Pennsylvania Treasurer Joe Torsella is accusing 14 financial firms of collaborating to illegally inflate the prices of Fannie Mae- and Freddie Mac-issued bonds from 2009 to 2016.
"Direct evidence provided by a cooperating co-conspirator confirms the agreement and economic analysis details pricing patterns consistent with such behavior," Torsella said in a Thursday night filing in the U.S District Court for the Southern District of New York.
The co-conspirator, he said, relates to a U.S. Department of Justice probe into price fixing in the secondary market for bonds that government-controlled enterprises issue — so-called GSE bonds.
The filing cites brief transcripts of what it asserts are online chats by traders from various financial institutions that are the largest dealers of the bonds.
Named as defendants are Barclays, Bank of America/Merrill Lynch, Citigroup, Credit Suisse, Goldman Sachs, BNP Paribas, First Tennessee, TD Securities, Morgan Stanley, Nomura, JP Morgan, Cantor Fitzgerald, UBS and HSBC.
"Defendants are horizontal competitors in the GSE bond market," said the filing.
Pennsylvania’s Treasury Department is seeking class action in the case, which has included lawsuits by government agencies, labor unions, public pension systems and the city of Baltimore. Torsella was appointed as lead plaintiff in the proposed class action
The filing said Pennsylvania’s various agencies bought or sold $63 billion in GSE bonds during the seven-year period.
"Due to their perceived safety and high credit quality, GSE bonds have been a key component of commonwealth fund investments for many years," the filing sad. "Commonwealth funds transacted in more than $63 billion in GSE bonds during the class period."
Torsella’s office is determining how much money state agencies lost.
"While these allegations are interesting, if not troubling, no one should get too excited yet," said Anthony Sabino, a Mineola, New York, white-collar defense lawyer and St. John's University law professor.
The jargony chats are open to wide interpretation, according to Sabino, a former federal prosecutor.
"Online 'chats' are easily misinterpreted by third parties listening after the fact. Add the fact that bond traders have a nomenclature all their own, and it would be quite easy to misconstrue innocent comments as unlawful activity."
Sabino added: "That said, it is still important for the Pennsylvania authorities to drill deeply, and get to the bottom of whatever transpired here. Sadly, we have seen past allegations of price fixing proven true, and that kind of wrongdoing simply cannot be tolerated."
Worth watching, according to Sabino, is whether the Justice Department investigation results in criminal charges.
"That could well fortify Pennsylvania’s civil case for money damages," he said.
