Federal prosecutors and the top U.S. commodities regulator have
asked banks to turn over information in connection with a broad
probe into whether their traders rigged auctions on government
debt, according to people familiar with the matter.
Banks are in the process of providing details to prosecutors at
the Fraud Section at the Justice Department, as well as
investigators at the Commodity Futures Trading Commission, the
people said.
The two agencies sent the requests this summer to many of the
banks that serve as primary dealers, which are authorized to deal
directly with the government on the sale of Treasury bonds, the
people said. The list of primary dealers includes Goldman Sachs
Group Inc., as well as other Wall Street banks and many of their
biggest European and Asian counterparts.
There are 22 primary dealers, but it isn't clear whether all of
those firms received the requests.
Goldman appeared to reference the inquiries Tuesday in a
regulatory filing. The firm noted that regulators were scrutinizing
activities related to the offering and auction of various
securities, as well as "when-issued trading," a classification for
bets dealers and traders place on the interest rate that will be
offered by the government debt issued at auction a week later. The
disclosures hadn't appeared in Goldman's previous quarterly
filings. A representative for Goldman declined to comment.
The requests from the CFTC and Justice Department's Fraud
Section hasn't been previously reported, nor has the fact that
banks have begun to turn over information at the request of the two
agencies.
In August, New York's Department of Financial Services, the
state's banking regulator, sent its own information requests to
nine large banks within its jurisdiction, The Wall Street Journal
has reported.
The requests went out to Bank of Nova Scotia, Bank of Montreal,
Barclays PLC, BNP Paribas SA, Credit Suisse Group AG, Deutsche Bank
AG, Goldman, Mizuho Financial Group Inc. and Socié té Gé né rale
SA, said a person familiar with the matter. Representatives for
Barclays, Credit Suisse, BNP, Deutsche and Mizuho declined to
comment, and the others didn't respond to requests for comment.
The New York regulator asked banks to respond with troves of
information about their orders, trading and pricing in Treasury
sales, said the person. The agency also asked for details of any
communications between traders at different banks related to the
Treasury auctions.
Authorities are looking into whether bank traders worked
together to bolster their own profits by depressing prices at U.S.
government debt auctions. It isn't known what specific instances of
possible manipulation are being examined by regulators.
The requests for information from federal and state authorities
aren't an indication of any suspected wrongdoing by the banks that
were contacted, according to people familiar with the matter.
The $12.8 trillion Treasury market has emerged as the latest
focus for law-enforcement officials, regulators and plaintiffs'
attorneys looking for evidence of misconduct by Wall Street
banks.
Many of the world's largest banks have rung up billions of
dollars of fines and settlements in the wake of accusations they
manipulated interest-rate benchmarks and foreign-exchange
markets.
The Treasury market is arguably the deepest in the world and the
baseline for pricing a wide range of other assets. Treasury prices
influence rates on everything from mortgages to car loans, and they
act as a barometer of economic health. During market routs,
investors flock to Treasurys because they are typically bought and
sold more easily than other securities.
The involvement of the CFTC, which oversees the futures market,
suggests investigators are examining futures trading that occurs
ahead of and around Treasury auctions. It isn't clear why the
Justice Department's Fraud Section is taking the lead on the
inquiry, but indicates prosecutors are focused on allegations of
manipulation, rather than collusion, which would be investigated by
the antitrust division of the department.
Separately, there are about three dozen private lawsuits into
potential collusion by banks in the Treasury market, which are also
at a nascent stage. One led by the Cleveland Bakers and Teamsters
Pension Fund accuses dealers of conspiring to lower Treasury
prices, and turning around and selling those same bonds into the
secondary market at higher prices, "reaping substantial
profits."
According to the Cleveland complaint, data from Treasury
auctions analyzed by plaintiff lawyers indicated that prices on the
newly issued bonds were depressed, and their yields inflated, in
69% of the auctions studied by about 0.91 percentage point. Bond
yields move inversely to prices.
"This repeated bias cannot be explained as a result of random
chance; instead, the only plausible explanation is that defendants
coordinated artificially to influence the results of the auctions,"
according to the complaint.
There will be a Dec. 3 hearing in a New Orleans federal court to
decide whether the private lawsuits will be consolidated in New
York, Chicago or elsewhere.
Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com, Justin
Baer at justin.baer@wsj.com and Katy Burne at
katy.burne@wsj.com
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(END) Dow Jones Newswires
November 03, 2015 19:45 ET (00:45 GMT)
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