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State-Boston Retirement System, on behalf of itself and v. Bank of Nova Scotia

(CN) - Many of the world's biggest banks manipulated Treasury Department auctions on the Chicago Mercantile Exchange to sell securities, futures and options at inflated prices, a class action claims.

In its complaint, State-Boston Retirement System claims Goldman Sachs, HSBC, Morgan Staley, Citigroup, Barclays and others shared confidential customer information and trading strategies to dramatically scale up the auction price of financial products, and rigged the bidding process so they could buy auctioned securities at deflated prices.

The products allegedly included in the scheme included U.S. Treasury bills, notes and bonds, and derivative products pegged to them.

"In a competitive market not manipulated by Defendants, prices (yields) of Treasury securities generally tend to be higher (lower) in the when-issued market than prices tendered at auction," the complaint says. "However, as a result of Defendants' unlawful manipulation of the Treasuries market, the prices of when-issued Treasury securities were artificially high and the prices of Treasury securities at auction were artificially low. This scheme maximized Defendants' profits at the expense of their customers and others in the market."

According to State-Boston Retirement System, the defendants employed a two-pronged scheme to manipulate the Treasury securities market.

" First, Defendants used electronic chat rooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies, and increase the bid-ask spread in the when-issued market to inflate prices of Treasury securities they sold to the Class," the complaint says. "Second, Defendants used the same means to rig the Treasury auction bidding process to deflate prices at which they bought Treasury securities to cover their pre-auction sales. Recent reports confirm that traders at some of these primary dealers "talked with counterparts at other banks via online chat rooms" and "swapped gossip about clients' Treasury orders."

By engaging in this alleged unlawful conduct, State-Boston Retirement System says the defendants maximized the spread not only for transactions in the when-issued market, but also between their buy (auction) price and sell (when-issued) price.

"This conduct lined the pockets of Defendants while raising prices to investors trading Treasury securities in the when-issued market, investors trading Treasury security-based futures and options, and investors transacting in instruments benchmarked to the prices of Treasury securities determined at auction, including certain bonds and other asset backed securities and interest rate swaps."

The retirement system says it hired economists to analyze certain price behavior of Treasury securities, and in their preliminary analyses, the economists "observed a greater spread between when-issued prices and auction prices around December 2012. Around this same time, there were the public revelations that several banks manipulated and rigged their interest rate submissions for the London Interbank Offered Rate ("LIBOR")-including Defendants Barclays, Deutsche Bank RBS, and UBS (or their parents and affiliates)."

"Plaintiff's experts further found that bid-ask yield spreads of Treasury securities in the when-issued market were higher in the period leading up to the revelation of the LIBOR scandal than they were after the scandal broke. Plaintiffs' experts found the change in these spreads to be statistically significant," the complaint says.

The retirement system seeks compensatory and punitive damages and injunctive relief for multiple violations of federal antitrust and commodities laws.

It is represented by Greg Asciolla, Jay Himes and Michael Stocker of Labatin SU Pa Ow LLP of Manhattan.

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