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Banks Rigged Treasury Bonds, Class Claims

(CN) - Just as they did with LIBOR, major Wall Street banks have for years manipulated the $12.7 trillion U.S. Treasuries market, a federal class action alleges.

The Oklahoma Firefighters Pension and Retirement System is the lead plaintiff in the complaint filed in Manhattan against Barclays Capital, Deutsche Bank, Goldman Sachs, HSBC Securities, Merrill Lynch, Morgan Stanley, Citigroup and others.

Monday's filing comes on the heels of a June investigation by the Department of Justice into possible fraud committed by banks at Treasury auctions, the secretive process in which the price of U.S. Treasury securities are set.

U.S. Treasury bonds are considered extremely safe investments, since there is virtually no chance the U.S. government will default on its bond obligations.

Therefore, strong demand for U.S. government debt signals less confidence in the market, and will result in a lower interest rate attached to Treasury bonds. In contrast, lower demand will result in a higher interest rate, because it signals that banks believe there is a good chance of making money in a riskier investment.

The rate attached to the sale of Treasurys also impacts a range of other borrowing costs, including mortgages, credit card rates and corporate bonds.

"Defendants are expected to be 'good citizens of the Treasury market' and compete against each other in the U.S. Treasury Securities markets; however, instead of competing, they have been working together to collusively manipulate the prices of U.S. Treasury Securities at auction and in the when-issued market, which in turn influences pricing in the secondary market for such securities as well as in markets for U.S. Treasury-Based Instruments," the 28-page complaint states.

The State-Boston Retirement System filed similar allegations last month, also in Manhattan.

As in that lawsuit, the Oklahoma pension fund accuses the defendant banks of using their position as primary bond traders to inflate the price of Treasuries on the secondary market.

"Bloomberg has reported that individual traders working for defendants 'have talked with counterparts at other banks via online chatrooms,' and such conduct is believed to have continued at least through 2014," the complaint states. "Perhaps for this reason, the Primary Dealers have been regarded as an 'insiders club.' Bloomberg further reported that traders 'shared broad guidance' in advance of auctions and that in many instances, traders did not follow internal guidelines prohibiting them from discussing client information before auctions.

"The exchange of competitively-sensitive information between and among the defendants allowed them to coordinate bidding strategies at Treasury Department auctions as well as in the when-issued market, thereby suppressing auction prices while increasing prices in the when-issued market which resulted in wider spreads (and thus increased profits) for the defendants at the expense of plaintiff, the class, and the U.S. Government." (Parentheses in original.)

It's been just three months since five of the banks named in the Treasuries suit, representing the biggest banks in the world, pleaded guilty and agreed to pay $5 billion for manipulating the London Interbank Offered Rate (LIBOR) and other foreign benchmark interest rates.

Approximately two dozen banks and financial institutions were linked to the scandal.

This week's class action seeks treble damages from the banks for fixing bids during Treasury auctions, a practice that allegedly causing U.S. government bonds to be artificially priced from 2007 until the present.

The class is represented by Robert Kaplan with Kaplan, Fox & Kilscheimer.

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