• 69% of reissued Treasury auctions were suspicious, suit says
  • Same type of analysis caught cheating in currencies, Libor

The same analytical technique that uncovered cheating in currency markets and the Libor rates benchmark -- resulting in about $20 billion of fines -- suggests the dealers who control the U.S. Treasury market rigged bond auctions for years, according to a lawsuit.

The analysis was part of a 115-page lawsuit filed in Manhattan federal court on Aug. 26 by Quinn Emmanuel Urquhart & Sullivan LLP and other law firms. The plaintiffs built their case against the 22 primary dealers who serve as the backbone of Treasury trading -- including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley -- using data from Rosa Abrantes-Metz, an adjunct associate professor at New York University who has provided expert testimony in rigging cases.

Her conclusion: More than two-thirds of a certain type of Treasury auction appear to have been rigged. She found issues with other auctions, too.

“The only plausible explanation is that Defendants coordinated artificially to influence the results of the auctions in the primary market,” according to the complaint filed by the Cleveland Bakers and Teamsters Pension Fund and other investors.

The lawsuit, which seeks unspecified damages, comes as the U.S. Justice Department probes whether information in the Treasury auction market is being shared improperly by financial institutions, three people with knowledge of the investigation said in June. Treasury traders at some banks learn of customer demand hours before auctions, and were communicating with their counterparts at other firms via chat rooms as recently as last year, Bloomberg News reported earlier this year.

Abrantes-Metz’s analysis is similar to one used in lawsuits claiming bank and broker manipulation of the London interbank offer rate, or Libor. Those cases resulted in about $9 billion in settlements from the financial firms. Banks and brokers have paid about $9.9 billion in fines to global regulators related to manipulation of currency markets as of May.

Representatives of Goldman Sachs, JPMorgan and Morgan Stanley declined to comment on the Treasury lawsuit’s allegations.

The U.S. Treasury initially sells securities to the primary dealers who in turn sell them to clients, creating a secondary market for trading. Sometimes, after auctioning off debt, the government later issues an identical batch of securities -- known as reissued Treasuries.

When the second set of Treasuries is issued, their prices and yields can be compared with the identical securities already trading in the secondary market. If there are pricing differences, that could be evidence of a problem. According to the plaintiffs, 69 percent of the auctions of reissued Treasuries from 2009 to 2015 appear to have been rigged, artificially boosting yields by 0.91 basis points.

The plaintiffs said there’s evidence of cheating from at least 2007 through earlier this year, when press reports revealed the Justice Department investigation into the auction process.

“These analyses reveal a consistent pattern: Treasury auction yields were artificially high (and prices correspondingly low),” according to the complaint. “Defendants then turned around and sold the Treasuries at higher prices (and correspondingly lower yields) in the secondary markets, reaping substantial profits.”

The data analysis showed similar discrepancies when prices at Treasury auctions were compared to those in the secondary market as well as the when-issued market. Treasury futures experienced similar downward pressure on prices leading up to auctions, the lawsuit claims.

Among the lawyers representing the investors is Daniel Brockett, a Quinn Emmanuel attorney who recently won a $1.87 billion settlement against Wall Street’s largest banks in a case alleging they conspired to limit competition in the market for credit-default swaps.

Brockett said in an interview that the new lawsuit alleges the artificially low auction prices grew in direct proportion to how many primary dealers were involved in an auction.

“No matter which way you measure it, they end up benefiting in ways that wouldn’t otherwise be possible in a liquid market of this size,” he said. The $12.8 trillion Treasury market helps sets interest rates on everything from home mortgages to credit cards and is often described as the largest, most-liquid market in the world.

Another group of investors, including Boston’s public employee retirement system, has filed a similar suit against Wall Street primary dealers. Experts interviewed by Labaton Sucharow LLP, the law firm that filed that suit, analyzed auctions and the market for when-issued securities, which are essentially agreements to buy or sell Treasury bonds, notes or bills once they’re issued.

They claim that banks colluded to push prices artificially low at auctions, and to drive prices for when-issued securities to artificially high levels, until December 2012, when news broke of investigations into how Libor was set.

“These scenarios all turn on a very simple conflict of interest,” attorney Michael Stocker said in a telephone interview. “You had banks who were auction participants who also had the power to move the prices that those markets depended on.”

The new case is Cleveland Bakers and Teamsters Pension Fund v. Bank of Nova Scotia, 15-cv-06782, U.S. District Court, Southern District of New York (Manhattan).

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