Banks settle swaps market manipulation case for $1.86 billion
A dozen major banks have agreed to pay nearly $2 billion in a class-action settlement concerning allegations of market manipulation dating back to the financial crisis, attorneys for investors who brought the lawsuit announced Thursday.
If approved by a judge later this month, the settlement could mean a payout of millions of dollars for a Los Angeles County employee pension fund and other plaintiffs, which argued that the banks conspired to reap unfair profits on trades of credit default swaps, a type of insurance for investors.
The deal calls for the defendants to pay $1.86 billion, which will be distributed to investors claiming they lost huge sums because of the banks’ anti-competitive practices. It also sets in place a framework that could create a more transparent trading system for swaps.
“Some of these investors are going to get $100 million back,” said Daniel Brockett, who served as lead counsel for the plaintiffs. “The amount that this settlement is going to pay is historic.”
Still, the size of the settlement falls short of penalties that banks and other financial institutions have agreed to over wrongdoing uncovered in the years since the financial crisis.
In 2012, mortgage lenders agreed to a $25-billion settlement, and in May several banks were fined nearly $6 billion after admitting to manipulating foreign-exchange rates.
The latest agreement still needs to be approved by the federal judge in New York handling the case. If approved, Brockett said, there could be thousands of pension funds, university endowments, hedge funds and other investors that can claim a share of the settlement.
Until that process plays out, he said, it’s unclear how much each investor will get. Still, given the size of the settlement, even small funds could receive $5 million to $10 million, Brockett said.
Michael Herrera, in-house counsel at the Los Angeles County Employees Retirement Assn., the lead plaintiff, said he’s pleased with the agreement despite not knowing the group’s share.
“Believe me, I want to know that number too,” said Herrera, whose client manages retirement funds for 156,000 current and former public employees.
Attorneys and representatives for the defendants did not return calls for comment, or said they could not provide any details of the settlement.
But one defendant, London financial data provider Markit Group, reported in a public filing last month that it expects to pay less than $50 million.
That would leave at least $1.81 billion for the remaining defendants: Bank of America, Citigroup, JP Morgan Chase, Morgan Stanley, Credit Suisse, Deutsche Bank, Goldman Sachs, Royal Bank of Scotland, HSBC Bank, Barclays Bank of London, Paris banking group BNP Paribas, Swiss bank UBS and the International Swaps and Derivatives Assn., a New York trade group.
Association representative Lauren Dobbs said the trade group is “pleased the matter is close to resolution.”
Credit default swaps work like insurance: An investor pays a premium to an insurer and the insurer pays the investor in case the investment -- usually corporate debt -- sours.
Investors also can buy and sell swaps, essentially betting on the health of the investments to which the swaps are tied. The sales are most often handled by large banks.
The county pension fund and other plaintiffs in their 2013 lawsuit alleged that the defendants conspired to keep other firms from setting up more open exchanges for swaps, thereby allowing the banks to charge exorbitant prices for swap transactions.
The unfair trades were alleged to have occurred from 2008 until the lawsuit was filed.
As part of the settlement, Brockett said, the swaps and derivatives association has agreed to set up a committee that could ease the way for new firms to set up swap exchanges.
Twitter: @jkoren
