On March 26, 2019, Cohen Milstein, on behalf of the Dallas Area Rapid Transit Employees Defined Benefit Retirement Plan and Trust (“DART”) and Plaintiffs Sheet Metal Workers’ Local 19 Pension Fund (“SMW Local 19”), and other class members, filed an antitrust class action against Bank of America, Barclays Capital, BNP Paribas Securities, Citigroup Global Markets, Deutsche Bank, and several other Wall Street banks.

Plaintiffs claim that Defendants violated the Sherman Act by conspiring to fix prices and restrain competition in the market for unsecured bonds issued by Government-Sponsored Enterprises (“GSEs”) from at least as early as January 1, 2012 through June 1, 2018.

Case Background

GSEs are federally-created but privately-held enterprises that were designed by Congress to advance public policy objectives in key areas of the economy, such as housing and agriculture. This case concerns bonds issued by four GSEs: the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal Farm Credit Banks Funding Corporation (“FFCB”), and the Federal Home Loan Banks (“FHLB”).

GSEs issue debt in order to fund their activities. Unsecured bonds issued by Fannie Mae, Freddie Mac, FFCB, and FHLB are referred to here as “GSE bonds.” Although GSE bonds are not formally backed by the full faith and credit of the United States, due to their association with the federal government, GSE bonds benefit from an implicit federal guarantee.

GSE bonds are sold on both the primary and secondary markets. GSEs issue most bonds on the primary market through a syndication process. In a syndication, when a GSE wants to issue bonds, it retains one or more banks to underwrite its bond issue and sell those bonds to investors. Defendants are among the largest underwriters of GSE bonds sold on the primary market. According to one measure, they comprise the top seven largest underwriters of U.S. agency bonds (a larger category which includes GSE bonds).

Investors can also buy or sell at resale previously issued GSE bonds from dealers on the secondary market. In addition to dominating underwriting in the primary market for GSE bonds, Defendants are among the largest such dealers in the secondary market.

As competitors in the secondary market for GSE bonds, absent collusion, Defendants have an incentive to compete vigorously for the business of their investor clients. But because Defendants were not satisfied with the bid-offer spreads that would result from genuine competition in the market for GSE bonds, they colluded to rig the market—by manipulating the prices and spreads of GSE bonds.

The structure and characteristics of the GSE market offered extraordinary opportunities for collusion. Plaintiffs allege that the desks trading GSE bonds for the Defendant banks observed no divisions or ethical walls between “syndicate” functions relating to primary bond issuances and secondary trading. As a result, the traders who structured and marketed new bond issuances during the Class Period and who, as part of that function, regularly communicated non-public pricing and client information with the other banks that make up the rest of the underwriting syndicate—were the same people who traded those bonds post-issuance in the secondary market.

Without any ethical walls between syndicate and secondary trading activities, Defendants’ GSE bond traders could exchange—on a large scale—inside information pertaining to primary issuances by the GSEs, which they could use to their advantage. Sharing information on their respective pipelines, the conspirators could position themselves to earn supracompetitive trading profits in the secondary market because they knew more about supply and demand in the market and could position their trades accordingly.

Defendants’ goal was to ensure that the cartel members would transact with their investor clients at prices more favorable for the conspiring dealers—and thus worse for the customer—than could have been achieved absent collusion. In addition to refraining from competing with each other, Defendants actively helped each other to subvert competition so they could execute GSE bond trades on financial terms more favorable to them than in a competitive market.

As a result of their conspiracy, Defendants padded their own profits, and their personnel received huge annual bonuses, by cheating Plaintiffs and the Class —including pension funds, university endowment funds, hedge funds, insurance companies, corporate treasuries, fiduciary and depository institutions, small banks, money managers, and individual investors —out of potentially billions of dollars, resulting in potentially billions of dollars in damages.

Defendants’ GSE bonds conspiracy is currently under investigation by the U.S. Department of Justice (“DOJ”). In June 2018, Bloomberg reported that the DOJ had launched a criminal investigation regarding “whether traders manipulated prices in the $550 billion market for unsecured bonds issued by Fannie Mae and Freddie Mac.”

Plaintiffs seek treble damages and injunctive relief.

Case Name: Dallas Area Rapid Transit Employees’ Defined Benefit Retirement Plan and Trust, et al. v. Bank of America, N.A., et al., Case No. 1:19-cv-02715, U.S. District Court, Southern District of New York