Wednesday, August 30, 2017

New lawsuit alleges primary dealers manipulated U.S. Treasuries, related markets

By Lene Powell, J.D.

An action filed in the Southern District of New York alleges that 27 banks have conspired since 2007 to fix and manipulate the markets for U.S. Treasuries and related auctions and derivative financial products. The plaintiffs, a financial services firm and two proprietary trading firms, contend that the banks abused their position as primary dealers to manipulate an important benchmark in violation of the Commodity Exchange Act, the Sherman Act, and common law (Breakwater Trading LLC v. Bank of America Corporation, August 25, 2017).

Primary dealers. According to the complaint, the defendants currently or previously acted as primary dealers of Treasuries, trading directly with the Federal Reserve, acting as Treasuries market makers, and bidding on Treasuries offered for sale by the U.S. Treasury at auctions. Primary dealers have certain market integrity obligations including helping to maintain vigorous competition and not engaging in price manipulation.

Alleged manipulation. The plaintiffs, liquidity providers who say their combined annual trading in the relevant products amounted to over $1 trillion during the class period, alleged that the defendants conspired to fix and otherwise manipulate U.S. Treasury Bills, Notes, Bonds, Floating Rate Notes (FRNs), and Treasury Inflation-Protected Securities (TIPS) (all together, “Treasuries”) markets, as well as related auctions and derivative financial products, including exchange-traded futures and options (“Treasury-Predicated Instruments”).

The plaintiffs say that since January 1, 2007, the defendants have used a combination of electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential and competitively sensitive customer order flow information in order to coordinate trading strategies and execute transactions. The alleged aim was to artificially affect pricing in the primary and secondary Treasuries and Treasuries-Predicated Instruments markets before, during, and after Treasuries auctions.

According to the plaintiffs, independent expert analysis shows that Treasury auctions were in fact manipulated, displaying both upward and downward Treasuries pricing manipulation, with highly correlated effects across all maturities of both Treasuries and Treasuries-Predicated Instruments. The plaintiffs also cited news reports that the alleged manipulation is under investigation by the SEC, CFTC, Department of Justice, and New York State Department of Financial Services.

The plaintiffs say market participants were damaged by the defendants’ price-fixing and manipulative conduct regardless of whether the manipulation moved the price of the affected Treasury instrument artificially higher or lower.

Violations. The plaintiffs allege that the defendants violated Section 1 of the Sherman Act; Sections 6(c)(3) and 9(a)(2) of the Commodity Exchange Act (CEA) and CFTC Rule 180.2 (manipulation); and CEA Sections 6(c)(1) and 9(a)(2) (use of a manipulative or deceptive device). The plaintiffs assert that the defendants are liable under the CEA as principal for the acts of their agents and that the defendants aided and abetted one another’s violations. The plaintiffs also assert common law claims of unjust enrichment and breach of the implied covenant of good faith and fair dealing. The complaint seeks damages of three times overcharges in an amount to be determined at trial, plus fees and costs.

The case is No. 17-6497.

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