State Attorney General Files Suit Charging Wall Street Mega Banks with “Multi-Year Bid Rigging and Price Fixing” Conspiracy in Credit Default Swaps Market

July 8th, 2021

Awake Goy

Last week the New Mexico Attorney General’s office filed a breathtaking, 128-page anti-trust lawsuit in federal court in New Mexico on behalf of the state’s $31 billion investment fund, the New Mexico State Investment Council. The Council manages a permanent endowment along with money for 23 state agencies.

The lawsuit alleges, backed by striking evidence, that the following banks have engaged in a 16-year conspiracy of “bid rigging and price fixing” in the Credit Default Swap (CDS) market: Bank of America/Merrill Lynch; Barclays; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; JPMorgan Chase; Morgan Stanley; and RBS.

The lawsuit also names a swaps trade association, the International Swaps and Derivatives Association (ISDA), as a defendant, noting that a “majority of ISDA’s board members” are employed by the bank defendants. The lawsuit characterizes ISDA as a “front organization.” Two other companies involved in the allegedly rigged Credit Default Swap protocol are also named: Creditex and Markit. The lawsuit draws attention to the fact that “Until mid-2014, Markit was majority-owned and controlled by a consortium of approximately 16 investment banks,” including each of the bank defendants (along with HSBC and UBS) who sat on its board of directors.

As fascinating as the details of the alleged price fixing are in the lawsuit, equally fascinating is the name of the outside law firm that is representing the plaintiff, the New Mexico State Investment Council. That law firm is Kirby McInerney, which has a history of representing whistleblowers in frauds committed by Wall Street miscreants. The law firm’s name jumped out at us because the extremely intimate and comprehensive details of how this alleged fraud was conducted, as outlined in the lawsuit, sounds uncannily like the work of an insider who is now blowing the whistle.

The general outline of the conspiracy is described as follows in the lawsuit:

“Since 2005, the Wall Street banks that comprise the major dealers of credit default swaps (‘CDS’) have been engaged in a conspiracy to manipulate the CDS ‘final auction price,’ the benchmark price used to value all CDS contracts market-wide at settlement. The final auction price is generated through an auction process that was introduced to the market by the Dealers in 2005. The Dealers – Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, and RBS…have implemented this conspiracy by using their power over the CDS auction process to rig the CDS auctions and produce a (typically) supra-competitively low CDS final auction price. Working with three entities over which the Dealers yield significant power and influence – Creditex, ISDA, and Markit (together, with the Dealers, the Defendants) – the Dealers’ conspiracy has yielded them billions of dollars in cartel profits at the expense of non-dealer market participants like Plaintiff and the putative Class members.”

One has to hope that the federal judge overseeing the case has a strong skill set in mathematics or statistical analysis because the lawsuit includes actual formulas that were used to compile a statistical regression analysis that found the following: