On July 23, 2015, a Boston retirement fund sued 22 financial companies that have served as primary dealers of U.S. Treasury securities in federal court, in the first nationwide class action alleging a conspiracy to manipulate Treasury auctions that harmed both investors and borrowers. The State-Boston Retirement System, the pension fund for Boston public employees, accused Bank of America Corp’s Merrill Lynch unit, Citigroup Inc, Credit Suisse Group AG , Deutsche Bank, Goldman Sachs Group Inc , HSBC Holdings Plc, JPMorgan Chase & Co, UBS Group AG and 14 other defendants of illegally trying to profit on the sale of Treasury bills, notes and bonds at investors’ expense.
According to the pension fund’s complaint, filed in U.S. District Court in New York, the banks used chat rooms, instant messages and other means to swap confidential customer information and coordinate trading strategies in the roughly $12.5 trillion Treasury market. This enabled the banks to inflate prices on Treasuries they sold to investors in the pre-auction “when issued” market, and deflate prices when they bought Treasuries to cover their pre-auction sales, violating antitrust laws, according to the complaint. Primary dealers are the banks authorized to transact directly with the Federal Reserve. They are big players in Treasury bond auctions and act as market makers in the secondary market.
The pension fund said its “expert economists” observed wide gaps between when-issued and auction prices around December 2012, but that these gaps narrowed significantly as the U.S. Department of Justice (DOJ) and other regulators began probing alleged manipulation of the London interbank offered rate (Libor), a benchmark used to set interest rates for trillions of dollars in loans around the world. The Justice Department is reportedly investigating possible collusion in Treasury auctions. The Fund stated:
The only plausible explanation for the sharp break is that defendants felt the heat of the DOJ’s ongoing investigation into Libor, and ceased their efforts to manipulate the Treasury securities market because Defendants’ Treasury traders feared that they too would be prosecuted.
The scheme was said to have harmed private investors who paid too much for Treasuries. It harmed municipalities and corporations because the rates they paid on their own debt were also inflated by the manipulation. Even a small manipulation in Treasury rates can result in enormous consequences. The case filed by State-Boston Retirement System is in the U.S. District Court, Southern District of New York. The suit was filed on behalf of investors in Treasury securities, including futures and options, from 2007 to 2012.
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