Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Dealer banks charged with collusion to manipulate agency bonds market, (May 19, 2016)

By Linda O’Brien, J.D., LL.M.

Foreign and domestic dealer banks and four individual bond traders colluded to reduce competition by fixing and manipulating the prices of supranational, sub-sovereign, and agency bonds denominated in various currencies that were sold to investors in the United States, according to a complaint filed in the federal district court in New York City (Boston Retirement System v. Bank of America, N.A., May 18, 2016).

Boston Retirement System is a government-defined benefit plan that manages over $3.9 billion in assets on behalf of the members and beneficiaries of the city departments and agencies associated with the City of Boston.

The complaint states 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 sell the bonds to the public. Since SSA bonds are generally regarded as highly-secure investments, investor demand for SSA bonds has increased steadily between 2005 and the present. From 2005 to 2012, the SSA bond market has tripled in size.

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. A group of foreign and domestic banks—Bank of America, Bank of America Merrill Lynch International Limited, Credit Agricole Corporate and Investment Bank, 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 complaint alleges.

According to the plaintiff, in a competitive market, the defendant 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 allegedly entered into an illegal scheme to fix the bid and ask spreads for SSA bonds sold to investors. The scheme had the same effect as fixing the prices at which investors bought and sold SSA bonds in the secondary market, the lawsuit asserted.

Economic analysis confirmed that the bid-ask spread for SSA bonds were significantly higher than bid-ask spreads for sovereign bonds, even though they were of similar credit-worthiness and were both highly liquid, Boston Retirement System maintained. In addition, experts allegedly found anomalous intraday movements between two and four basis points in the bid-ask spreads for certain SSA bonds. 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 has opened preliminary investigations into potential anticompetitive conduct in the SSA bond market, the complaint alleges.

The action also alleges that investors of SSA bonds in the secondary market have been injured by the defendants’ conduct of inflating the prices at which they sold SSA bonds and reduced the prices at which they purchased those bonds purchased from investors.

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-03711.

Attorneys: Gregory S. Asciolla, Jay L. Himes, Garrett J. Bradley, Karin E. Garvey, and Matthew J. Perez (Labaton Sucharow LLP) and Michael D. Hausfeld, William P. Butterfield, and Timothy S. Kearns (Hausfeld LLP) for Boston Retirement System.

Companies: Bank of America, N.A.; Bank of America Merrill Lynch International Limited; Credit Agricole Corporate and Investment Bank; Credit Suisse AG; Deutsche Bank AG; Nomura International plc

News: Antitrust NewYorkNews