NOTE: Background information about this litigation is available here.

Pennsylvania Treasurer Stacy Garrity Announces Release of Antitrust Compliance Report for GSE Bond Market

Meet-and-confers with banks following price-fixing settlement led to unprecedented state review of national GSE market conduct

Harrisburg, PA - Pennsylvania Treasurer Stacy Garrity today announced that a final report containing detailed compliance recommendations and best practice considerations designed to prevent antitrust violations by large banks has been filed with the U.S. District Court for the Southern District of New York as part of settlement agreements in a 2019 government-sponsored enterprise (“GSE”) bond price-fixing class action lawsuit filed and led by the Pennsylvania Treasury Department (“Treasury”). The suit alleged that 16 large banks manipulated prices of GSE bonds, damaging institutional investors nationwide.

As a state agency and GSE market participant, Treasury was uniquely positioned to oversee and direct this comprehensive analysis of the GSE bond market. The thorough review, intended to identify antitrust compliance reforms in order to detect and prevent market price manipulation, significantly benefits state, local, and municipal governments and public agencies that routinely invest public dollars in GSE bonds.

Due to varying state laws, most every state, local and municipal authority has limited investment options. GSE bonds are one of the few avenues available for these entities to invest their funds. Public dollars invested in GSE bonds support necessary expenses like sewer repairs, road improvements, and schools throughout the country.

Treasury retained former SEC Commissioner Troy Paredes, of Paredes Strategies LLC (“Paredes”), and Hunton Andrews Kurth LLP (“Hunton”) as consultants in the meet-and-confer process with the 16 banks. Treasury was determined to ensure the resolution of this case was not limited to a financial recovery, but also included robust and thorough reviews of the banks’ commitment to antitrust compliance policies and programs to protect state, local and municipal authorities’ investments in the GSE market moving forward.

The final report, prepared by Paredes and Hunton, as directed and overseen by the Pennsylvania State Treasurer, is the culmination of extensive meet-and-confers with each of the large banks accused of conspiring to fix the prices of GSE bonds issued by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Federal Home Loan Bank, and the Federal Farm Credit Bank between 2009 and 2014. The Commonwealth of Pennsylvania, like many state, local and municipal authorities, completed hundreds of transactions for these bonds during this period.

“My goal was to make sure this conduct does not happen again because the GSE market is tremendously important to public entities that invest taxpayer dollars. I’m proud that Treasury’s leadership will benefit every American taxpayer, as GSE bonds help fund everything from roads to schools. Paredes Strategies and Hunton Andrews Kurth were outstanding partners throughout this process. The recommendations and best practices spelled out in the report provide a clear benchmark for banks to follow to ensure market integrity.”

Pennsylvania State Treasurer, Stacy Garrity

“Effective antitrust compliance fosters fair and efficient competitive markets. We are privileged to have had the opportunity to assist the Pennsylvania Treasury in its commitment to promoting competition that benefits market participants. And we appreciate the banks’ constructive engagement and dialogue throughout the process.”

SEC Commissioner, Troy Paredes

The large banks named in the lawsuit led by Treasury – which was filed in 2019 in the U.S. District Court for the Southern District of New York – include Barclays Capital Inc., BNP Paribas Securities Corp.; Citigroup Global Markets Inc.; Credit Suisse Securities (USA) LLC; Deutsche Bank Securities Inc.; First Tennessee Bank, N.A. and FTN Financial Securities Corp.; Goldman Sachs & Co. LLC; J.P. Morgan Securities LLC; Merrill Lynch, Pierce, Fenner & Smith Inc.; UBS Securities LLC; Morgan Stanley & Co. LLC; HSBC Securities (USA) Inc.; Nomura Securities International, Inc.; TD Securities (USA) LLC; Cantor Fitzgerald & Co.; and SG Americas Securities, LLC.

The meet-and-confer process consisted of semi-annual meetings with the named large banks that continued to maintain a GSE bond desk (with one bank having an annual obligation) and was designed to ensure robust antitrust compliance. It was established as part of the settlement agreements entered in the case, which also included $386.5 million paid by the 16 banks.

More than 40 meet-and-confers with large banks in the GSE marketplace took place from fall 2020 to spring 2022. Each session lasted approximately 1.5 to 2 hours and resulted in numerous follow-up conversations.

The process involved about 1,300 hours of reviewing materials, preparing and conducting meet-and-confers, assessing compliance programs and preparing the Initial Report, Preliminary Observations, and the Final Report. More than 200 policies, procedures, Codes of Conduct, training materials, communications, and other materials were reviewed.

Best practices described in the final report include:

  • Ensuring antitrust is identified as a specific risk.
  • Encouraging realistic scenarios to motivate individuals to follow and understand antitrust processes, practices and oversight.
  • Reinforcing “do’s” and “don’t’s” using real-world scenarios to include roleplaying and other concrete interactions.
  • Establishing robust communications policies and leveraging technological advancements to deploy surveillance tools to detect and deter wrongdoing.
  • Ensuring a compliance program is effective in practice and not just “on paper.”
  • Establishing working groups or committees involved in the compliance program at all levels up to the board of directors.
  • Reevaluating risk environments as they are constantly changing due to new regulations, litigation, technology and market conditions.
  • Reinforcing codes of conduct or ethics.
  • Remaining up-to-date on new technologies and how they impact risk, bolstering controls when necessary.
  • Reviewing patterns, trends and aberrations in data to help identify potential anticompetitive conduct.
  • Elements of even a successful compliance program may need to be redesigned or improved to account for new businesses, technology, regulations, or marketplace dynamics, or even reorganization.

Due to the individual needs of each financial institution, the Final Report acknowledges that there is no one-size-fits-all approach to antitrust and compliance programs.

Large banks continued to make improvements to their compliance programs and were exploring new features throughout the meet-and-confer process. The Final Report encourages these large banks to continue to reevaluate and improve their compliance programs moving forward.

“It’s my hope that this report, which lays out the internal safeguards needed to prevent manipulation of the GSE market, is used by financial institutions as an important and necessary guide. GSE market integrity is imperative, as it’s financed by every American taxpayer.”

Pennsylvania State Treasurer, Stacy Garrity

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