Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Dealer banks allegedly conspired to manipulate agency bonds market, (Jul 21, 2016)

By Linda O’Brien, J.D., LL.M.

A group of foreign and domestic dealer banks and four individual bond traders conspired to reduce competition by fixing and manipulating the prices of supranational, sub-sovereign, and agency bonds that were sold to investors in the United States, according to a complaint filed in the federal district court in New York City (Painters and Allied Trades District Council No. 35 Pension Fund v. Bank of America, N.A., July 19, 2016).

Painters and Allied Trades District Council No. 35 Pension Fund manages pension assets for over 4,000 union members in Massachusetts, Maine, New Hampshire, and Vermont, who have actively participated in the finishing trades.

The complaint alleges that supranational, sub-sovereign, and agency (SSA) bonds are issued by national governments to fund ongoing and future operations. SSA bonds are issued through one or more banks, which are charged with creating a market for the issue. The underwriting process entails judging investor demand, determining the price at which the bonds will be sold, and distributing the bonds to the public.

Appointment of the managing underwriter is usually a competitive process among banks, with each bank submitting bids to SSA bond issuers for underwriting services, according to the complaint. The prices of SSA bonds are stated in terms of the bond’s par value, coupon, and maturity date and are generally quoted as a discount or premium to the bond’s par value. After the initial issuance of SSA bonds in the primary market, the bonds are further traded by bond dealers and investors and the resale is known as the secondary market. Bank of America, Merrill Lynch, Crédit Agricole, Credit Suisse AG; Deutsche Bank AG, and Nomura International plc—are among the world’s largest dealers of SSA bonds in the secondary market.

The plaintiff alleges that, in a competitive market, the dealer banks compete with each other for customers seeking to buy and sell SSA bonds as well as providing underwriting services for SSA bond issuers. Rather than compete with each other, the defendant banks and their traders entered into an illegal scheme to fix the bid-ask spreads for SSA bonds sold to investors. The scheme ensured that investors received non-competitive prices for their secondary market SSA bond trades.

The defendants orchestrated and maintained their conspiracy through regular electronic communications, including instant messaging and chat rooms. Through these communications, the traders discussed their respective customers’ identities and confidential information about the size and nature of their orders before deciding the prices that they would quote to their customers for SSA bonds, the complaint charges.

The defendants’ conduct has drawn scrutiny of the U.S. and European regulators. The U.S. Department of Justice has launched an investigation into the defendants’ practices in the SSA bond market. Similarly, the U.K. Financial Conduct Authority and the European Commission have opened preliminary investigations into potential anticompetitive conduct in the SSA bond market, the complaint alleges.

The complaint also states that the defendants’ conspiracy caused injury to investors of SSA bonds in the secondary market by inflating the prices at which they sold SSA bonds and reduced the prices at which they purchased those bonds purchased from investors. The conspiracy deprived investors of the benefit of competitive SSA bond prices that reflected true market conditions.

The plaintiff asserts claims for unjust enrichment and conspiracy in restraint of trade in violation of Section 1 of the Sherman Act. The action seeks declaratory and injunctive relief, treble damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 1:16-cv-05755.

Attorneys: Gerald Silk and Blair A. Nicolas (Bernstein Litowitz Berger & Grossmann LLP) and Scott Martin, Michael D. Hausfeld, and Michael P. Lehmann (Hausfeld LLP) for Painters and Allied Trades District Council No. 35 Pension Fund.

Companies: Painters and Allied Trades District Council No. 35 Pension Fund; Bank of America Corporation; Bank of America, N.A.; Merrill Lynch International Limited; Crédit Agricole Corporate and Investment Bank; Credit Suisse AG; Deutsche Bank AG; Nomura International plc

News: Antitrust NewYorkNews