "to give the defendant fair notice of what the claim is and the grounds upon which it rests." Port Dock & Stone Corp. v. Oldcastle Northeast, Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly, 550 U.S. at 555). The court "may consider the facts as asserted within the four comers of the complaint together with the documents attached to the complaint as exhibits, and ...


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