Last Monday, a group of investors filed a consolidated complaint in a class action that accuses 12 big banks of manipulating the foreign currency exchange market.
As we reported previously, plaintiffs are suing Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, RBS, and UBS for violating federal antitrust law. (Korein Tillery is representing Haverhill Retirement System and Oklahoma Firefighters Pension and Retirement System in the litigation.)
The $5.3 trillion-a-day FX market is the largest-and least regulated-financial market in the world. A global investigation was launched last year into manipulation of the FX market on the heels of another international rate-rigging scandal involving the London interbank offered rate (LIBOR) benchmark. In particular, the FX investigation has focused on the manipulation of the WM/Reuters fixing rates, which are the key benchmark rates used to value currencies in the FX market.
In the FX class action filed in U.S. District Court for in the Southern District of New York, traders at the defendant banks are accused of colluding with one another to rig the WM/Reuters benchmark rates in their banks’ favors. One strategy employed by traders, called “banging the close,” involves pushing trades through immediately before and during the 60-second window when the benchmark is set. Another maneuver used is called “front running,” wherein a trader receives a customer order that could potentially move the market, and executes his proprietary trades ahead of his customer’s trade in order to benefit from the subsequent movement in the market. And in yet another scheme known as “painting the screen,” traders place phony orders with one another to create the illusion of trading activity in a given direction in order to move rates prior to the fixing window.
These tactics are illegal in some jurisdictions and unethical everywhere, since they place the banks’ interests ahead of their clients’. The traders also violated the Sherman Act when they conspired as a group to execute these strategies in order to manipulate the market.
Many of the details in the class action about the traders’ activities come directly from some of the same banks that were implicated in the LIBOR scandal, including Barclays, RBS, and UBS, which have been cooperating with federal authorities. (UBS settled its LIBOR claims for $1.5 billion with U.S., U.K., and Swiss authorities, while JPMorgan and Citigroup paid LIBOR-related fines of $107 million and $95 million, respectively, to the European Commission.) There is speculation that the banks’ cooperation in the FX investigation may reflect the lessons learned from the LIBOR investigation, especially regarding immunity given to the first banks who step forward with information.
The traders implicated in the FX investigation represent a close-knit group wholive primarily in the same exclusive neighborhood outside of London and frequently socialize with one another, and have in many cases worked together in prior positions. The traders manipulated the benchmark rates by exchanging confidential customer order information and trading positions amongst themselves via instant messages, emails, and chat rooms. These chat rooms were given names like, “The Cartel,” “The Mafia,” and “The Bandits’ Club,” by the traders who participated in them. After this litigation was filed, many defendants banned the use of such chat rooms.
The banks, which have declined comment, have a strong incentive to cooperate with government investigators. In the U.S., a company can obtain immunity from convictions and fines if it’s the first to report antitrust violations. Companies that self-report antitrust violations later than others must do so in a “timely fashion” or face stricter penalties. And since the defendants have already produced evidence to government investigators confirming that their traders “inappropriately share[d] market-sensitive information with rivals,” and that “it was common for a group of senior currency traders to discuss with their competitors the types and volume of trades they planned to place,” it’s not much of a stretch to suspect that settlement talks with government authorities are underway at some of the big banks.