Big Banks’ $500 Million Settlement Puts Wall Street on Notice

A nearly $500 million settlement agreement by four investment banks over control of the stock-loan market is prompting changes to bank practices and warning the industry to take antitrust violations more seriously, analysts said.

Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co., and UBS Group AG last week said they agreed to settle claims in a case brought by pension funds led by the Iowa Public Employees’ Retirement System. The funds in 2017 filed suit, accusing the Wall Street giants of conspiring to thwart all-electronic trading systems that match stock lenders and borrowers in an effort to preserve the banks’ privileged role as a broker on every stock loan trade.

The settlement also pressures the lone holdout in the case, Bank of America Corp.; the funds are pursuing class action status that would add more plaintiff investors. Bank of America declined to comment for this story.

The banks relied on EquiLend, a joint-venture trading and clearing platform owned by the banks. As part of the settlement, EquiLend agreed to changes designed to diminish collusion, such as adhering to an antitrust code of conduct and agreeing to a reporting mechanism. The market for stock loans is seen as particularly opaque, and therefore prone to anticompetitive behavior.

“This is a really big win for the little guys,” said Julie Goldsmith Reiser, a partner at Cohen Milstein Sellers & Toll PLLC. Her firm is co-lead counsel for the plaintiffs along with Quinn Emanuel Urquhart & Sullivan, LLP. “This kind of pressure from public pension funds, who are acting on behalf of regular everyday people, can influence how the markets work.”

Other steps EquiLend must take include rotating outside antitrust counsel and EquiLend board members; limiting who can access commercially sensitive information; and compliance, training, and monitoring programs.

Banks ‘Very Nervous’

Though rare, it is not unheard of for changes in corporate practices to be part of a settlement in an effort to dissuade misconduct, particularly if the targeted behavior is an ongoing issue in an industry, said Kathleen Bradish, vice president for legal advocacy at the American Antitrust Institute.

“It actually makes sense to have a settlement that has forward-looking injunctive relief because no amount of damages is going to fix the problem,” Bradish said.

Compliance officers at multiple banks should be thinking about potential violations and eyeing internal processes that could prove problematic, said Mayra Rodríguez Valladares, managing principal for financial risk consulting firm MRV Associates.

“Anytime there is a big scandal like this, banks get very nervous,” Valladares said. “It immediately puts them on notice of, wait a minute—are any of these things happening at our institution?”

While the $499 million expected to be paid out by the four banks is just “pocket change” to them, that money could have been used for lending in an environment of high interest rates, and for hiring and training employees, she said.

“That’s a better use of money than this,” Valladares said.

Push to Class Action

The plaintiffs will continue pursuing class certification for the settlement so that thousands of similarly situated investors are able to pursue their claims in one litigation.

A magistrate judge has already recommended class action but it still must be formally certified, Reiser, of Cohen Milstein, said.

The banks’ settlement agreement, which is still preliminary, is predicated on the fact that it would cover all claims from plaintiffs, including those who join down the line.

The move by the four banks to settle also pressures the case’s remaining defendant, Bank of America, to settle or face treble damages, said Eleanor Tyler, principal legal analyst for Bloomberg Law. A Credit Suisse Group AG unit settled claims against it last year for $81 million.

“They are leaving Bank of America out to dry,” Tyler said.

Bloomberg Intelligence analysts said they believe Bank of America can settle for less than $100 million.

The case is Iowa Public Employees’ Retirement System et al v. Bank of America Corp., S.D.N.Y., No. 17-cv-6221.