New market manipulation case targets BofA, Citi, Barclays, and 24 other Primary Dealers of Treasuries

Maria Nikolova

The Defendants are alleged to have manipulated US Treasury Bills, Notes, Bonds, FRNs, and TIPS markets, as well as related Auctions and derivative financial products, starting at least as early as January 1, 2007.

Primary Dealers of US Treasuries, including Bank of America Corp (NYSE:BAC), UBS Securities LLC, Barclays Capital Inc, Citigroup Global Markets Inc, and Deutsche Bank Securities Inc are defendants in the latest market manipulation lawsuit filed at the New York Southern District Court.

In a case, filed on August 25, 2017, a total of 27 defendants, all of which are or were Primary Dealers of Treasuries, are accused of taking part in a conspiracy, starting at least as early as January 1, 2007 and thereafter continuing, to fix and otherwise manipulate marketable US Treasury Bills, Notes, Bonds, Floating Rate Notes (FRNs), and Treasury Inflation-Protected Securities (TIPS) markets and related Auctions and derivative financial products, including Treasury-predicated futures and options traded on the Chicago Mercantile Exchange (CME).

There are three plaintiffs:

  • Breakwater Trading LLC, which at varying times throughout the Relevant Period, including from 2007-2009 was a top 15 liquidity provider for Treasuries.
  • BWT Professional Trading, LLC, which throughout the Relevant Period, BWT has often been a top trader in terms of volume in the When Issued Roll during monthly Treasury Auctions.
  • Endeavor Trading, LLC, which was, during portions of the Relevant Period, a top 20 liquidity provider for cash Treasuries.

The Complaint, seen by FinanceFeeds, starts with the claim that each Defendant in this case is or was a Primary Dealer of Treasuries during the Relevant Period. Some numbers are provided regarding the market share controlled by the defendants. Investment funds and foreign entity bidders constitute over 95% of all the Indirect Bids awarded at Auction, and the majority of investment fund and foreign entity bidders purchase Treasuries through one of the Primary Dealers.

Hence, Primary Dealers are responsible for purchasing the majority of Treasuries issued by the US Treasury. For the Treasuries Auctions held between 2007 and 2013, Primary Dealers purchased around 48-54% of all the marketable Treasuries issued at Auction, while Indirect Bidders purchased 33-41%, and Direct Bidders purchased the remainder. Together the Primary Dealers and Indirect Bidders account for the overwhelming majority of the Treasuries acquired at Auction during the Relevant Period.

Given that most Indirect Bids are funneled through Primary Dealers, the Complaint states, the Primary Dealers have access to significant and extremely valuable Auction order flow information not available to any other market participant.

The Defendants are alleged to have violated their market integrity obligations and otherwise abused their positions of trust to their own ends. They are accused to have conspired by, among other things, sharing confidential and competitively sensitive client order information to fix and otherwise manipulate the Treasuries and Treasuries-Predicated Instruments markets before, during, and after Treasuries Auctions.

The sharing of their respective price discovery information meant that Primary Dealers subvert the Auction process to the detriment of all other market participants. The unlawful sharing and aggregating of order flow information allegedly altered the fundamental risk landscape of Treasuries trading across the WI (when issued), Auction, and secondary Treasuries markets.

Importantly, when Defendants manipulated Treasuries prices downward in the Auction, there was a directly correlated artificial run-down in prices in related futures markets.

The manipulation practices were fostered by Defendants’ routine hiring of each other’s Treasuries traders. Moreover, Primary Dealer Defendants are said to have shared their proprietary clients’ information with one another to coordinate their positions across all Treasuries instruments and derivatives trading.

The Complaint notes that Defendants’ use of chat rooms and other communication channels to improperly share – and thus take advantage of – client trade information is not a new pattern of conduct.

Violations involving Libor, Forex, and ISDAFIX have involved similar collusive misconduct by and among many of the same Defendants over the same time period.

In Forex, for instance, beginning around 2003, many of the same Defendants colluded by using clandestine communications, including private chat rooms, to swap competitively sensitive information, including customer order information, to manipulate Forex benchmark rates for their own benefit. In May 2015, Defendants Barclays, Citigroup, JPMorgan, and RBS and/or their affiliates pled guilty to charges of conspiracy to manipulate FX rates. In all, at the moment of drafting the Complaint, the Plaintiffs estimate that over $10 billion in fines have been levied to date against Bank of America, Barclays, Citigroup, JPMorgan, RBS, UBS, and other banks to settle charges that they each participated in an unlawful conspiracy to fix FX rates.

In addition, the Plaintiffs refer to an Independent expert analysis of Auction pricing data confirming that certain Treasury Auctions were manipulated during the Relevant Period. This independent consulting experts’ analysis is said to confirm that the March 10, 2011 Treasuries Auction and the October 14, 2010 Treasury Auction were both manipulated, albeit in different directions, across all Treasuries maturities, including the re-opened portion of those Auctions.

All three Plaintiffs claim that, as a direct and proximate result of Defendants’ collusion, manipulative conduct, and unlawful acts, Breakwater, BWT and Endeavor were injured in their business or property. The defendants are charged on seven counts, including violations of the Sherman Act, the Commodity Exchange Act, breaches of Implied Covenant of Good Faith and Fair Dealing, as well as unjust enrichment.

The plaintiffs are asking the court, inter alia, to award damages (three times overcharges) in an amount to be determined at trial, plus interest in accordance with law.

The case is captioned Breakwater Trading LLC et al v. Bank of America Corporation et al (1:17-cv-06497).

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