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By Jonathan Stempel
NEW YORK, July 23 (Reuters) - Twenty-two financial companiesthat have served as primary dealers of U.S. Treasury securitieswere sued in federal court on Thursday, in what was described asthe first nationwide class action alleging a conspiracy tomanipulate Treasury auctions that harmed both investors andborrowers.
The State-Boston Retirement System, the pension fund forBoston public employees, accused Bank of America Corp's Merrill Lynch unit, Citigroup Inc, Credit Suisse Group AG, Deutsche Bank, Goldman Sachs Group Inc, HSBC Holdings Plc, JPMorgan Chase & Co,UBS Group AG and 14 other defendants of illegallytrying to profit on the sale of Treasury bills, notes and bondsat investors' expense.
According to the pension fund's complaint, filed in U.S.District Court in New York, the banks used chat rooms, instantmessages and other means to swap confidential customerinformation and coordinate trading strategies in the roughly$12.5 trillion Treasury market.
This enabled the banks to inflate prices on Treasuries theysold to investors in the pre-auction "when issued" market, anddeflate prices when they bought Treasuries to cover theirpre-auction sales, violating antitrust laws, according to thecomplaint.
Primary dealers are the banks authorized to transactdirectly with the Federal Reserve. They are big players inTreasury bond auctions and act as market makers in the secondarymarket.
The pension fund said its "expert economists" observed widegaps between when-issued and auction prices around December2012, but that these gaps narrowed significantly as the U.S.Department of Justice and other regulators began probing allegedmanipulation of the London interbank offered rate, a benchmarkused to set interest rates for trillions of dollars worth ofloans around the world.
"The only plausible explanation for the sharp break," thefund said, "is that defendants felt the heat of the DOJ'songoing investigation into Libor, and ceased their efforts tomanipulate the Treasury securities market because defendants'Treasury traders feared that they too would be prosecuted."
Media reports last month said the Justice Department wasalso investigating possible collusion in Treasury auctions.
"The scheme harmed private investors who paid too much forTreasuries, and it harmed municipalities and corporationsbecause the rates they paid on their own debt were also inflatedby the manipulation," Michael Stocker, a partner at LabatonSucharow, which represents State-Boston, said in an interview."Even a small manipulation in Treasury rates can result inenormous consequences."
The lawsuit seeks class-action status on behalf of investorsin Treasury securities, including futures and options, from 2007to 2012, and unspecified triple damages.
Spokespeople for Bank of America, Citigroup, Credit Suisse,Deutsche Bank, Goldman, HSBC and UBS declined to comment. Otherbanks had no immediate comment or were not reached.
The case is State-Boston Retirement System v Bank of NovaScotia et al, U.S. District Court, Southern District of NewYork, No. 15-05794. (Reporting by Jonathan Stempel in New York; Editing by LeslieAdler)
