US investors led by Boston pension scheme sue banks over alleged US Treasury market manipulation

The investors accuse the banks of overcharging them on sales of US treasuries

Several institutional investors in the US, including the $5.4 (€4.9bn) State-Boston Retirement System (State-Boston), have filed class-action lawsuits against 22 investment banks, charging that the institutions created a conspiracy to manipulate prices on bonds from the US government (US treasuries).

Apart from State-Boston, the investors litigating against the banks include the Arkansas Teacher Retirement System as well as pension funds for the US truckers’ union Teamsters and the International Food and Commercial Workers’ Union (IFCW). The defendants include some of the world’s most prominent financial institutions like Goldman Sachs, Citigroup, Credit Suisse, Deutsche Bank and JPMorgan.

In the complaints, filed with a federal court in New York, the investors allege that the banks colluded to induce investors to pay higher than warranted prices on US treasuries in the pre-auction market, known in the industry as the “when issued market.” After getting the investors to pay the high prices, the banks turned around and depressed the prices on the securities when they bought them at auction to cover their sales, pocketing the difference, the investors charge.

To collude, the investors say bank traders used chat rooms, instant messaging and other methods to exchange confidential customer information and coordinate trading strategies.“Given that there is more than $12trn in the outstanding treasuries market, even a small artificial increase in the spreads made by the primary dealers would result in enormous illicit profits,” Michael Stocker, a Partner at the New York law firm Labaton Sucharow, told Responsible Investor. Stocker’s firm is State-Boston’s legal counsel.

In terms of damages the investors are seeking, Labaton Sucharow said it could not quantify them as the scope of the fraud was not clear.

“Prior to discovery of transaction data and an evaluation by experts, it is fair to say that damages to the class ‎are likely to be quite substantial, given the massive size of the US treasuries market,” said Gregory Asciolla, Co-Chair of Labaton’s antitrust and competition litigation practice. There was no reported comment on the lawsuits from the 22 banks.

The lawsuits are reminiscent of the Libor scandal, in which traders from some of the same banks implicated this time were found to have conspired to rig the UK’s most important interest rate. The Libor scandal led to regulators slapping billions of dollars in fines on such banks as Deutsche Bank, UBS, J.P. Morgan and Lloyds TSB.

Added Stocker: “This (alleged) collusion not only robbed investors participating in the when issued market for these auction securities, but imposed billions in additional costs on borrowers ranging from (US) students to municipalities.” Link