Edelweiss appeals bank victory in Massachusetts VRDO case

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The municipal advisor accusing Wall Street banks of widespread fraud in the variable-rate market has asked a Massachusetts appeals court to overturn a 2019 decision in the banks' favor.

Johan Rosenberg filed that appeal with the Commonwealth of Massachusetts Appeals Court Jan. 9, asking that a lower court decision dismissing his whistleblower lawsuit on behalf of the state be reversed. That lower court found in July that Rosenberg's lawsuit was blocked by the public disclosure bar, a legal standard that exists to prevent whistleblowers from filing lawsuits supported by information that was already known to the public.

But Rosenberg's legal team told the appeals court that the lower court erred in qualifying information disclosed on EMMA as a public disclosure for purposes of the disclosure bar, stating that Rosenberg has “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions," and that the whistleblower action would not be possible based on EMMA and other public disclosures alone.


Rosenberg’s lawsuits, which have also been unsealed in Illinois, California, and New York, accuse many of the nation’s largest banks of conspiring with each other to keep variable rate demand obligation (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.

As a whistleblower, Rosenberg stands to reap a substantial windfall for himself, potentially millions of dollars, if the lawsuits recover money for issuers.

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 relator'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.”

Rosenberg's attorneys argues that the Superior Court made an "error of law" in conflating the "independent" inquiry under original source with the “substantial similarity” test for whether there is a public disclosure at all.

"In sum, had it not been for relator’s substantial efforts, defendants’ fraud would have continued unabated," the appeal filing states. "Because relator’s forensic investigation was independent of and materially added to publicly disclosed information, he qualifies an original source exempt from the public disclosure bar."

The appeals court typically sits in panels of three justices.

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