Fannie Bond-Rigging Suit Lists 27 Traders Without Accusing Them
Fannie Bond-Rigging Suit Lists 27 Traders Without Accusing Them
(Bloomberg) -- More than two dozen traders at banks including Deutsche Bank AG, UBS Group AG and FTN Financial Securities Corp. were identified in a civil lawsuit that alleges their employers colluded to rig the prices of bonds issued by Fannie Mae and Freddie Mac.
An amended complaint listing the names was filed Monday in a proposed class action against about a dozen financial institutions. The 27 traders, referred to as “key personnel” on those bond desks, aren’t named as defendants in the suit, brought by the Alaska Electrical Pension Fund in Manhattan federal court.
Bloomberg reported last June that the Justice Department had opened a criminal investigation into whether some traders manipulated prices in the market for unsecured bonds, known as agencies, issued by the government-backed companies. The size of the market runs into the hundreds of billions of dollars. No individuals or banks have been charged.
All of the defendant banks in the civil suit had traders identified in the complaint. Six were associated with Deutsche Bank, and five each with UBS and FTN Financial. Other defendants include Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley.
The banks declined to comment.
The lawsuit claims that traders at those banks worked together using Bloomberg electronic chats as well as emails, texts and phone calls to share confidential information with one another so that they could position their books to take advantage of their customers’ trading strategies and manipulate the prices and spreads of the bonds.
“Through their communications, defendants were kept constantly informed of each other’s GSE bond inventories, positions, customers and pricing,” said the amended complaint by Daniel Brockett at Quinn Emanuel Urquhart & Sullivan LLP, referring to Fannie and Freddie as government-sponsored entities.
Former Trader
Among the more prominent names is Beth Hammack, a former trader who’s now the treasurer at Goldman Sachs and chairwoman of the influential committee that advises the U.S. Treasury on its borrowing. The bank declined to comment, and Hammack didn’t respond to an email.
At least two of the individuals were terminated by their banks after the Justice Department investigation became public, regulatory filings indicate. They included Justin Roth of Morgan Stanley and Jaiman Lee of Goldman Sachs. Alexis Frum left BNP Paribas a year after the bank reported he was involved in a government investigation. They didn’t respond to requests for comment.
While investor lawsuits against Wall Street banks are common -- particularly after the Justice Department or a regulatory agency has opened an investigation -- it’s unusual that several employees are identified by name. That’s especially true before a judge has even decided whether to allow the case to proceed to discovery, where documents and other evidence might identify people at the center of the controversy.
Conspiracy ‘Pattern’?
The plaintiffs say their analysis of trades showed that bid-offer spreads in the market for GSE bonds were artificially inflated from January 2012 until the beginning of last June -- the day the Bloomberg report on a criminal probe was published -- when spreads returned to levels that would be expected in a “properly functioning market.”
“This pattern is indicative of a conspiracy that started to break apart at the first news of the DOJ investigation,” the amended complaint says.
Fannie and Freddie are known for pooling home mortgages into securities, part of a government-backed effort to finance Americans’ home purchases. But those aren’t the securities that attracted investigators’ attention. Instead, authorities are looking at secondary trading in unsecured bonds issued by Fannie and Freddie themselves, known as agencies, two people familiar with the matter told Bloomberg last year.
Together, the two mortgage-finance companies have about $500 billion of short- and long-term securities outstanding, according to the firms. Most of the debt is composed of agencies, which are often traded by desks that handle government bonds.
Prosecutors from the Justice Department’s antitrust and criminal divisions are working on the investigation, the people previously told Bloomberg. Antitrust lawyers focus on collusion to fix prices, while the criminal division is responsible for prosecuting fraud charges.
Bank of America alumnus Lou Diamond, who was listed in the lawsuit and is now an inspirational speaker, said he sold interest-rate derivatives instead of trading agency bonds. “There certainly was no conspiracy,” he said. “There was no collusion -- period.”
--With assistance from Dan Wilchins.
To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net;Max Abelson in New York at mabelson@bloomberg.net;Shahien Nasiripour in New York at snasiripour1@bloomberg.net
To contact the editors responsible for this story: Jeffrey D Grocott at jgrocott2@bloomberg.net, David S. Joachim
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