Banks lose a round in Illinois Edelweiss VRDO case

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An Illinois intermediate appellate court on Monday denied a bid by JPMorgan and other banks to make an interlocutory appeal in the middle of the Edelweiss variable rate demand obligation case.

“Upon consideration of Defendants-Appellants JPMorgan Chase & Company; et al.'s application for leave to appeal pursuant to Illinois Supreme Court Rule 308, and upon consideration of Plaintiff-Appellee State of Illinos, ex rei., Edelweiss Fund, LLC's response thereto, IT IS HEREBY ORDERED THAT: Defendants-Appellants JPMorgan Chase & Company, et al.'s application for leave to appeal pursuant to Illinois Supreme Court Rule 308 is DENIED,” the statement said.

An interlocutory appeal asks an appellate court to review an aspect of the case before the trial has concluded.

The whistleblower suit charges that the banking firms set VRDO rates artificially high to be paid for remarketing services without having to remarket them, in violation of remarketing agreements that generally commit remarketing agents to try their best to set the rates at the level necessary to market the bonds at par. It claims the firms used a “Robo Resetting” device to reset many CUSIPs without respect to their individual characteristics.

The key issue for determining whether the defendants could take an interlocutory appeal of the trial court’s order denying the motion to dismiss is whether there is a “substantial ground for difference of opinion as to a question of law” and whether “an immediate appeal may materially advance the ultimate termination of the case,” lawyers said.

When the trial court looked at this a few months ago, the judge found that there was substantial ground for difference of opinion.

The key to this case is the electronic forensic analysis relied upon by Edelweiss’ Bjorn “Johan” Rosenberg’s data.

A source close to the case said it is the analytical technique of gathering and categorizing information and Rosenberg argues that it is the original source because of the very nature or characteristics of such an analysis that is an essential characteristic of a forensic analysis in its independent nature or creation of new information.

The court found that there is substantial ground for difference of opinion as to whether the trial court should consider the nature of the information relied upon in deciding the original-source question.

Rosenberg disagreed with the conclusion that there was a substantial ground for a difference of opinion.

There are no reasons given in yesterday’s order from the appellate court, so it is not possible to tell precisely why the court did what it did.

The argument that the defendants raised in Illinois on their motion to dismiss the case is the same one that they have raised in motions to dismiss in California and Massachusetts.


The lawsuit accusing banks and broker-dealers of fraud in the variable-rate demand obligation market moved forward in an Illinois court in February, setting the stage for what may be the first of several VRDO trials.

A Cook County, Illinois, Circuit Court judge handed a win to Edelweiss Fund, LLC, the Delaware-registered limited liability company formed specifically to pursue the Illinois case and many others filed since.

Attorneys representing JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Barclays PLC, Morgan Stanley, William Blair & Co., BMO Financial Group, and Fifth Third Bancorp had asked that the suit be dismissed for several reasons, but saw their motion defeated across the board in February.

Lawyers for the banks argued in their motion to dismiss that the suit failed to allege any specific false statements as required under the Illinois False Claims Act, and that the suit should be considered subject to a “public disclosure bar.” That concept exists to prevent whistleblower suits from being filed based on publicly available information, and the Edelweiss suit was based entirely on public VRDO reset information, the banks’ lawyers told the court.

Judge Diane Shelley sided with Edelweiss, deciding that the suit adequately stated false claims by the defendants and that while the VRDO reset information was public, no public information existed which would have demonstrated that anything fraudulent was occurring.

“These data did not publicly disclose that an alleged algorithmic mechanical system to reset interest rates for the VRDOs may have been utilized,” Shelley wrote in her decision in February.

The firms named in the suit either declined to comment or could not immediately be reached for comment.

Two other very similar cases brought by Edelweiss are also pending in Massachusetts and California, but have not progressed as far as the Illinois case. The Illinois decision is not binding on suits filed elsewhere.

An expert consulting witness for Edelweiss is Michael Lissack, the former Smith Barney banker who helped the government win hundreds of millions of dollars — and reaped tens of millions of dollars himself in the process — from filing whistleblower lawsuits against Wall Street and other firms in 1995 over charges they engaged in yield-burning. Rosenberg would also stand to reap a financial reward should any of the lawsuits ultimately succeed. Rosenberg is a registered municipal advisor who is chairman of the Minnesota-based holding company Tril 1 LP.

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Variable-rate bonds Lawsuits