California, Massachusetts courts at odds over VRDO lawsuits

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The whistleblower accusing banks and broker-dealers of fraud in the variable-rate demand obligation market is preparing to file an amended complaint in California, where a judge has approached the case very differently than has another jurist across the country in Massachusetts.

Lawyers for Edelweiss Fund LLC have been given until Oct. 8 to file a new complaint in the Superior Court of California, where a judge found that there is at least a “reasonable possibility” that a lack of specificity in the whistleblower’s lawsuit can be cured in an amended complaint. That’s in contrast to the decision of a Massachusetts court last month, where a judge dismissed the case without giving Johan Rosenberg, the man behind Edelweiss Fund, a chance to submit a new complaint.

The difference hinges on the two courts’ different interpretations of whether or not the allegations clear the public disclosure bar. The public disclosure bar is a legal standard that exists to prevent whistleblowers from filing lawsuits supported by information that was already known to the public, and the Wall Street and other banks being sued have repeatedly used it in its motions to dismiss and its demurrers.


Rosenberg’s lawsuits, which have also been unsealed in Illinois and New York, accuse many of the nation’s largest banks of conspiring with each other to keep VRDO interest rates high so that 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 RMAs and for providing letter of credit services without having to actually remarket the bonds.

Rosenberg’s complaints said that he revealed the alleged fraud through an analysis of VRDO interest rate resets over several years, which he claims shows that the banks “bucketed” the debt and reset the rates in groups in contradiction to their contractual obligation to set them at the lowest rates possible.

Rosenberg, who stands to reap millions of dollars for himself if he prevails in a trial, has alleged some $1.6 billion of damages in the lawsuits he has filed. His accusations also appear to have spurred Philadelphia and Baltimore to file similar lawsuits earlier this year.

Massachusetts Superior Court Justice Mitchell Kaplan decided July 23 that the public disclosure bar applies to Rosenberg’s allegations, and dismissed the suit.

“The allegations in the complaint reference substantially the same transactions publicly disclosed in these sources, and they were obviously disclosed before the relator filed this action,” Kaplan wrote in his ruling, noting that the rates were disclosed on EMMA and elsewhere.

“While it may be true that the realtor's forensic analysis is unique to him and has caused him to reach certain opinions concerning how the defendants set the interest rates, the relator does not dispute that his analysis is performed on publicly available information.”

In San Francisco, Superior Court Judge Anne-Christine Massullo, despite agreeing that the complaint did need more specificity, didn’t buy the public disclosure bar argument. Unlike in the Massachusetts case, Massullo wrote, her court is bound by a previous decision that offers a narrower definition of “news media” that would not include the EMMA website. As such, she found, there was no “news media” disclosure of the information.

An Illinois court has also declined to dismiss the case based on the public disclosure bar or any other of the banks’ defenses, and that case is headed toward trial.

Rosenberg plans to appeal the Massachusetts ruling. It is not known whether, or how many, additional whistleblower suits Rosenberg may have filed in other states, as such suits are often under seal and therefore not known to the public to exist for months or even longer.

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Lawsuits Securities law Variable-rate bonds Court cases Wells Fargo Barclays JPMorgan Chase Washington DC California Massachusetts
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