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Citi, Goldman, Other Banks Accused of CDS Antitrust Scheme (2)

July 1, 2021, 7:55 PM; Updated: July 1, 2021, 11:10 PM

New Mexico’s sovereign wealth fund brought a federal antitrust lawsuit claiming Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., and other top financial institutions rigged the credit default swap market by manipulating a key benchmark.

The proposed class action, docketed Thursday, also targets Barclays Plc, BNP Paribas SA, Credit Suisse Group AG, Deutsche Bank AG, JPMorgan Chase & Co., Morgan Stanley, Natwest Group Plc, and three industry groups.

By rigging the “final auction price” used “to value all CDS contracts market-wide at settlement,” the banks have made “billions of dollars in cartel profits at the expense of non-dealer market participants,” according to the complaint filed in the U.S. District Court for the District of New Mexico.

Credit Suisse, Deutsche Bank, Goldman, and JPMorgan declined to comment Thursday. The other banks didn’t immediately respond to requests for comment.

The case concerns a system allegedly orchestrated by the banks starting in 2005 for pricing credit default swaps through auctions rather than bilateral negotiations between investors standing on both sides.

Credit default swaps are financial derivatives that work by paying out to holders of investments that are “impaired” by a “credit event” like a default, in exchange for premium-like payments over the life of the instrument. They can also be used to speculate on investments not owned by the swap holder.

The banks promoted industrywide adoption of the auction process by telling regulators during the 2008 financial crisis that it would clean up some of the derivative trading practices that had led to the meltdown, according to the complaint filed by the New Mexico State Investment Council.

“The reality was much different,” the suit says. They allegedly “formed a dealer-only ‘working group’” that had “no formal name” and whose “existence was not publicized,” through which they agreed only banks would be allowed to participate directly in the auctions.

“Shrouded from the public,” the working group built “secrecy and lack of scrutiny” into “the DNA of the CDS auction process,” according to the complaint. Although the scheme began in 2005, the litigation filing window remained open because the conspiracy was “self-concealing,” the suit says.

Because the banks operate “without serious government oversight” under a “regulatory patchwork” that divides authority over swaps among different agencies, they “have not been caught” before now, according to the complaint.

Cause of Action: Section 1 of the Sherman Act; the Commodity Exchange Act and related regulations; unjust enrichment.

Relief: Treble damages, costs, fees, and interest.

Potential Class Size: Anyone who has settled a credit default swap at a price set through the auction process introduced in 2005.

Attorneys: The investment fund is represented by the New Mexico attorney general’s office and Kirby McInerney LLP.

The case is N.M. State Investment Council v. Bank of Am. Corp., D.N.M., No. 21-cv-606, complaint filed 7/1/21.

(Updates fourth paragraph to indicate the banks that responded to requests for comment by declining to do so.)

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editor responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com

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