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Kessler Topaz Leads the Charge in the Closely Watched VIX Manipulation Multidistrict Litigation

By Kimberly A. Justice and Joshua A. Materese

This multidistrict litigation arises from over a decade of manipulation of financial instruments linked to the Chicago Board Options Exchange’s (“CBOE”) Volatility Index, the “VIX,” and the opaque settlement process CBOE designed for certain of those instruments. [1]  In September, Kessler Topaz and its co-lead counsel filed the operative consolidated complaint against “John Doe” defendants and CBOE for violations of several federal statutes based on that misconduct.  The Complaint is the first step toward remedying the harm done to investors who, collectively, lost billions of dollars trading these instruments on what they were duped into believing was an even playing field.

The VIX and Products Linked to the VIX.  Since its creation in 2004, the VIX has become a widely used financial index that is now connected to billions of dollars’ worth of financial products that are traded each day.  The VIX’s value is determined by reference to the real-time pricing of put and call option contracts linked to the S&P 500 (“SPX Options”) that trade on CBOE’s options exchange.  The prevailing quotation levels of SPX Options, in theory, serve as a barometer for the prices people are willing to pay or accept for a 30-day SPX Option.  These Options provide an estimate of how much movement in the market (i.e., volatility) investors currently anticipate over the next 30 days and, in turn, what VIX Options and VIX Futures should be worth today.  As a general matter, the VIX is higher when the market is expected to be more volatile in the future (i.e., when investors fear more swings in stock prices), and lower when less volatility is expected.  Thus, over time, investors have come to treat VIX as the U.S. stock market’s “fear gauge.”  

Because investors cannot trade the VIX outright, it initially served only as benchmark figure.  Investors could not take a position in the VIX, or on the direction they believed the market was moving.  In response to growing demand, a universe of products allowing investors to wager on the VIX has emerged, the vast majority of which are exclusively owned by or licensed to CBOE.  Prime examples, and at the core of this action, are CBOE’s proprietary VIX Options and VIX Futures contracts, and the earlier mentioned SPX Options, for which CBOE holds an exclusive license.  CBOE’s exchanges are the only places to trade the vast majority of these products.

Moreover, because the VIX is not a physical good, VIX Options and VIX Futures can only be exercised at expiration, and all are cash-settled at that time.  The cash-settlement value for both is determined through a CBOE-created and administered settlement process that is similar, but not identical to the process used to calculate the VIX itself.  Specifically, when VIX Options and VIX Futures expire, a primary input into CBOE’s calculated settlement values is the trading price of certain SPX Options during a short window of time on specific days, known as the Special Opening Quotation, or SOQ, auction, within which a pre-determined set of investors are permitted to partake. Since the settlement process is dependent on the value of thinly traded, out-of-the-money SPX Options, trading even a small number of such Options could result in large differences in the settlement value of VIX Options and VIX Futures.  In essence, the formula CBOE created, operated, and maintained is a zero-sum game that determines who is the winner and who is the loser, and by how much, for investors in VIX Options and VIX Futures. 

Of particular relevance to this case, by design, trading on CBOE’s exchanges is anonymous.  As a result, CBOE, and perhaps only CBOE, has the ability and means to monitor trading on its exchanges and ensure an even and fair playing field for investors.  This has been a unique (and difficult) aspect of the case since inception, as the Doe Defendants remain unknown.

Procedural Background.  In February 2018, Kessler Topaz brought on behalf of an individual investor the first lawsuit alleging improper trading activity in VIX-linked products.[2] Not surprisingly, following that leading complaint, investors across the country flooded the dockets with over twenty-five actions charging similar misconduct under various federal statutes.  As the complaints continued to mount, in July 2018, the Judicial Panel on Multidistrict Litigation packaged all pending actions for pre-trial purposes and sent the litigation to the Northern District of Illinois before Judge Manish S. Shah, where it is now pending. 

With an MDL in place, many prominent law firms vied for leadership of the litigation.  In the end, Kessler Topaz, led by Kimberly A. Justice, emerged from the crowded field and was selected to co-lead the action by Judge Shah.  As the first order of business, in September, co-lead counsel filed a Consolidated Class Action Complaint, asserting claims against CBOE and the Does for violations of the federal securities, commodities, and antitrust laws.  The Complaint was filed on behalf of investors who held or traded SPX Options, VIX Options, VIX Futures, or exchange-traded products based on the VIX.

The Manipulation of the Settlement Process.  Throughout the time period in question, investors were assured by CBOE that its settlement process was fair and balanced when, in fact, that process was for years routinely hijacked by the John Does to manipulate the cash settlement values for VIX Options and VIX Futures.  Specifically, because the settlement process is dependent on the value of thinly traded, out-of-the-money SPX Options, Does were able to – and did – unlawfully influence the SOQ formula.  

Plaintiffs’ claims are corroborated by significant empirical evidence, including a study into the relationship between the VIX settlement price and the pricing of VIX Options and VIX Futures conducted by Prof. John M. Griffin of the McCombs School of Business at The University of Texas at Austin.[3]  These economic analyses show, among other things, trading abnormalities and patterns that are compelling indications of market manipulation and misconduct.  Among other things, the data shows a uniquely disproportionate use of puts over calls during the settlement period, indicating that market actors just so happened to be transacting in the type of order that would maximize a manipulative effect during the precise time when such manipulative effect was possible.  Data and analyses pled in the Complaint likewise show that trading volume increased during settlement days, particularly for out-of-the-money SPX Options, and that the alleged bad actors transacted in such ways to force the VIX SOQ formulate to include SPX Options that were further and further out of the money, pushing the settlement price up or down, in their favor. 

The manipulation harmed investors by causing them to either pay more or receive less from VIX-related products that were affected by the wrongdoing.  CBOE, as the creator, owner, and operator of the SOQ, and its proprietary suite of VIX products, knew or turned a blind eye toward the alleged misconduct, and routinely failed to enforce its own rules to prevent such malfeasance.  Plaintiffs will now seek to hold the Does and CBOE accountable.  Notably, multiple regulators, including the Commodities Futures Trading Commission, Securities Exchange Commission, and FINRA are now reported to be investigating the manipulation of VIX-related products. 

[1] The case is captioned In Re: Chicago Board Options Exchange Volatility Index Manipulation Antitrust Litigation, No. 1:18-cv-04171 (MDL No. 2842) (N.D. Ill.).

[2] See Samuel v. John Does, No. 18-cv-1593 (S.D.N.Y. Feb. 21, 2018).

[3] Prof. Griffin is co-author of a 2017 paper in The Review of Financial Studies entitled “Manipulation in the VIX?,” available at