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FBI Suspects Front-Running of Fannie, Freddie Swap Orders

JAN 16, 2014 11:39am ET
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Bank employees may have profited by trading ahead of Fannie Mae and Freddie Mac swap orders, Reuters reported, citing a description of the practice in a U.S. Federal Bureau of Investigation intelligence bulletin.

Federal investigators, drawing on interviews and statements from people including a former high-level U.S. bank employee and another at a Canadian bank, said traders may have conspired to rig rates or front-run the two firms in the interest-rate swaps market, Reuters wrote. The FBI bulletin, which was distributed to security officers at financial services companies, didn't name any financial institutions, according to the report.

As the information about traders using hand signals and setting different ring tones to identify certain customers was verified by multiple sources with direct knowledge, the FBI had medium confidence in the acquired facts, Reuters reported, citing the bulletin. The FBI had low confidence that the traders could be prosecuted as the trades seemed legitimate, according to the report.

The bulletin follows regulatory probes into the rigging of benchmarks for interest rates, currencies and energy contracts. A U.S. clampdown on insider trading led to the conviction of Galleon Group LLC co-founder Raj Rajaratnam in October 2011 and the trial of SAC Capital Advisors LP hedge fund managers.

Voice brokers and senior traders at the U.S. and Canadian banks encouraged traders to listen in on calls with investors to glean information on large orders and front-run them or manipulate the market, Reuters cited the FBI communique as saying. People on the calls sent hand signals to other traders so they could also benefit, Reuters said.

The high-level employee of the U.S. lender estimated that front-running had led to profits of as much as $100 million for that bank, according to the FBI report, Reuters said.

"We did not and will not be releasing that report to the media," Shelley Lynch, an FBI spokeswoman in Charlotte, North Carolina, said in an emailed response to Bloomberg News.

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