VRDO suit on track to head to trial in Baltimore and Philadelphia

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A U.S. District Court denied major banks’ motion to dismiss a variable-rate demand obligation lawsuit brought by the cities of Baltimore and Philadelphia, a win for the municipalities that keeps the suit on track to head to trial.

On Monday, the U.S. District Court for the Southern District of New York, denied the motion of eight large banks seeking dismissal of the VRDO lawsuit. Philadelphia and Baltimore said the banks worked together to keep interest rates on VRDOs artificially high by sharing information such as VRDO inventory and planned changes to the VRDO’s base interest rates.

However, the court did allow some aspects of the case to be dismissed. The accused banks have denied wrongdoing in court filings.

Philadelphia, as well as Baltimore, sued eight major banks, claiming that the banks colluded in the setting of interest rates for VRDOs issued by states and localities.

Philadelphia and Baltimore both sued the banks, claiming that the institutions colluded in the setting of interest rates for VRDOs issued by states and localities. The accused banks are, or are affiliates of, Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Wells Fargo.

In July 2019, attorneys representing the banks filed a motion to dismiss and a memorandum of law in support of the motion in the U.S. District Court for the Southern District of New York.

The court on Monday did grant a dismissal of the “unjust enrichment claims.” The cities raised an unjust enrichment claim against the banks, but the court said the claims were duplicative. The court said the cities failed to allege, as Maryland and Pennsylvania law require, that the banks were enriched at their expense.

In July, the banks said the cities’ complaint fails to rise to the level of prior court decisions necessary to show a conspiracy. They also argued that their economic analyses were methodologically flawed and showed a convergence between VRDO rates and commercial paper rates from 2008 to 2016 which was “only natural” given interest-rate policies set by the Federal Reserve.

The banks also argued that the cities weren’t dissatisfied with the interest rates and said issuers had a common motive and stood to gain by participating in the rate-fixing scheme. The court called those arguments “unavailing.”

“A bank serving as both RMA (remarketing agent) and liquidity provider would still be (legitimately) motivated not to frequently draw on letters of credit, as the high fees could drive the issuer to move its business entirely,” the court said.

The banks also alleged that the cities’ antitrust claims are subject to a four-year statute of limitations. Philadelphia and Baltimore have asked the court to reject the claim that the suit is barred by a four-year statute of limitations.

“The court need not decide which statutes of limitation apply at this stage, however, because plaintiffs plausibly allege that defendants concealed their conspiracy,” the court said.

Philadelphia and Baltimore’s combined lawsuit is closely related to a series of state-level claims lawsuits filed by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund.

In those cases, the legal argument turns on whether the banks committed fraud in purporting to keep interest rates as low as possible while actually keeping them high. The VRDO suits call into question the integrity of the whole variable-rate market, and market participants are watching closely.

In March 2020, a New York Supreme Court judge dismissed a joint motion from several major banks to dismiss a similar whistleblower lawsuit accusing them of wrongdoing in the VRDO market. Illinois did the same.

Next, the banks can file an answer regarding the cities’ remaining claims in the next three weeks. The court will also schedule an initial pretrial conference.

Bank of America, Barclays, Citigroup, JPMorgan Chase, RBC, and Wells Fargo declined to comment. Goldman Sachs and Morgan Stanley did not respond to a request for comment.

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