Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Labor union funds claim banks colluded to manipulate U.S. Treasury securities market, (Aug 27, 2015)

By Linda O’Brien, J.D., LL.M.

A group of the largest dealer banks in the world colluded to manipulate the U.S. Treasury securities market and derivative financial products, including Treasury futures and options traded on U.S. exchanges, according to a complaint filed in the federal district court in New York City (Cleveland Bakers and Teamsters Pension Fund v. Bank of Nova Scotia, August 26, 2015).

Cleveland Bakers and Teamsters Pension Fund and the Cleveland Bakers and Teamsters Health and Welfare Fund provide pension and health benefits to members of the Bakers and Teamsters local labor union. Masterinvest Kapitalanlage GmbH is an Austrian investment company.

The complaint states that a group of select banks—including Barclays, CitiGroup, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, and Merrill Lynch—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 in market auctions. The defendant banks purportedly used their privileged position as primary dealers to subvert the proper operation of the Treasury securities market. They allegedly colluded to manipulate Treasury Department auctions by artificially driving up the yield of the securities and correspondingly driving down the prices of those securities, so they could sell them at higher prices in the secondary market.

Economic analysis has confirmed that the defendant banks were inflating yields and suppressing prices in the Treasuries, the complaint charged. The use of “screens,” which are statistical tools based on economic models that use data to identify the existence and scope of manipulation, revealed a consistent pattern. Treasury auction yields were artificially high and prices correspondingly low when compared to yields in the secondary market from at least 2007 through June 2015, when the U.S. Department of Justice announced its investigation into possible manipulation of the U.S. Treasury securities market, according to the plaintiff. Moreover, the defendants were able to consistently turn and sell the Treasuries for a profit, and the movements in post-auction yields/prices could not be explained by general market trends, the complaint alleges.

According to the complaint, the structure of the Treasuries market promoted manipulation and collusion. First, in the Treasury market, there were a small number of participants and the sales volume was very high. Second, the defendants’ position as primary dealers gave them first-hand knowledge of the yields and prices that investors were willing to pay for forthcoming issuances. The defendants’ ability to bid on behalf of both themselves and indirect bidders during each auction gave them an inside track on determining market demand. Third, the defendants routinely shared confidential customer order and bid information. Fifth, the Treasuries market was only lightly regulated. Finally, the veneer of a competitive auction process allowed the defendants to continue their conspiracy for years without detection.

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

The case is No. 1:15-cv-06782.

Attorneys: J. Douglas Richards (Cohen Milstein Sellers & Toll PLLC), Daniel L. Brockett (Quinn Emanuel Urquhart & Sullivan, LLP), Joseph C. Kohn (Kohn Swift & Graf, P.C.), and Peter Safirstein (Morgan & Morgan) for Cleveland Bakers and Teamsters Pension Fund, Cleveland Bakers and Teamsters Health and Welfare Fund, and Masterinvest Kapitalanlage GmbH.

Companies: Masterinvest Kapitalanlage GmbH; Bank of Nova Scotia; BMO Capital Markets Corp.; BNP Paribas Securities Corp.; Barclays Capital Inc.; Cantor Fitzgerald & Co.; Citigroup Global Markets Inc.; Commerz Markets LLC; Countrywide Securities Corp.; Credit Suisse Securities LLC; Daiwa Capital Markets America Inc.; Deutsche Bank Securities Inc.; Goldman, Sachs & Co.; HSBC Securities 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 LLC; UBS Securities LLC

News: Antitrust NewYorkNews