Amended VRDO lawsuit claims insider proof of collusion

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Philadelphia and Baltimore have refiled an amended lawsuit against several Wall Street banks, ramping up the legal conflict over alleged wrongdoing in the variable rate market.

The two municipalities jointly filed the amended complaint in a New York federal court May 31, consolidating their substantially similar claims that many of the largest banks violated federal antitrust law and committed breach of contract by conspiring to set the interest rates of variable-rate demand obligations at artificially high levels. The amended complaint contains more detail than the initial filing by Philadelphia in February.

While Philadelphia’s original complaint pointed to “economic analysis” that “provides strong support for the existence of this conspiracy,” the amended lawsuit references inside sources who allegedly confirm that the banks worked together to set rates at levels that allowed them to avoid having to remarket the VRDOs, while also making them more attractive to money market funds that buy variable-rate debt, many of which are also run by those same banks.


“Plaintiffs have confirmed these facts through interviews with numerous well-placed industry sources, including high-level insiders who worked within the municipal securities groups and remarketing desks at the defendant banks during the class period,” wrote the lawyers for Philadelphia and Baltimore in the newest complaint. “According to these insiders, employees on defendants’ trading and sales desks communicated with each other on a daily basis, including in person, via telephone, and through electronic communications such as electronic chat rooms on Bloomberg.”

The accused banks are Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, RBC, and Wells Fargo, as well as subsidiaries of those banks. The lawsuit seeks treble damages for the losses that the two municipalities and “others similarly situated” have suffered as a result of the anti-competitive practices alleged in the suit.

The amended complaint also makes more detailed reference to marketing materials provided by the defendant banks, where the previous version of the complaint made more oblique reference to certain claims routinely made in such materials.

While Philadelphia and Baltimore initially filed their lawsuits separately in federal district court for the Southern District of New York, the court ordered the lawsuits consolidated because they are so similar.

The municipalities’ class action suit is closely related, but not identical, to a series of state-level false claims lawsuits filed by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund. In those cases, where alleged damages have now climbed to some $1.6 billion, the legal argument turns on whether the banks committed fraud in purporting to keep interest rates as low as possible while actually keeping them high. The antitrust suit turns on the existence of a conspiracy to achieve that end.

“Free-market competition is, and has long been, the fundamental economic policy of the United States,” the suit states. “Defendants were supposed to be aggressively competing with each other for the business of their customers, but they secretly conspired not to compete against each other and instead to work together to keep VRDO interest rates high.”

The banks accused have consistently declined to comment, though several of them have denied wrongdoing in state-level court filings.

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Lawsuits Securities law Variable-rate bonds Crime and misconduct Bank of America Wells Fargo Barclays Washington DC Maryland Pennsylvania
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