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KTMC to Lead National Antitrust Case Alleging VIX Manipulation

August 20, 2018

Kessler Topaz partner Kimberly Justice  to  direct multidistrict litigation over alleged manipulation of index commonly referred to as the investor fear gauge; consolidated amended complaint to be filed by September 14 in Chicago, laying out case that the “VIX was fixed”

A federal judge in Chicago has appointed Kessler Topaz Meltzer & Check Partner Kimberly Justice to serve as co-lead counsel in a nationwide antitrust litigation stemming from the manipulation of prices of financial instruments linked to the Chicago Board of Options Exchange’s Volatility Index.

On August 15, Judge Manish S. Shah of the Northern District of Illinois appointed Kessler Topaz Antitrust Practice co-chair Kimberly Justice to co-lead the multidistrict litigation on behalf of investors who incurred massive losses from false pricing information of securities linked to the Volatility Index, known as the VIX. Prior to entering private practice in 2011, Ms. Justice spent nearly a decade as an enforcement lawyer for the Antitrust Division of the Department of Justice.

As co-lead counsel, Ms. Justice and Jonathan Bunge of Quinn Emmanuel will oversee preparation of a consolidated master amended complaint, to be filed by September 14. The two firms will conduct all pretrial discovery in unraveling a complex conspiracy to game the VIX to the detriment of ordinary investors. Ms. Justice and Mr. Bunge will also direct a steering committee comprised of lawyers representing investors around the country as part of the coordinated action.

Kessler Topaz partner Joseph Meltzer will also play a key role as the cases move forward.

This past February, on behalf of a private investor, Kessler Topaz brought the first antitrust action alleging a conspiracy to distort prices of various derivative securities tied to the VIX. The firm soon brought a second complaint on behalf of another investor asserting violations of the Commodities Exchange Act in addition to violations of the Sherman Act. In the following months, numerous related actions involving the VIX were filed in multiple courts around the country. The Judicial Panel on Multidistrict Litigation then centralized all actions for pre-trial purposes in the Northern District of Illinois before Judge Shah.

The VIX is a widely-tracked but opaque index that measures the 30-day implied volatility of the financial markets. Its value is intended to reflect real-time pricing of put and call option contracts linked to the S&P 500 Index that trade on the CBOE. Various derivative instruments linked to the VIX – including options and futures contracts – trade exclusively on the CBOE and its Futures Exchange, operated by CBOE Global Markets, Inc.

By its design, the VIX is highly susceptible to market manipulation.  The final settlement value of expiring VIX options and futures contracts is calculated on the third or fourth Wednesday of each month using only the opening prices of certain out-of-the-money SPX Options that expire 30 days after the relevant VIX options and futures expiration dates, known as the settlement price.  This process takes place in an auction called the SOQ, for Special Opening Quotation.  Given this complex formula, a change in the price – or bid/ask quotes – of SPX Options has a direct impact on the pricing of VIX and, correspondingly, the pricing of financial instruments linked to the index.  By placing large or even high volumes of orders for OTM SPX Options, a trader can directly impact the VIX Settlement Price.

According to investor complaints, various parties – possibly including executives at the CBOE – colluded to fix the pricing of the VIX and the settlement price, depriving those properly trading in VIX-linked derivatives of a competitive marketplace and exposing them to artificial volatility.  In carrying out their scheme, defendants allegedly opened long or short positions in VIX options and/or futures contracts prior to the SOQ closing; they also placed buy or sell orders in OTM SPX Options during the SOQ on each monthly settlement date; and they reaped illicit profits when the SOQ closed and the respective VIX options and futures settled at a manipulated price. 

Investors’ claims are corroborated by significant empirical evidence, reflected in 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.  Prof. Griffin is co-author of a 2017 paper in The Review of Financial Studies entitled “Manipulation in the VIX?”: http://www.jgriffin.info/wp-content/uploads/2017/12/vix_pub.pdf.  

“I am honored to have been selected by Judge Shah as co-lead counsel on behalf of investors harmed by the deception surrounding the CBOE’s Volatility Index,” Ms. Justice said. “We believe evidence will show that, rather than a true reflection of market volatility on the S&P 500 index, the VIX was manipulated by colluding individuals who created their own rigged casino.”

During her tenure at the DOJ’s Antitrust Division, Ms. Justice investigated and prosecuted multiple cases of anticompetitive behavior, including cases involving benchmark interest rates (LIBOR), municipal bonds, ocean shipping, carbon products and other sectors.

“The VIX was popularly known as the ‘fear gauge’ because it was supposed to paint an accurate picture of market risk,” Ms. Justice continued. “In reality, we will demonstrate that the VIX was fixed and that investors’ worst fears were realized by the way the index operated against them. I look forward to prosecuting plaintiffs’ claims with the support of my team at Kessler Topaz and the remarkable group of lawyers from around the country that the court has appointed.”

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