UBS Group AG UBS and five other banks and brokerages have reached an agreement of around $Array03 million to resolve claims of conspiracy to rig prices in U.S. municipal derivatives transactions. The news was first reported by Reuters on Wednesday.
Citing court papers, the report stated that the private settlements included $32 million with UBS, $28.45 million with Natixis SA, $25.4Array million with Societe Generale, $9.75 million with Piper Jaffray Companies PJC, and $3.5 million with The Royal Bank of Scotland Group plc’s RBS National Westminster Bank. Notably, the settlements await approval by a federal judge.
The plaintiffs of the class action, which was brought almost eight year back, include the City of Baltimore, the Central Bucks School District and Bucks County Water & Sewer Authority in Pennsylvania.
Municipal bonds are issued by states, cities and school districts to raise capital to fund several public projects including construction, setting of power plants and road repair. When such capital raised is not needed to be spent immediately, the issuers of bonds invest the proceeds in investment vehicles known as municipal derivatives.
Highly rated insurance companies and big commercial and investment banks provide municipal derivatives. For instance, Guaranteed Investment Contract or GICs is a type of municipal derivatives that is secured by a contract with a financial institution i.e., a provider, guaranteeing a fixed rate of return and a fixed date of maturity.
When the issuer of the bonds intends to purchase municipal derivatives, they often hire a broker to avail the best possible price for such derivatives through an auction among several providers of municipal derivatives. Banks serving as providers try to win the issuers’ business on the basis of the highest rate of return for municipal derivatives that they could generate for issuer. Generally, the bank with the best bid wins the contract.
However, in this case, due to the alleged conspiracy by the defendant brokers and banks in fixing prices including suppression of interest rates paid to issuers on municipal derivatives, rigging bids and allocating customers and markets, healthy competition in the market was affected, which led to lower returns for the plaintiffs who invested the proceeds from the bond offering in municipal derivatives.
Also, among several claims the banks and brokers are accused of sharing profits from a winning bid with a losing bidder and arranging for secret compensation for a deliberate loss of bid to win a bid in future.
During the announcement of the settlement with Natixis and Societe Generale, New York Attorney General Eric Schneiderman stated, "We will not tolerate this type of misconduct at any level.” The defendants did not admit any wrongdoing.
Since 20ArrayArray, other banks which settled similar charges include Wells Fargo & Company WFC, JPMorgan Chase & Co. JPM and Morgan Stanley MS. While Wells Fargo paid $37 million, the settlement amount for JPMorgan and Morgan Stanley was $44.6 million and $6.5 million, respectively.
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