City files major class action lawsuit against big banks

Apr 5, 2019

The City of Baltimore has filed a lawsuit against 10 major banks claiming they illegally inflated interest rates for particular bonds for public works — overcharging the city and other municipalities by billions of dollars. 

The lawsuit was announced at a news conference Thursday by acting Mayor Bernard C. “Jack” Young and City Solicitor Andre Davis. (Watch News Conference Here)

“These financial instruments are collectively referred to as “FFBS,” short for Fannie and Freddie Bonds,” said Davis. “These bonds are favored by municipalities because they are generally considered safe investments that provide a high degree of liquidity.”

Recent news reports reveal that the U.S. department of justice has opened a criminal investigation into price manipulation by bank traders in the secondary FFB market.  Based on this report, the city of Baltimore conducted economic analysis of available price data and market information.  The results indicate that defendants have engaged in a price-fixing conspiracy in the market for FFBS, which inflated the prices of FFBS purchased by investors, both at issuance and in the secondary market, and deflated the prices of FFBS sold by investors in the secondary market. 

Alerted to this conspiracy, Baltimore filed suit on its own behalf and on behalf of the class of entities harmed by the conspiracy. During the conspiracy period (2009-2014), the city of Baltimore paid almost $1 billion for 108 FFBS.

Defendants include, Bank of America, Barclays, Citi, Credit Suisse, Deutsche Bank, First Tennessee Bank, Goldman Sachs, Jefferies Group LLC, JP Morgan, Merrill Lynch, Pierce, Fenner & Smith, Inc., UBS, and other unnamed co-conspirators. Defendants are horizontal competitors and the dominant dealers in ffbs, meaning that they controlled the FFBS supply ultimately available to investors, like Baltimore, in both the primary market (or, issuance) and in the secondary market. The secondary market for FFBS is a vast “over-the-counter” (“OTC”) market, which facilitated defendants’ price-fixing conspiracy.

In other words, the FFBS are traded through a network of broker-dealers, rather than on a centralized, formal exchange such as the New York Stock Exchange where a multitude of banks and investors and other agents are able to see public information updated in real-time as they trade.  This OTC market is therefore a dark market that enabled a few select, knowledgeable, and privileged dealers with exclusive access to price information to collude and harm investors, without risking that these investors would discover their conspiracy.

“This lawsuit shows that Baltimore City is serious about protecting the interests of our taxpayers,” said Ex Officio Mayor Bernard C. “Jack” Young. "We are sending a signal to unscrupulous corporate actors that we will hold them accountable.” 

“The Law Department continues to vigilantly safeguard City taxpayer interests,” said Davis. “We pursue recoveries when we learn that large banks have colluded to increase prices on complex financial instruments, overcharging the City by millions of dollars.”  

The City is represented by outside counsel, Bill Carmody, Arun Subramanian, Seth Ard, and Stephanie Spies of Susman & Godfrey.