A Connecticut-based trading firm filed a class action lawsuit against 25 large banks, alleging they used their “privileged position” as primary dealers to collude to artificially depress the auction prices of U.S. Treasury securities at the expense of the Treasury and secondary market participants.  According to the complaint, the plaintiff, Torus Capital, LLC, performed a statistical analysis that revealed the Treasury auction yields were artificially high (and prices correspondingly low) “from at least 2007 through early June 2015,” when the Department of Justice (DOJ) announced it “had commenced an investigation into Defendants’ misconduct within the Treasuries markets.”  The DOJ investigation is ongoing.

The complaint describes findings from the analysis of “reissued Treasuries,” or securities auctioned by the Treasury that are identical in principal amount and maturity date to securities previously auctioned.  In a competitive market, since the reissued Treasuries are identical to those previously issued, the price and yield of the reissued securities and the previously auctioned securities trading on the secondary market should be the same or similar.  According to the complaint, the plaintiffs’ analysis found the yields “were inflated in 69% of the auctions, by 0.91 basis points,” a result the complaint alleges “cannot be explained as a result of random chance.”

The complaint seeks to certify a class of “many thousands” who sold Treasury securities or Treasury futures “around the time of a Treasury auction” and others who were parties to swaps, contracts, or other instruments where “cash flows were tied to a Treasury Security auction result” since January 1, 2007.  The action was filed on July 7 in the U.S. District Court for the Southern District of New York.