Pipeline bond underwriters sued for Flint water contamination

Register now

Victims of Flint, Michigan’s water contamination crisis are suing the underwriters of bonds sold in 2014 to finance a new water pipeline built to serve the city and surrounding area.

The lawsuit filed Wednesday in the U.S. District Court for the Eastern District of Michigan seeks up to $2 billion in damages from JPMorgan Chase & Co., Wells Fargo Bank, and Stifel Nicolaus & Co. Inc., accusing them of aiding and abetting in the events that led to the lead poisoning crisis.

Bond underwriters for a water pipeline to Flint, Michigan, face a $2 billion lawsuit.

Representatives of the three firms declined to comment Thursday.

The crisis occurred after the city's contract with Detroit to receive Lake Huron water ended and the city began pulling its water supply from the Flint River water in April 2014 while awaiting the completion of the $285 million Karegnondi water pipeline carrying Lake Huron water to Flint and other Genesee County communities.

The city failed to properly treat the Flint River water, triggering lead contamination because of pipe corrosion. It was not abated until the city in the fall of 2015 shifted back to Detroit-supplied water.

The Karegnondi Water Authority issued $220.5 million of bonds in 2014 to finance the project. Flint was on the hook for $85 million of the bonds. JPMorgan was senior manager and Wells and Stifel were as co-managers.

The three banks “engaged in conscience shocking behavior by underwriting Flint’s participation in the KWA — and thus the poisoning of Flint’s children, residents, and other users — knowing full well there would be drastic and dire health consequences to the children of Flint,” the lawsuit alleges.

“They agreed to and facilitated a plan for Flint to leave the Detroit Water and Sewerage Department and enter the KWA, and they knew that a necessary element of the plan was the use of raw, untreated Flint River water as an interim drinking water source, which would expose Flint’s residents and water users to lead-poisoning and legionella bacteria,” the lawsuit charges.

If not for the borrowing that allowed Flint to participate in the pipeline project, “Flint would not have been able to join the KWA” and if Flint had continued purchasing water from Detroit “no children would have been lead poisoned and no lives would have been ruined, lost, and otherwise forever changed.”

Other key participants in the financing included bond counsel Miller Canfield Paddock and Stone Plc and financial advisor Stauder Barch & Associates Inc., which was absorbed by PFM in 2015. Neither firm is named in the litigation.

The plaintiffs previously filed a lawsuit against former Gov. Rick Snyder and other state officials including the Snyder-appointed emergency managers who orchestrated the water switch along with environmental engineering firms. They ultimately came to a proposed $600 million settlement with the state.

“Further investigation and discovery have revealed new defendants in a category of their own: J.P. Morgan Chase, Wells Fargo, and Stifel, institutions that underwrote a 2014 municipal bond sale, which aided and abetted the perpetration of the violation of Plaintiffs’ firmly established constitutional right to bodily integrity,” the lawsuit alleges.

The accusations cite the city’s efforts to bypass debt limit caps to participate in the bond financing, which were previously laid out in charges filed by Michigan's former attorney general against several officials, including the city’s former emergency managers.

City officials used a state approved Administrative Consent Order approving remediation of a lime sludge lagoon which was in theory to be used by the Flint Water Treatment Plant and served as a pretext for Flint’s participation in the KWA bond sale financing without violating the debt cap. The remediation cost was about $8 million. It was not included in the bond deal and future criminal allegations accused city officials of using it to skirt state caps.

The underwriters “knew about the farce that was the Administrative Consent Order, in addition to other facts, such as that the Flint River would be used as an interim source of drinking water for Flint for the foreseeable future,” the lawsuit alleges.

The litigation also accuses the banks of knowing of the “hazards to human health presented by the Flint River’s highly corrosive water and Flint’s aging network of lead service lines, Flint’s inability to pay for necessary upgrades to the Flint” water plant and “the fact that Flint’s residents and water users would begin consuming raw, untreated, and deleterious water shortly after the switch in April 2014.”

The three banks all either employed an internal public water expert or retained a consultant with significant public water expertise and so were aware of the city’s troubled plans. “At all material times this information was known” by the three banks, the lawsuit alleges.

The lawsuit — LeeAnne Walters, et al v. J.P. Morgan Chase & Co.; Wells Fargo Bank, National Association; and Stifel, Nicolaus, and Company, Incorporated, defendants — accuses the firms of professional negligence and breach of duty.

The more 2,000 plaintiffs were all minors who lived in Flint and used city water during the crisis. Children’s developing brains are considered most at risk to damage from lead poisoning and the plaintiffs meet the criteria under the state’s statute of limitations on claims.

The lawyers representing the plaintiffs said the ongoing investigation led them to the banks.

“In the U.S. citizens have a right to bodily integrity. That means that their bodies cannot be messed with. If their government poisons them, that’s arguably a violation,” said Corey Stern, a partner at Levy Konigsberg LLP, in an email. “While private entities are normally not subject to this type of liability, when they are part of a scheme that deprives folks of this right they can be held liable. That absolutely happened here.”

Stern said “if the evidence leads there” the firm could name additional participants in the financing.

The law firm is among those representing clients in the settlement, announced by Gov. Gretchen Whitmer and Attorney General Dana Nessel in August.

Whitmer inherited the lawsuits from Snyder, whose administration came under fire for failing to prevent or move quickly to correct the contamination.

The seeds of the crisis began several years before the bond issue when the city — then under state emergency management — agreed to participate with Genesee County in financing the construction of the new water pipeline to trim water costs. Flint pledged to repay about 34% of the $220 million 2014 bond issue that provided initial financing for the 63-mile pipeline led by Genesee County. The deal was recognized by The Bond Buyer as Midwest Deal of the Year.

In addition to the toxic lead poisoning of household water, a 2014-15 Legionnaires’ disease outbreak in the Flint region led to the deaths of at least 12 and sickened another 79 individuals.

Flint reverted to Detroit water in October 2015 and signed a long-term contract to continue receiving water through the Great Lakes Water Authority, a regional agency that is the successor agency to Detroit’s system.

The long-term water supply arrangement between GLWA and Flint does not alter the terms of the KWA financing contract or the obligation of Flint to make contractual payments to the issuer at the times and in the amounts required. Under its GLWA contract, Flint receives credit for the portion of the debt service on the KWA system bonds that Flint pays to the issuer. Ultimately, the county is on the hook for debt service.

Fifteen government officials were criminally charged. Seven struck plea agreements. Nessel, who took office last year, dismissed all pending criminal cases related to the crisis, two of which were against former state-appointed city emergency managers Gerald Ambrose and Darnell Earley. The office launched a new case citing the development of new evidence and criticisms of the original investigation under then-Attorney General Bill Schuette.

Ambrose served as Flint’s EM from Jan. 13, 2015 through April 28, 2015. Earley was named EM in September 2013 and served until January 2015. Both were appointed by Snyder.

Earley oversaw the decision to change the city's water source to the Flint River. A March 13, 2014, order signed by Ambrose for a water main cut-in at the water plant cleared the way for the switch to the river. Flint exited from state financial receivership on April 10, 2018, after seven years under state oversight.

For reprint and licensing requests for this article, click here.
City of Flint, MI JPMorgan Chase Stifel Financial Wells Fargo Michigan Lawsuits
MORE FROM BOND BUYER