GSE bond settlement will 'reinvigorate compliance,' legal expert says

A $250 million settlement in a bond price-fixing lawsuit in which 12 banks agreed to stricter antitrust oversight will revive compliance, according to a legal expert.

Pennsylvania Treasurer Joe Torsella first filed the lawsuit in March against 16 of the nation’s largest banks, for colluding to fix prices of Fannie Mae and Freddie Mac bonds — government-sponsored entity instruments — between 2009 and 2016.

The settlement Torsella announced Tuesday brings total recovery to $386.5 million.

Torsella, who has since been designated as class representative, said four of the defendant banks have agreed to settlement terms that include monetary recovery and structural overhaul that will prevent anticompetitive conduct in the future.

"While the monetary recovery is notable in and of itself, the more far reaching aspect of the proposed settlement is the implementation of a more rigorous compliance system at each of the defendant institutions," said Anthony Sabino, a Mineola, New York, attorney and St. John's University law professor. "Reinvigorating compliance will deter anticompetitive behavior in the future, and assure a fair and open market in GSE instruments, a far more important result where taxpayer dollars are at stake."

The 12 remaining banks in the lawsuit are BNP Paribas; Cantor Fitzgerald; Citigroup Global; Credit Suisse; HSBC; J.P. Morgan; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley; Nomura Securities; SG Americas; TD Securities; and UBS Securities. Separately, settlement agreements were reached with four of the original 16 defendants: Deutsche Bank, First Tennessee Bank, Goldman Sachs and Barclays.

The suit alleged that the defendant financial institutions — the largest underwriters of Fannie Mae and Freddie Mac bonds — violated federal antitrust law when they exploited their dominant market position and conspired to unlawfully increase prices, overcharging and/or underpaying investors in GSE bond transactions.

The suit included evidence of more than a dozen online chat rooms used by traders representing the defendant banks to discuss and agree on artificial prices before bringing the bonds to market.

“The allegations in this case were preventable from the start. If the proper safeguards were in place at these banks, we wouldn’t need to be here knocking the door down on behalf of investors who were harmed by the banks’ conduct," Torsella said.

Assuming classwide damages of $857 million, the total recovery of $386.5 million represents nearly 59% of the 16 defendants’ proportionate share of single damages, Torsella said.

As part of the settlement, all defendant banks have agreed to establish and maintain an effective antitrust compliance program. Each settling bank, to the extent that they are participating in GSE bond market, must conduct rigorous employee training; establish a "culture of compliance" with strong oversight; dedicate resources for oversight; and ensure consistency with industry best practices through periodic assessment of a program by a Pennsylvania Treasury representative.