Illinois blocks dismissal of VRDO lawsuit

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The state of Illinois has blocked dismissal of a lawsuit accusing several major banks of wrongdoing in the variable-rate market, effectively preventing those banks from using the only argument that has so far offered them any success in their defenses across several states.

Illinois Attorney General Kwame Raoul

The office of Illinois Attorney General Kwame Raoul notified the Circuit Court of Cook County in a filing late last week it is blocking dismissal of a whistleblower suit on public disclosure grounds. This development mirrors the action of New York Attorney General Letitia James in February, which also blocked dismissal of a nearly identical lawsuit there.

“The Illinois False Claims Act grants the state the right to block dismissal of any claim on the basis of the public disclosure bar,” wrote Assistant Attorney General Isaac Jones.

Both the New York and Illinois lawsuits, as well as others in California and Massachusetts, stem from allegations raised by Minnesota-based municipal advisor Johan Rosenberg, who claims he discovered a widespread fraud in the VRDO market following a proprietary analysis he completed.

The suits brought by Rosenberg, filed by a corporation he created called Edelweiss Fund, charge that the firms set VRDO rates artificially high in order to be paid for remarketing services without having to remarket the bonds, 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. They claim the firms used a “robo resetting” device to reset many CUSIPs without respect to their individual characteristics.

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 have contended among other things that the lawsuit is precluded by the public disclosure bar, a feature of whistleblower laws designed to prevent suits from proceeding on the basis of publicly available information.

Banks have contended that VRDO rates and other information is available on EMMA and elsewhere, barring the suits from proceeding. Rosenberg’s legal team has argued that none of that information makes plain the alleged fraud. So far, only one judge, in Massachusetts, has agreed that the public disclosure bar applies to Rosenberg’s claims.

The banks accused in Illinois and elsewhere have also raised other contentions and in court filings have denied the existence of any fraud or conspiracy to manipulate the VRDO market.

As a whistleblower, Rosenberg stands to reap a substantial windfall if his lawsuits result in damages being recovered on behalf of the states. He would be entitled to a percentage of those damages, which in Illinois alone are alleged to surpass $300 million.

The circuit court initially sided with Rosenberg on the disclosure bar issue in February 2019, but allowed for an immediate appeal, which, following decisions in higher courts, appeared to be headed toward a reexamination of the public disclosure bar question.

But the action by Raoul’s office prevents the court from considering the question. Jones noted, “the state takes no position on any other issues that may have been raised or may be raised in the pending interlocutory appeal.”

The state action raises the chances that the lawsuit will proceed to trial in Illinois, though the process is slow and maybe be slowed further by social distancing measures that have delayed court proceedings in many parts of the country.

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