Baltimore has become the second municipality to file suit against Wall Street banks for allegedly conspiring to hold variable-rate debt interest rates artificially high, a sign such lawsuits may proliferate.
The mayor and city council of Baltimore filed a lawsuit against Bank of America and some of its subsidiaries, Barclays, BMO Financial Group, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, Wells Fargo, RBC and Fifth Third in federal court in New York Tuesday. The banks conspired to fix variable-rate demand obligation rates in violation of their obligations to remarket them at the lowest possible rate, the suit alleges, allowing them to make money as remarketing agents without actually having to remarket the bonds.
“Defendants conspired to restrain competition to their collective benefit, to the detriment of plaintiff and members of the class, and in blatant violation of the federal antitrust laws,” according to the suit, which seeks redress for both Baltimore and for other issuers “similarly situated.”
The allegations are now familiar to muni market participants as those alleged by whistleblower Johan Rosenberg, a Minnesota-based municipal advisor who earlier this month
Baltimore’s suit references Rosenberg and states that his accusations of collusion by the banks are supported by further expert analysis, according to Baltimore’s lawyers. They drew that conclusion based in part on an analysis of rates before and after the alleged collusion took place.
Before that time “the comparison of SIFMA and 7-day AA financial commercial paper rates provides the results one would expect,” according to the suit. “Namely, the yield on taxable commercial paper is noticeably higher than the yield on tax-exempt VRDOs. However, during the class period, the margin between the yields on taxable commercial paper and on tax-exempt VRDOs plummets—indeed, the rates are nearly identical. This supports the existence of defendants’ conspiracy to artificially elevate interest rates on VRDOs.”
Rosenberg’s lawyers have said he discovered the misconduct based on his own independent investigation, which apparently included the use of a web application for which he owns the patent that allowed him to “create various analytical reports on variable rate securities,” according to U.S. Patent Office documents.
Baltimore’s filing seems to indicate that there may be more widespread willingness of muni issuers to file such lawsuits, rather than this being isolated to Rosenberg and Philadelphia. Representing Baltimore is the firm of Susman Godfrey, a group of litigation specialists with offices in New York, Los Angeles, Seattle and Houston.
The banks should be made to pay back all their profits from their alleged overcharging of Baltimore and other issuers, the suit says. Baltimore had more than $200 million of VRDOs in the market during the time frame covered by the suit from 2007-2016.
The banks accused have so far declined to comment publicly on the lawsuits, but have proclaimed their innocence in answers to suits filed by Rosenberg.
