Settlement appears near in long-running California VRDO lawsuit

Parties in a 12-year-old California whistleblower lawsuit accusing Wall Street banks of conspiring to rig interest rates on state and local variable-rate demand bonds may be closing in on a final settlement.

The California superior court judge overseeing the case last week pushed back a Sept. 2 status conference until Sept. 23, noting that the parties are "working to complete and sign the formal settlement agreement."

Court documents said the parties are awaiting details from the California Attorney General "regarding the plan of allocation of payments to California issuers."

A final deal would mark the second settlement among the four state-level False Claims Act lawsuits brought more than a decade ago by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC.

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

The variable-rate bond market has since significantly shrunk in size, although issuance has started to tick back up as interest rates remain relatively high.

The Securities and Exchange Commission in January said it would review broker-dealers' process for resetting interest rates on variable-rate demand bonds as part of its 2026 examination priorities as the issue.

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 accused 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 originally filed the California case in 2014. The claims are against Bank of America, Piper Jaffrey, Barclays, JPMorgan Chase, Citibank, Wells Fargo, Stifel, RBC, Stern Brothers and Morgan Stanley.

The parties, which include California Attorney General Rob Bonta's office, agreed to tentative terms in May and have since been working to nail down final terms. They swapped proposals in June and July, according to various court filings.

An Aug. 26 Joint Case Management Conference Statement outlining the state of the negotiations said the parties were now waiting to hear back from Bonta before moving forward.

"Since the date of the last case management conference, the parties and the Cal AG have been engaged in discussions and negotiations with respect to the formal settlement agreement," the court filing said, saying Edelweiss presented a settlement agreement draft to Bonta's office on Aug. 6.

On Aug. 24, the AG "indicated to [Edelweiss'] counsel" that it consented to sending the whistleblower's proposed changes to the defendants, which the counsel did. Edelweiss is now "awaiting further input from the Cal AG regarding the plan of allocation of payments to California issuers and certain other issues."

Bonta's office did not respond to requests for comment.

In the Illinois case, the role of the state AG briefly became controversial as Edelweiss attorneys accused the banks and the state of negotiating the settlement "in secret," before a final deal was reached.

The $70 million marked the largest settlement for Illinois under its False Claims Act to date. Of the $70 million, $48 million went to the state, giving Edelweiss a 30% cut, or $14.4 million.