WASHINGTON – The City of Philadelphia’s class action lawsuit accusing several large banks of misconduct in the setting of variable-rate demand obligation interest rates is likely to be taken more seriously by the issuer community than the anonymous whistleblower suits filed previously.
The Wednesday night filing of
“The market can’t ignore an issuer directly bringing a suit with such strong representation,” said Robert Novembre, president and chief executive of the Clarity BidRate alternative trading system that is a platform for VRDO pricing and trading.
The allegations in the new lawsuit, in which Philadelphia is represented by the law firm of Quinn Emanuel Urquhart & Sullivan, 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.
Some market participants have expressed some skepticism about the Edelweiss suits, noting that the individual behind Edelweiss stands to reap millions of dollars for himself if he wins in court or if the banks choose to settle. Further complicating feelings about the Edelweiss suits has been the participation of former Smith Barney banker Michael Lissack, who blew the whistle on Wall Street banks over yield burning in the 1990s before the Securities and Exchange Commission barred him from the industry. He remains unpopular with many in the banking community.
Oklahoma City Assistant Finance Director Kenton Tsoodle said the suit would make the market sit up and notice, though he added, "It is early and issuers will take a ‘wait and see approach’ in this case regarding any reactions.”
Tsoodle, who is current chair of the Government Finance Officers Association’s Committee on Governmental Debt Management, said it's up to the SEC to sort out any illegal activity. "Issuers and the GFOA would always be in favor of transparency," he said, comparing the VRDO pricing issue to the problem of replacing the London Interbank Offered Rate as a benchmark for bond rates.
"Much like our work with the Libor alternative, we would be happy to be part of the conversation in future efforts to come up with solutions to these types of problems,” he said.
Other market sources were less convinced of the significance of the new filing. Ben Watkins, director of Florida’s Division of Bond Finance, said he thought the Philadelphia suit was “more of the same.”
The Municipal Securities Rulemaking Board declined to comment on the development, and the National Association of Bond Lawyers was not able to comment in time for this report.
The accused banks have not yet filed an answer to the latest lawsuits. They
