New York. Lawyers who have accused Wall Street banks of rigging the price of Fannie Mae and Freddie Mac bonds have a cooperator who is providing “smoking gun” evidence including electronic chats, according to a new court filing.
The cooperator isn’t identified as a company or individual in the complaint filed Thursday in Manhattan. Only one institution appears in all the chats: Deutsche Bank AG. It’s also described as a co-conspirator and not a defendant. The bank declined to comment.
The lawsuit includes chats between traders at Deutsche Bank and others at Goldman Sachs Group Inc., Morgan Stanley and BNP Paribas SA. It accuses more than a dozen financial institutions of ripping off pension funds and others from 2009 to 2016.
Lawyers for the plaintiffs, including the treasurer of Pennsylvania, said chats and other information were received from a cooperating co-conspirator who discovered the conduct in January 2016.
Last June, Bloomberg News reported that the Justice Department had opened a criminal investigation into whether some traders manipulated prices in the market for unsecured bonds issued by Fannie and Freddie, the government-backed companies whose financing underlies most US home purchases. The market for their agency debt — which doesn’t directly finance mortgages — runs into the hundreds of billions of dollars. No individuals or banks have been charged.
The complaint filed on Thursday alleges that the chats about the pricing of the bonds in the secondary market also directly implicate Barclays Plc, Bank of America Corp., Citigroup Inc., Credit Suisse Group AG, First Tennessee Bank NA, JPMorgan Chase & Co., Nomura Holdings Inc., UBS Group AG, HSBC Holdings Plc, TD Securities Inc. and Cantor Fitzgerald LP.
Representatives of Morgan Stanley, Nomura and Cantor Fitzgerald didn’t immediately respond to requests for comment. The other banks declined to comment.
In addition to Fannie Mae and Freddie Mac, these government-sponsored-enterprise (GSE) bonds finance the Federal Farm Credit Banks and the Federal Home Loan Banks.
The complaint published portions of four chats that the pension funds claim are examples of improper coordination among the banks. The chats name the banks but not the traders. While multiple banks are involved in each chat, a Deutsche Bank trader is involved in all four.
In one from Feb. 17, 2012, traders at Deutsche Bank, BNP and Morgan Stanley were trying to sell about $390 million in Federal Home Loan Bank bonds that they won at a joint auction four days earlier.
“I just don’t want to create a race to the bottom between the 3 of us, doesn’t help anyone,” a Morgan Stanley trader wrote.
“ugh this thing is a pig,” wrote the Deutsche Bank trader, who then proposed a free-to-trade price of $99.985.
“Sure FTT at 99.985,” the Morgan Stanley trader responded.
“Good by me,” the BNP trader said.
More: Wall Street’s Legal Nemesis Is Sidelined in Fannie Rigging Case
The lawsuit, filed by lead plaintiff attorneys with Scott + Scott and Lowey Dannenberg who are seeking class-action status, didn’t name any individual traders. An earlier complaint, filed by another law firm that lost its bid to be lead counsel, identified 27 traders by name as “key personnel” on their firms’ trading desks, though it didn’t accuse them of wrongdoing.
Traders of these agency bonds were a close-knit group who often attended the same industry events and socialised with one another, according to the new complaint. Some of that closeness was reinforced by the way such bonds were sold — with three banks working together on each issuance. Because of that structure, restrictions on communications placed on other traders in the wake of criminal investigations into the rigging of currency and benchmark interest rates didn’t always apply to agency-bond traders, the complaint says.
The traders improperly used information they had from underwriting agency-bond issues to help them manipulate the price of the bonds on the secondary market, the plaintiffs say. This structure was known among industry players who nicknamed these trading desks “Casino Royale,” a reference to the James Bond film, the filing said.
US District Judge Jed Rakoff, who has set a May 4, 2020, trial date, will decide whether the case will have class-action status.