The City of Birmingham Retirement and Relief System and the Electrical Workers Pension System Local 103 have filed a proposed class action securities fraud lawsuit accusing a number of big banks of colluding with one another to rig the prices of Federal Home Loan Mortgage Corp. (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) unsecured bonds. The defendants in the case include JP Morgan (JPM), Bank of America (BAC), Citigroup (C), Barclays Bank (BARC), Deutsche Bank (DB), Credit Suisse (CS), UBS (UBS), Merrill Lynch, BNP Paribas Securities Corp., FTN Financial Securities, Goldman Sachs (GS), and First Tennessee Bank.
According to Law360, the plaintiffs contend that the bank took advantage of the dark market nature of the “private, ‘over the counter’ (OTC) market” where these bonds are bought and sold to get investors to buy the Freddie Mac and Fannie Mae bonds at prices that were “artificially high.”
Fannie and Freddie are both government-backed mortgage-finance companies. They are typically known for converting mortgages into mortgage-backed securities. This investor fraud lawsuit, however, is focused on their unsecured bonds. The proposed class contends that investors purchased the bonds because they thought they were safe, liquid, low risk, and likely to make returns. Their complaint states that the plaintiffs and other investors had not expected the “overcharges and underpayments” that resulted because of the banks’ alleged collusion.
The proposed class points to data it obtained on over 1.6 million bond transactions that it claims revealed pricing on the bonds that were “highly anomalous” and which they believe is proof of price rigging.
Law 360 reports that the proposed class is accusing the defendant banks of raising prices on newly issued Freddie and Fannie bonds while having the “expectation” that additional sales were more like to take place right after the bonds were released than “in between issuances.” The banks would then “offload” them onto investors.
The proposed class contends that there is data demonstrating that in the day before new bonds were issued, bank traders would gradually raise the older bonds’ prices so as to “inflate the benchmark price.” Meantime, the banks were allegedly making agreements with each other to not compete against one another as purportedly demonstrated by how the price difference between what the banks paid when they purchased the bonds and the prices that they sold them at remained “relatively steady.”
Last June, Bloomberg reported that the US had begun a criminal probe into whether the banks had rigged the prices of the Freddie and Fannie unsecured bonds. Bloomberg stated that the Securities Industry and Financial Markets Association (SIFMA) found that the two mortgage finance companies had approximately $548B of these bonds outstanding. Among the largest holders of the bonds are institutional investors, including the states of Florida and Maryland, the US Federal Reserve, BlackRock Inc., and others.
A number of these banks were recently named in a different and unrelated institutional investor fraud case also alleging price rigging, this one brought by the city of Philadelphia, Pennsylvania. Philadelphia is accusing Bank of America, Citigroup, Goldman Sachs, Wells Fargo (WFC), JPMorgan Chase, Barclays, and Royal Bank of Canada (RBC) of colluding together to rig variable rate demand obligations (VRDOs) by agreeing not to compete against one another for re-marketing services involving these securities. Meantime, they secretly made hundreds of millions of dollars in unearned fees while Philadelphia contends that it and other investors paid billions of dollars in inflated interest rates.
Institutional Investor Fraud
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