New Jersey top court revives VRDO rate-rigging lawsuit

Dennis and Ilene MacDonald/Dennis MacDonald - stock.adobe.com

The Supreme Court of New Jersey Thursday resurrected a whistleblower lawsuit against a group of Wall Street banks accused of conspiring to rig interest rates on state and local variable-rate demand bonds.

The opinion returns the decade-old case to New Jersey trial court. Meanwhile, separate cases in California and New York are inching toward possible settlements, according to court filings.

The New Jersey case is one of several state-level False Claims Act lawsuits brought by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC. Edelweiss sued on behalf of the states and their entities that issued variable-rate debt and entered into contracts with banks as remarketing agents and liquidity providers.

Edelweiss accuses the banks of conspiring to keep VRDO interest rates high in a "robo-resetting" scheme 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 as RMAs and for providing letter-of-credit services for a fee without having to actually remarket the bonds.

Edelweiss filed the New Jersey complaint in 2015.

Thursday's Supreme Court ruling turned on a question of whether a 2023 amendment to the state's False Claims Act applied to the case.

The issue, which was argued before the court in April, comes after both parties filed summary judgments based on whether the False Claims Act's "public disclosure bar," which bans private parties, but not the attorney general, from suing based on publicly disclosed transactions applied in the case.

While the summary judgments were pending, the New Jersey Legislature passed an amendment to the NJFCA that allows the attorney general to oppose dismissal on public disclosure bar grounds without needing to intervene in the case, as was previously required.

In August 2023, the attorney general filed a notice of opposition in the case pursuant to the amended statute.

The question before the court was whether the change "applies to a notice of opposition submitted by the attorney general after the amendment's effective date in a case filed prior to the amendment's effective date."

The answer is yes, the judges said.

"We find that the amendment was procedural in nature and took effect immediately as directed by the legislature," the ruling said. "We therefore reverse the appellate division's judgment and hold that the attorney general effectively opposed application of the public disclosure bar in this matter, which may now proceed."

Meanwhile, separate cases in California and New York appear to be inching toward settlement. The California case had been heading toward trial, but the parties in June told the court they had "agreed to settlement terms and were working to memorialize a formal settlement" agreement.

Edelweiss "will be ready to file the formal settlement agreement and ancillary matters with the court within the next 3-4 weeks," the filing said.

Similarly, a settlement appears possible in the New York case, which last year analyzed the banks' rate-setting practices, which is stayed pending a related decision by the Appellate Division.

An Illinois case was settled in October 2023 for $70 million.