Municipalities urge federal judge to allow VRDO lawsuit to continue

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Banks accused of a conspiracy to manipulate the variable-rate demand obligation market are engaging in “strawman” argumentative tactics that a federal judge should reject, lawyers for two municipalities said in a court filing.

The latest court documents, filed Monday in U.S. District Court for the Southern District of New York, are a response to a motion to dismiss filed by the eight large banks accused in the antitrust lawsuit. Philadelphia and Baltimore are jointly suing, claiming that the banks colluded in the setting of interest rates VRDOs issued by states and localities. The accused banks are, or are affiliates of, Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, RBC, and Wells Fargo.

“The court should reject defendants’ strawman attacks on their own mischaracterizations of the alleged conspiracy,” lawyers for the two municipalities wrote. “When the complaint’s allegations are considered as a whole, and reasonable inferences made in plaintiffs’ favor, as is required at the pleading stage, the complaint easily states a plausible conspiracy claim.”


The question of whether the lawsuit states a “plausible” conspiracy claim as required to move forward was the subject of the banks’ motion to dismiss filed in July. In a 2007 U.S. Supreme Court case, Bell Atlantic Corp. V. Twombly, the court ruled that an antitrust complaint must include facts showing that it is “plausible” that the parties conspired not to compete, rather than merely showing that they behaved similarly.

Lawyers for the banks told the court in July that the claims raised by Philadelphia and Baltimore fail to meet the Twombly standard, alleging only that banks “shared information” about their VRDO businesses, not that they made specific agreements to fix rates.

Not so, the plaintiffs fired back this week. The complaint contains details of how the defendants shared information about their inventories and their future rate-setting plans, the plaintiffs’ lawyers wrote, as well as the defendants’ motives for doing so. By keeping rates artificially high, the complaint alleges, the banks prevented investors from exercising their rights to “put” VRDOs back to the banks. That enabled the accused institutions to collect remarketing fees from issuers for doing “essentially no work,” the plaintiffs’ attorneys told the court.
An analysis of rates also shows that the alleged conspiracy had its desired effect, they added.

“When all of these factual allegations are properly considered as a whole, the complaint more than satisfies the Twombly plausibility standard.”

The legal teams for Baltimore and Philadelphia asked the court to reject the banks’ plausibility argument, as well as their claim that the suit is barred by a four-year statute of limitations, and to allow the suit to proceed.

The municipalities’ class action suit is closely related, but not identical, to a series of state-level false claims lawsuits by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund. Market participants have been watching the VRDO suits, which call into question the integrity of the whole variable-rate market.

The Edelweiss suits so far have a mixed record of success. A lawsuit filed in Illinois survived challenges and appears to be moving toward trial, while in California a judge gave Rosenberg’s attorneys a chance to file an amended complaint to cure a lack of specificity in the initial filing. But a Massachusetts court dismissed a suit filed there, saying it was barred because it was based on publicly-available information. Rosenberg plans to appeal the Massachusetts ruling.

While Rosenberg has also filed a suit in New York, is not known whether, or how many, additional whistleblower suits Rosenberg may have filed in other states. That’s because 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 Municipal disclosure Variable-rate bonds Wells Fargo Barclays Citigroup Washington DC Pennsylvania Maryland
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