California trial set in rate-rigging VRDO case against banks

A California judge on Tuesday set a trial date for early June in the years-long case of Wall Street banks facing whistleblower allegations of conspiring to rig interest rates on variable-rate demand bonds.

San Francisco County Superior Court Judge Ethan Shulman in his ruling narrowed the scope of the case but preserved the bulk of it. The banks could be on the hook for substantial damages, as the False Claims Act requires parties to pay three times the amount of losses and attaches a penalty to each false claim, which in this case total in the tens of thousands.

Shulman set a trial date of June 8.

The California case is one of several state-level False Claims Act lawsuits brought by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC. Edelweiss sued on behalf of the states and their entities that issued variable-rate debt and entered into contracts with banks as remarketing agents and liquidity providers.

Edelweiss accuses the banks of conspiring to keep VRDO interest rates high in a "robo-resetting" scheme so investors would not exercise their rights to tender the VRDOs back to the banks serving as remarketing agents, thus allowing the banks to collect fees for serving as RMAs and for providing letter of credit services for a fee without having to actually remarket the bonds.

Edelweiss originally filed the California case in 2014. The claims are against Bank of America, Piper Jaffray, Barclays, JPMorgan Chase, Citibank, Wells Fargo, Stifel, RBC, Stern Brothers and Morgan Stanley.

Last July, the court ruled in favor of the banks' motion for summary adjudication of Edelweiss' claims regarding liquidity fees. Since then, both sides have filed motions for summary judgement or summary adjudication. After a Feb. 19 hearing, Shulman on Tuesday denied the summary judgement motions for both parties and granted in part the banks' summary adjudication motion.

The judge agreed with the banks that the rate-resetting notifications do not constitute 'claims' — because they were not demands for payment — and were not 'false' under the California False Claims Act because they accurately reflected the interest rates that were set on the VRDOs.

Among other things, Shulman ruled there are "triable" issues of material fact as to the existence of a conspiracy between the banks. "Although there may not have been a formal agreement amongst defendants, defendants' regular communications with each other regarding rates raise a triable issue of material fact as to whether there was a tacit agreement amongst defendants sufficient to constitute a conspiracy," he wrote.

Shulman rejected Edelweiss' summary judgment motions on the "fatal" grounds that it did not include any argument regarding conspiracy, and ruled that its alternative motions for summary adjudication were "procedurally improper."

The New York case, which last year analyzed the banks' rate-setting practices, has a March 27 hearing. The New Jersey Supreme Court has agreed to hear an appeal — likely in the spring — of a lower court's decision that granted summary judgment to the banks.

An Illinois case was settled in October 2023 for $70 million.

In January, the Securities and Exchange Commission announced it would review broker-dealers' process for VRDO rate-resetting as part of its 2026 examination priorities.