Bank of America, Royal Bank of Scotland Accused of Inflating Price of European Government Bonds

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Bank of America, N.A. and the company formerly known as The Royal Bank of Scotland PLC are among the defendants in a proposed class action lawsuit that alleges the banks have conspired to inflate the prices investors paid for European government bonds between January 1, 2007 and at least December 31, 2012.

Also named in the lawsuit are Bank of America Merrill Lynch International Designated Activity Company, Merrill Lynch International, and NatWest Markets Securities Inc.

The bonds at the center of the lawsuit arise from sovereign debt issued by the central governments of European nations that are part of the Eurozone, a monetary union made up of nations that have adopted the euro as their official currency. Banks such as the defendants, the suit explains, are designated by these governments as “primary dealers” – institutions that “have demonstrated ability to be market makers, provide liquidity to investors in the secondary market, and reliably purchase new European Government Bonds.” Primary dealers are permitted to acquire European government bonds in auctions held by the governments’ debt management offices, the case explains, or, though much less commonly, through a process called syndication by which the banks underwrite and conduct the initial sales of the bonds.

After dealers acquire the bonds, they sell them in the secondary market, which the defendants and their co-conspirators dominate, the suit says. According to the complaint, banks typically quote bond prices to customers by providing “bid and ask prices,” or the prices at which they would respectively buy and sell the bonds. The smaller the “spread” – that is, the difference between the bid and ask price – the more competitive the price, the case explains. Banks compete with each other by offering narrower bid-ask spreads, the suit says, and would likely lose business if they either lowered the bid price or raised the ask price too much.

“Only through collusion among banks can a dealer quote a wider spread than market conditions otherwise dictate without losing market share and profits,” the complaint states.

That is exactly what the defendants did, the lawsuit alleges. By secretly conspiring with other banks, the defendants inflated their bid-ask spreads and thereby raised the prices investors paid for European government bonds, the case says.

The banks supposedly accomplished this alleged scheme by instructing traders to share sensitive information, such as trading strategies, bid-ask spread quotations, customers’ identities, and details of customers’ orders, with co-conspirators in online chatrooms and through instant messaging.

The lawsuit follows on the heels of an investigation conducted by the European Commission into the allegedly anticompetitive practices of eight major banks, including the defendants. According to the suit, the investigation culminated with the agency issuing a statement of objection in which it accused the banks of participating in a “collusive scheme that aimed at distorting competition when acquiring and trading European government bonds.”

As a result of the defendants’ apparent conspiracy, investors were damaged by overpaying for tens or hundreds of billions of dollars’ worth of European government bonds, the case says.