New Mexico AG Reaches $32.5M Settlement With Wall Street Banks

The state of New Mexico has reached a $32.5 million settlement with seven financial institutions in a lawsuit alleging they manipulated prices of mortgage-backed securities purchased by state pension funds from 2003 to 2010.

About $24 million of the settlement will return to New Mexico public employee pension funds, according to state Attorney General Hector Balderas, who announced the settlement Monday.

The state filed a class-action lawsuit earlier this year against a host of Wall Street banks, alleging a 15-year pattern of manipulating the prices of complex financial instruments called credit default swaps.

The lawsuit alleged the New Mexico State Investment Council suffered losses because the banks conspired to artificially manipulate the auction price of the financial instruments in violation of the Sherman Anti-Trust Act.

The State Investment Council invests some $31 billion in permanent endowments for the state, in addition to investments from 23 other state agencies, according to the lawsuit.

The suit was filed June 30 in U.S. District Court of New Mexico on behalf of the State Investment Council by the Attorney General's Office and Kirby McInerney LLP, a New York law firm.

Balderas said Monday that he was grateful to Sen. Joseph Cervantes, D-Las Cruces, and the state Legislature "for giving us the legal tools to partner with citizen whistleblowers and allowing our office to recover over $24 million that we will return to educator and public employee pension funds in New Mexico."

Jerri Mares, a spokeswoman for the Attorney General's Office, said the lawsuit was filed under the 2007 New Mexico Fraud Against Taxpayers Act. Under the act, the whistleblower is entitled to 25% of the total settlement amount. She did not identify the whistleblower.

The settlement was reached with Barclays Capital, Citigroup Global Markets, Goldman Sachs & Co., J.P. Morgan Securities, Merrill Lynch, Pierce, Fenner & Smith, NatWest Markets Securities, and Washington Mutual Mortgage Securities Corp., the AG's Office said in a statement.

The firms admitted no liability and the state dismissed the claims against them as part of the settlement, the statement said.

The suit alleged the Wall Street banks that comprise the major dealers of credit default swaps were engaged in a conspiracy beginning in 2005 to rig the final auction price of the instruments.

A credit default swap historically served as a type of financial insurance for an underlying investment, such as corporate bonds or mortgage-backed securities, according to the lawsuit. The seller promises to pay compensation to the buyer should the underlying investment fail.

But credit default swaps differ from insurance in that buyers don't need to own the underlying bonds, which led to a speculative market for swaps.

The market for credit default swaps ballooned to more than $60 trillion in 2008 on the eve of the Great Recession, according to the suit. Since 2014, the market has ranged from $5 trillion to $8 trillion.

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