SOS to GSEs: A Wrap-Up

For this Manipulation Monitor post, I’m going to dig up something from the archives for an update. If you’ve been reading for a while, you might remember our March 2019 post on a new litigation concerning government-sponsored enterprises, or GSE. If that’s not ringing any bells, or if you think you could just use a refresh after eighteen months, you can take a look back here: SOS to GSEs: Your Bonds are a Beautiful Mess. As you might suspect, things haven’t been quiet over in the Southern District. This post will cover the highlights: two motions to dismiss, motion to certify a class, and a global settlement. There’s a lot to cover, so let’s get started!

Motion to Dismiss – Take One

On June 13, 2019, Defendants filed a joint motion to dismiss the consolidated complaint. Briefing on the motion was done with lightening speed, with opposition submitted on June 27, 2019, and replies on July 9, 2019. Despite the filing of a second amended complaint on July 12, 2019 (“SAC,” filed solely for the purpose of adding Deutsche Bank as a defendant), Judge Rakoff was similarly speedy, issuing his opinion and order on September 3, 2019.

  • Denied as to Deutsche Bank, BNP Paribas, Morgan Stanley, and Merrill Lynch
  • Granted with leave to amend for remaining defendants

Each of the sixteen Defendants are bond-dealers, pre-approved to issue GSE bonds – i.e., the unregulated and unregistered bonds issued by privately-run enterprises sponsored by the federal government – entities like Fannie Mae and Freddie Mac, among others. As bond dealers, Defendants would both underwrite GSE bonds and trade bonds with investors in the secondary market. In the first stage, approved bond dealers would typically form syndicates; those syndicates would place bids to win an allocation of newly-issued GSE bonds, and members of the syndicate would work together to place the bonds with a bulk buyer in a the primary market. During this stage, the bond dealers were permitted to communicate with each other, and typically used multi-bank chat rooms to do so. After this “syndication phase” ends, the new bonds become “free to trade,” (“FTT”) and the members of the syndicate return to working in competition with one another. Plaintiffs’ complaint, however, posits the theory that the defendant traders never returned to a state of competition – instead, Plaintiffs allege, Defendants agreed to keep prices high for the newly-issued bonds after they were released to the secondary market.

Plaintiffs submitted direct evidence of this conspiracy, in the form of transcripts of chatroom conversations — allegedly received from a “cooperating co-conspirator” — between dealers acting on behalf of several defendants. The Order recapped each conversation; highlights included a Morgan Stanley trader expressing concern over “creat[ing] a race to the bottom between the 3 of us,” with a Deutsche Bank trader suggesting that they “go out FTT at 99.985?”; a BNP Paribas trader asking if their price was “too cheap.” Plaintiffs also offered indirect evidence, including that the bond market itself — which involved the same traders at all phases of acquiring and selling GSE bonds and an opaque market that hides heightened pricing from buyers—facilitates unlawful coordination. Plaintiffs further pointed to the fact that the buy-sell differential for the price at which the dealers purchased and sold notes (a common type of GSE bond) was nearly nine time higher during the class period than after it.

While Defendants advanced a variety of arguments in support of their motion to dismiss, including that the chat logs were not “direct evidence,” the Court found them compelling. Describing the chat transcripts as “the rare smoking gun,” the Court held that the SAC “adequately alleg[ed] the existence of a conspiracy to fix the price of GSE bonds, at least among those defendants who appear in the chat room transcripts – i.e. Deutsche Bank Securities, Inc., BNP Paribas Securities Corp., Morgan Stanley & Co., Goldman Sachs & Co, and Merrill Lynch, Pierce, Fenner & Smith, Inc.” The Court also concluded that the SAC plausibly plead the extension of the conspiracy beyond the “Chatroom Defendants,” but did not find the remaining allegations adequate to link the remaining named defendants to the conspiracy. With respect to those Defendants, the motion to dismiss was granted with leave to re-plead. In doing so, the Court took care to note that Plaintiffs were not required to produce direct evidence, like the transcripts, for each Defendant, but simply that the complaint must make allegations sufficient to “tie[] each defendant to the conspiracy.” The statistics, which “not so unreliable to be useless at this very early state of litigation,” still did not suffice to plausibly suggest that “the particular defendants named in this suit were part of that conspiracy.” Note to future Plaintiffs: break down your differentials by defendant!

Continuing the breakneck pace of this litigation, the Order directed that Plaintiffs file any amended complaint by September 10, 2019, with a joint renewed motion to dismiss due just one week later, on September 17, and replies just six days later, on September 23., 2019.

Motion to Dismiss – Take Two

Briefing on the renewed motion to dismiss was limited to the new allegations presented by the third amended complaint (“TAC”), and the Order was correspondingly brief. In the TAC, Plaintiffs added nineteen new chatroom transcripts implicating the remaining defendants, all of which show similar patterns of behavior as the initial four. My personal favorite? “i don’t get it. Why try to compete when there’s no need to make it competitive.” (Emphasis added). He’s either in the wrong line of work, or exactly the right one.

Of the remaining defendants renewing the motion to dismiss (First Tennessee Bank, N.A. and FTN Financial Securities moved straight to a proposed settlement), only one – Citigroup – bothered to argue that the new allegations were insufficient to implicate it in any alleged conspiracy. They were, unsurprisingly, unsuccessful. The remaining defendants simply attempted to narrow the scope of the conspiracy by (1) limiting what conduct properly forms part of the alleged conspiracy, and (2) limiting the duration of the alleged conspiracy. The Court disregarded both arguments, noting that “it is implausible on its face that such an agreement [to conspire to fix prices] would be limited to certain kinds of GSE bonds, and not to others,” and that, with respect to the end date of the conspiracy, Plaintiffs’ indirect evidence showing that the conspiracy continued until January 1, 2016 was sufficient.

So, let’s talk settlement . . .

Class Certification and Settlement

Between October 2019 and February 2020, the Court granted preliminary approval to five settlement agreements: individual agreements with Deutsche Bank, First Tennessee Bank/FTN Financial Securities, Goldman Sachs, and Barclays Capital; and one global settlement agreement covering all remaining Defendants. A review of the motions for preliminary approval show that the Global Settlement Agreement required payment of $250 million; Barclays Capital, $87 million; Goldman Sachs, $20 million; First Tennessee Bank/FTN Financial Securities, $14.5 million; and Deutsche Bank, $15 million. In addition to the financial payouts, Deutsche Bank and Goldman Sachs, also had additional obligations of cooperation in the continued litigation.

While the settlement discussions and approval moved forward, Plaintiffs filed a motion to certify the class. Members of the Class were defined as follows:

All persons or entities who purchased unsecured GSE Bonds issued by Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Farm Credit Banks, and Federal Home Loan Banks in the secondary market during the period of January 1, 2009 through January 1, 2016 (the “Class Period”) from a Defendant where such transaction took place in the United States or its territories.

On June 16, 2020, the Court issued an order granting final approval to all five settlements, granting co-lead counsel’s motion for attorneys’ fees and payment of litigation expenses, and granting final class certification for settlement purposes.

And with that very tidy wrap-up, it seems safe to say that our blogs on this particular line of cases are at a close. May all future plaintiffs’ lawyers be so blessed by smoking guns!

This post was written by Alexandra M.C. Douglas.

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