Tuesday, August 22, 2017

Pension Funds File Sweeping Securities Lending Class Action

Allege collusion by the largest prime brokers

Author: David Schwartz J.D. CPA

Three U.S. pensions have filed a class action suit against the largest prime brokers alleging collusion to fix fees and stifle competing electronic platforms in securities finance. This suit follows the theme of other class actions involving allegations of collusion and manipulation amongst the biggest global banks in relation to LIBOR, municipal bonds, Forex, and interest rate swaps. The suit filed was filed August 16, 2017 in the US Southern District Court of New York as an anti-trust action by the Iowa Public Employees’ Retirement System, Orange County Employees Retirement System and Sonoma County Employees’ Retirement Association. The unusually detailed yet virtually unsourced complaint alleges that six major lending agent banks created a “working cartel” to capture 76 percent of securities lending business, force out competing platforms, and inflate fees.  


The suit accuses the banks of overt and covert violations of anti-trust law. The pension funds allege that the six banks “jointly cultivated and fought to maintain” an “inefficient, antiquated, and opaque” securities lending system. This system, the plaintiffs allege, worked to the advantage of the banks and the detriment of lending customers like the plaintiffs as well as other pension plans and institutional investors as a class. The six banks, the plaintiffs allege, actively opposed new platforms and technologies that might have threatened the defendant banks’ hold on the “opaque” securities lending market and lowered fees.


“Recognizing the nascent threat posed by all-to-all electronic trading, the prime broker defendants took steps to organize themselves into a working cartel. Their first step was to form a ‘dealer consortium’ to protect their mutual interests.”


The “dealer consortium” EquiLend, the plaintiffs allege, was the platform the banks used to “coordinate their conduct to ensure the securities lending market does not develop in ways that threaten their collective dominance.”


According to the complaint, the defendant banks worked together to stifle upstart peer-to-peer lending platforms like AQS by threatening to cut off hedge fund clients who used the platform from "critical prime brokerage services.”


"For instance, Renaissance Capital Technologies — one of the world’s largest and most successful quantitative hedge funds — asked each of its multiple Prime Brokers for direct access to AQS. Every one of them not only refused, but told Renaissance Capital that if they were not happy with that, they could move their business to another firm.”


The complaint further alleges BNY Mellon, D.E. Shaw, and SAC Capital received similar threats from a defendant bank. 


The plaintiffs also allege that in response to Basel III and the embrace of central clearing for securities lending transactions, the six banks colluded to monopolize central clearing as well. Allegedly dubbed “Project Gateway,” the plaintiffs allege that the six banks employed their “dealer consortium” EquiLend to purchase AQS, the only existing platform for clearing stock loans, thus giving the banks control of central clearing.  


Despite the specificity of the allegations in the pleading, the complaint filing is light on cited sources. To be successful, the plaintiffs will first have to survive the class certification phase and summary judgment motions from the defendants. Should they reach that point, the discovery phase will have to yield some fairly compelling evidence to substantiate these remarkably detailed claims of collusive activity on the part of the banks and particular bank officials. If successful, this sweeping suit could change the business of securities lending in a very dramatic way.  


The suit is Iowa Public Employees' Retirement System et al v. Bank of America Corporation, et al