A federal judge in Manhattan has refused to dismiss lawsuits four California issuers filed against Wells Fargo & Co., JPMorgan, and other banks, broker-dealers, and investment brokers, charging they conspired to rig bids and fix prices of guaranteed investment and derivatives contracts in the municipal market.
Judge Victor Marrero, of the U.S. District Court for the Southern District of New York, denied the firms’ motion for dismissal in an 18-page order late Monday that was released yesterday.
The ruling allows Oakland, Fresno, the Fresno County Financing Authority, and Alameda County to proceed with their individual suits against the firms.
However, the Justice Department yesterday was expected to formally request that the court limit discovery in all of the civil suits through April 2011, contending that the fact-finding will interfere with its separate criminal probe into muni bid-rigging and anticompetitive behavior. The department signaled its intent to prohibit the release of recorded phone calls and transcripts of them in a letter to Marrero earlier this month.
Sources said that U.S. attorneys plan to provide details of their stay request on May 4, after which all parties to the civil suits will have until May 14 to respond. The issuers are expected to fight the restrictive order. U.S. Magistrate Judge Gabriel Gorenstein will eventually rule on the matter. An earlier discovery stay lapsed on March 25 when Marrero refused to dismiss a similar lawsuit that a group of issuers led by Hinds County, Miss., filed against the firms.
Marrero’s ruling this week comes as another, larger group of California plaintiffs, including Los Angeles and the Sacramento Municipal Utility District, are still waiting for a decision on whether their individual suits can proceed. Though they allege the same conspiracy as the suits brought by the California issuers affected by Monday’s ruling, the Los Angeles group rests its case on slightly different legal arguments and names several more defendants, including the large financial advisory shop Public Financial Management as well as Bayerische Landesbank Girozentrale.
The group of plaintiffs led by Hinds County and including Mississippi, West Virginia, and Bucks County, Pa., are pursuing their case as a “putative” class action, allowing them to sue on behalf of, and seek damages for, other similarly affected jurisdictions. Marrero, who refused to dismiss their suit, has yet to certify their status as a class.
All three issuer suits have been consolidated in the federal court in Manhattan.
In Monday’s decision, Marrero ruled mostly in favor of the four California localities, though he did strike down their attempt to claim violations of the False Claims Act in a representative capacity of other public entities. The claim essentially alleges that the firms attempted to rip off the federal government.
But Marrero rejected the contention by banks that the four plaintiffs had failed to satisfy heightened pleading standards for False Claims Act claims, or that they were time barred. The judge noted that the plaintiffs had no knowledge of the alleged unlawful conduct until Bank of America agreed to cooperate with the Justice Department in exchange for indemnity in February 2007 and that the localities remained “ignorant of the conduct through no fault or lack of diligence on their part.”
Attorneys for the four plaintiffs involved in Monday’s ruling praised the decisions yesterday. “This is very good news after two years of hard-fought motions,” said Sylvia Sokol, an attorney at Moscone, Emblidge & Quadra LLP in San Francisco. “The court has held that our claims are sufficient and that we can proceed to discovery.”
The Justice Department’s criminal probe led last October to a federal grand jury indictment of CDR Financial Products, its founder David Rubin, its former chief financial officer Zevi Wolmark, and vice president Evan Andrew Zarefsky. A trial has been scheduled for Feb. 7, 2011, and is expected to last six to eight weeks.
In addition, three former CDR employees have pleaded guilty to criminal charges and have agreed to cooperate with the probe. They are former CDR vice presidents Matthew Adam Rothman and Douglas Alan Goldberg, and Daniel Naeh, who has not worked for CDR in years but was living in Israel and acting as a bidding agent on muni deals.
Court filings have suggested that the Justice Department has 670,000 audio tapes of conversations between firm officials supporting its claim that there was a broad bid-rigging and price-fixing conspiracy in the municipal investments and derivatives market. It would take an individual four straight years to listen to that many hours of recordings.
Though a status conference on the civil litigation was scheduled for Friday, Marrero yesterday agreed to delay it until after Gorenstein ruled on the Justice Department’s motion to restrict discovery. Marrero was responding to a request filed on behalf of an attorney for the defendants.
“Because the stay request is pending, we do not believe the April 30 conference will be productive,” wrote Joseph Wayland, a partner at Simpson Thacher & Bartlett LLP in New York.