Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Banks collusively manipulated U.S. securities market, complaint asserts, (Jul 24, 2015)

By Greg Hammond, J.D.

A group of the largest dealer banks in the world have been named in a class action suit by a Massachusetts-based governmental defined-benefit plan, alleging that the banks colluded to manipulate the Treasury securities market and derivative financial products, including Treasury futures and options traded on the Chicago Mercantile Exchange. The complaint was filed in the federal district court in New York City (State-Boston Retirement System v. Bank of Nova Scotia, New York Agency, July 23, 2015).

State-Boston Retirement System (SBRS) claims that the defendant banks—including BMO Capital, Barclays, CitiGroup, Deutsche, Goldman Sachs, HSBC, and J.P. Morgan — are primary dealers in the market for Treasury securities, debt instruments such as bills, notes, and bonds that are issued by the U.S. Treasury. The defendant banks purportedly used their critical position as primary dealers to subvert the proper operation of the Treasury securities market by colluding to manipulate Treasury Department auctions and pricing of Treasury securities in the “when-issued market.” The when-issued market is the period between an auction announcement date and the issuance of the auctioned securities.

Specifically, SBRS alleges that the banks act as sellers of Treasury securities to their customers during the when-issued market, but later become buyers of Treasury securities in order to cover the sales they made during the when-issued market. The difference in the price at which the banks sell in the when-issued market and purchase at auction is the banks’ profit. The goal of the alleged conspiracy was to produce supracompetitive profits, the complaint asserts.

A two-pronged scheme was allegedly used by the banks to manipulate the Treasury securities market: (1) the banks used electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies, and increase the bid-ask spread in the when-issued market to inflate prices of Treasury securities they sold to the class; and (2) used the same means to rig the Treasury auction bidding process to deflate prices at which they bought Treasury securities to cover their pre-auction sales. This conduct, according to SBRS, lined the pockets of the banks while raising prices to investors (1) trading Treasury securities in the when-issued market, (2) trading Treasury security-based futures and options, and (3) transacting in instruments benchmarked to the prices of Treasury securities determined at auction.

SBRS additionally claims that the banks fraudulently concealed the conspiracy, and that SBRS did not become aware of the anticompetitive conduct until after the U.S. Justice Department opened an investigation into the market for Treasury Instruments. The complaint alleges that the banks violated Section 1 of the Sherman Act by entering into an agreement to reduce competition by fixing and/or manipulating Treasury security prices before and during Treasury auctions. As a result, they fixed and manipulated the prices of Treasury securities, Treasury futures, and options on Treasury futures traded on the Chicago Mercantile Exchange. The complaint additionally asserts multiple violations of the Commodity Exchange Act, as well as unjust enrichment.

SBRS seeks to represent a class of all persons or entities who during the period from January 1, 2007, through December 31, 2012, transacted in any Treasury Instrument. The complaint requests a judgment that the banks violated Section 1 of the Sherman Act; injunctive relief restraining the banks from continuing and maintaining the alleged conspiracy; damages and trebled damages; a finding that the banks violated the Commodity Exchange Act; and costs of suit, including expenses and attorney fees.

In a separate class action complaint, Beaver County Employees’ Retirement Fund, Erie County Employees’ Retirement System, and Lackawanna County Employees’ Retirement Fund charged the defendant banks with violating the Sherman and Commodity Exchange Acts, and sought to represent a class of similarly situated investors that purchased Treasury securities or Treasury-based instruments at artificial prices as a result of market manipulation by the defendant banks (Beaver County Employees’ Retirement Fund v. Bank of Nova Scotia, New York Agency, July 23, 2015).

The case numbers are 1:15-cv-05794 and 1:15-cv-05807.

Attorneys: Gregory Asciolla (Labaton Sucharow LLP) for State-Boston Retirement System. Joseph H. Meltzer (Meltzer & Check, LLP) for Beaver County Employees’ Retirement Fund, Erie County Employees’ Retirement System, and Lackawanna County Employees’ Retirement Fund.

Companies: State-Boston Retirement System; Beaver County Employees’ Retirement Fund; Erie County Employees’ Retirement System; Lackawanna County Employees’ Retirement Fund Bank of Nova Scotia, New York Agency; BMO Capital Markets Corp.; BNP Paribas Securities Corp.; Barclays Capital Inc.; Cantor Fitzgerald & Co.; CitiGroup Global Markets Inc.; Credit Suisse Securities USA LLC; Daiwa Capital Markets America Inc.; Deutsche Bank Securities Inc.; Goldman, Sachs & Co.; HSBC Securities USA Inc.; Jefferies LLC; J.P. Morgan Securities LLC; Merrill Lynch, Pierce, Fenner & Smith Inc.; Mizuho Securities USA Inc.; Morgan Stanley & Co. LLC; Nomura Securities International, Inc.; RBC Capital Markets, LLC; RBS Securities Inc.; SG Americas Securities, LLC; TD Securities USA LLC; UBS Securities LLC

News: Antitrust