Illinois asks court to settle and dismiss VRDO case despite fee dispute

Illinois urged a Cook County court to approve a proposed settlement with a group of Wall Street banks accused of rigging variable-rate bond interest rates despite opposition from the whistleblower that brought the case, arguing the evidence backing up the lawsuit has proved meager.

The deal between the state and the eight banks calls for the banks to pay $68 million, an amount that includes attorney fees and expenses – the point of contention – and payments to the state and whistleblower Edelweiss Fund LLC.

Edelweiss is suing the banks for damages of about $243 million, which, with "mandatory trebled damages and penalties" would climb to $730 million.

If approved, the settlement, which would total $37.1 million for the state and local issuers, would be among the largest for Illinois under its False Claims Act.

In a July 27 brief, state Attorney General Kwame Raoul asks the court to approve the settlement considering the "substantial risk" that the banks would prevail if the case went to trial. Edelweiss, Raoul charges, "spent years chasing evidence of a sustained, wide-ranging conspiracy among defendants that never materialized."

Edelweiss Fund LLC is the entity formed by Minnesota-based municipal advisor Johan Rosenberg, who filed the Illinois lawsuit and similar claims in other states including California, New York, and New Jersey. In Illinois, Edelweiss is seeking damages from eight different banks that acted as remarketing agents for 121 separate variable-rate demand bond issues floated by 25 Illinois entities, including the state's own 2003 variable-rate general obligation bonds. The lawsuit accuses the banks of conspiring to keep VRDO interest rates high 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 RMAs and for providing letter of credit services without having to actually remarket the bonds.

"The problem with this conspiracy theory is that relator [Edelweiss] has failed to develop an evidentiary record to support its existence," the state's brief said. "To be clear, the issue with relator's case is not that they include no facts in their briefing on collusion. It is that those facts are facially insufficient to create a triable issue as to their massive, years-long, multi-billion-dollar collusion theory, raising no more than a sheer possibility that the collusion or coordination existed."

The state adds: "In fact, testimony from state officials involved in managing and monitoring the bonds at issue would very likely rebut relator's claim that the state was even defrauded in this case."

The settlement, which was reached in July just weeks ahead of a long-awaited Aug. 7 trial date, calls for the banks to pay $68 million. The state would use $15 million to cover Edelweiss' attorney fees and costs, reducing the final payment to $53 million. Of that, 30%, or $15.9 million, would go to Edelweiss – the maximum under state law – and the remaining $37.1 million would be divided among the various issuers and other parties entitled to recoveries.

Edelweiss argue that the $15 million tab for attorney fees and expenses covers less than half of actual fees racked up over the 10-year case.

Only the court, not the state AG, can approve legal fees, which should be decided outside of the settlement, Edelweiss attorneys argued at a July 17 hearing before Cook County Circuit Court Judge Thomas Donnelly.

Edelweiss attorney Todd Schneider, of Schneider Wallace Cottrell Konecky LLP, told Donnelly that the entire settlement "blows up" if the court opts to approve attorney fees higher than $15 million, rendering the settlement contingent on the court approving the $15 million fee.

The settlement terms outlined in the brief show the banks are allowed to walk away if the final figure, including attorney fees, is higher than $68 million.

The state argued that it has statutory authority to negotiate attorneys' fees as part of a settlement subject only to the court's review that it's fair and reasonable.

Further, Raoul said, the attorney fees and litigation expenses that are estimated at $39 million are "grossly disproportionate to the actual value of the claims at issue in this case." The $15 million fee "is more than fair given the substantial risk that relator's attorneys would recover nothing had they litigated this case through trial and appeal."

Edelweiss has until Sept. 15 to file a reply. A hearing on the settlement motion is set for Oct. 25.

The accused banks in the Illinois case are, or are affiliates of, JPMorgan Chase & Co.; Citigroup Inc.; William Blair & Company, LLC; Bank of America, N.A.; Merrill Lynch.; Morgan Stanley; BMO Financial Corp.; Barclays Capital Inc.; Fifth Third Bancorp; Fifth Third Bank; and Fifth Third Securities, Inc.