WASHINGTON — The variable-rate demand obligation allegations against major banks and broker-dealers intensified as the city of Philadelphia filed a federal class-action suit Wednesday night.
The suit, filed in U.S. District Court for the Southern District of New York, was brought not by Edelweiss Fund LLC but by the city of Philadelphia. While the Edelweiss whistleblower suits brought to the market’s attention a potential controversy in how VRDO interest rates have been reset, this one brought by the municipality on behalf of itself and others “similarly situated” seeks treble damages for losses that “thousands” of issuers may have suffered as a result of artificially high reset rates.
The allegations in the filing are substantially the same as those in the Edelweiss lawsuits filed in Illinois, Massachusetts, California, and New York. Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, RBC, and Wells Fargo violated remarketing agreements by conspiring not to compete against one another and working to keep VRDO interest rates artificially high, Philadelphia alleges. Standard remarketing agreements state that remarketing agents will set rates to allow them to be re-sold at par.
The arrangement benefited the firms and the money market funds that they largely manage, the lawsuit claims, because the funds holding the VRDOs profited from the higher rates and the banks got paid for remarketing services that Philadelphia claims they didn’t provide.
The suit makes reference to a whistleblower who began meeting and sharing data with federal authorities in 2015 and 2016, resulting in what the lawsuit characterizes as an ongoing criminal investigation conducted by the U.S. Department of Justice as well as a parallel Securities and Exchange Commission probe. Lawyers representing Philadelphia found, according to the suit, the defendant firms coordinated their rate-setting efforts as far back as 2008, with remarketing agents allegedly calling their counterparts at other firms and asking questions such as “are you going high or are you going low?”
“There is no reason for Defendants at competing RMA banks to discuss VRDO rates and other competitively sensitive information,” the lawsuit states. “Defendants knew what they were doing was against the law, and they took steps to keep their conduct secret.”
A former remarketing agent at one defendant firm allegedly confirmed the cover-up effort to Philadelphia’s lawyers, saying that firms would engage in “window dressing” by temporarily lowering rates on a single issuer in advance of a meeting or making a pitch for more business.
“This practice of ‘window dressing’ shows that the RMAs could have obtained lower rates for issuers, which was required by the remarketing agreements,” the lawsuit claims. “And the practice of hiding the low rates from the market shows that the defendants knew that any failure to publicly ‘stay in line’ could endanger the conspiracy.”
According to the analysis produced in the lawsuit, interest rates from 2009 until 2017 were 27 basis points higher due to the alleged collusion of the defendant firms. The result is that municipal issuers have suffered potentially billions of dollars in damages, according to the suit.
The suit seeks relief for breach of contract, conspiracy, and unjust enrichment, and demands a jury trial. The suit was signed by Daniel Brockett of the law firm of Quinn Emanuel Urquhart & Sullivan in New York.
