MF Global unit sues 11 banks over credit-default swap market

Damages estimated to be in billions

MF Global Capital LLC sued Bank of America Corp., Citigroup Inc. and nine other financial companies, claiming they were part of a plot to unlawfully restrict the market for trading credit-default swaps.

The complaint, filed by a unit of bankrupt MF Global Holdings Ltd. yesterday in federal court in Chicago, is at least the fourth such suit accusing swaps dealers of conspiring to control the market for information about the instruments and their trading, in violation of federal antitrust laws.

“The effect of these activities has been to decrease competition in the CDS market among defendants,” according to the complaint. “As a result, defendants’ customers were forced to pay inflated bid/ask spreads, which cushion the profits of the defendants while harming their CDS customers.”

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.

The value of outstanding over-the-counter derivative contracts traded in the U.S. was $583 trillion at the end of June 2010, according to the complaint. About $30 trillion in swaps are traded annually.

Damages Estimate

Damages sustained by the MF Global unit and other members of a proposed class of individuals and entities that bought or sold swaps from the defendants since October 2008 are estimated to be in the tens of billions of dollars, according to the filing.

Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America, and Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment on the allegations.

Also named as defendants in the case are the International Swaps and Derivatives Association, a trade group representing participants in the over-the-counter derivatives market, and London-based Markit Group Ltd., a financial-information company partly owned by the defendant banks.

Alex Paidas, a New York-based spokesman for Markit, declined to comment on the allegations. Lauren Dobbs, a spokeswoman for ISDA, didn’t immediately respond to an e-mailed request for comment.

Similar Allegations

Similar allegations were raised in a complaint filed May 3 by a suburban Cleveland sheet-metal workers union pension plan. Dobbs and Paidas said separately then that the allegations were without merit.

While not named as a defendant in the MF Global case, New York-based JPMorgan Chase & Co., the biggest U.S. bank, is accused of being a co-conspirator. Also named as a co- conspirator is the IntercontinentalExchange Inc., which together with the banks owns ICE Clear, a clearing facility for swaps contracts.

Brian Marchiony, a spokesman for JPMorgan Chase, declined to comment.

‘Efficient Way’

The defendants have blocked efforts to create a swaps exchange and, in the absence of one, “market participants have no efficient way to find other non-dealers that want to trade the same CDS,” MF Global alleged.

The sheet metal union pension plan case was followed this month by a complaint in Chicago federal court. A third suit was filed in federal court in Manhattan days later.

The Washington-based federal Judicial Panel on Multidistrict Litigation has been asked to consolidate the suits before U.S. District Judge Milton Shadur in Chicago.

MF Global Holdings, the New York-based parent company of brokerage MF Global Inc., filed for bankruptcy in 2011.

The case is MF Global Capital LLC v. Bank of America Corp., 13-cv-05417, U.S. District Court, Northern District of Illinois (Chicago).

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