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Wall Street Banks Held for Rigging Treasury Bond Auctions

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A lawsuit has been filed in Manhattan federal court against a few Wall Street banks, claiming that traders at such banks collaborated with each other to manipulate auctions of the $14 trillion US Treasury bond market. The malpractice helped banks earn more at the cost of their clients.

This lawsuit is an extension of the class-action suit filed earlier in 2015 by several pension funds and wealthy individual investors. This new lawsuit claims that dealers at several banks secretly shared their client information in online chat rooms to rig auctions of the bond markets.

The banks that have been accused are The Goldman Sachs Group, Inc. (GS - Free Report) , Morgan Stanley (MS - Free Report) , The Royal Bank of Scotland Group plc (RBS - Free Report) , UBS Group AG (UBS - Free Report) and some others. Per the lawsuit, the manipulative practices by these banks were carried on for a period of almost eight years, between 2007 and 2015.

The above-mentioned banks are primary dealers in the bond markets. In order to sell debt to their clients, they first purchase it directly from the Treasury. Notably, the debt is sold to clients at a pre-determined price.

There is an auction that is conducted by the Treasury. Banks need to submit their bids for the bonds. The bids depend on how much their investor or clients want and the price they are willing to pay. Once the bids are submitted, the Treasury proportionately allots the bonds to the banks. The bank that asks for the best price gets the maximum number of bonds.

Now, how much the investors want and at what price are confidential. Banks are not allowed to disclose such information.

However, the lawsuit claims that traders at these banks secretly shared their client interest, thereby giving other banks a clear picture of the overall demand and supply in the market. By doing so, each of the banks involved in the auction got a better chance to get a bigger share of the auction and hence sell the bonds at a higher price to earn more profit at the cost of their investors.

In order to get a proper understanding of the subject, probes are being conducted by the Justice Department, the Securities and Exchange Commission and other federal, state and overseas regulators. However, so far, none of the banks have been officially accused of any wrongdoing.

Also, none of the accused banks has commented anything yet.

Of the above mentioned banks, Royal Bank of Scotland currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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