Cities win class-action status on VRDO charges against banks

Cities across the country can participate in class-action claims against a group of Wall Street banks accused of rigging interest rates on local variable-rate bonds during a nearly eight-year period, a federal judge ruled Thursday.

Judge Jesse Furman of the U.S. District Court for the Southern District of New York granted class certification to consolidated claims by Philadelphia, Baltimore and the San Diego Association of Governments on behalf of themselves and a proposed class of issuers.

The municipalities allege that between 2008 and late 2015, remarketing agents at eight major banks conspired to fix interest rates on VRDOs and in doing so violated federal antitrust law and contractual and fiduciary duties under state law.

The class action suit is closely related, but not identical, to state-level false claims lawsuits brought by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC. The active state cases are in Illinois, California, New York and New Jersey.

In the Illinois case, which is the farthest along of the four, Edelweiss has asked the judge to reject as unreasonably low a $15 million attorney fee outlined in a $68 million settlement between the banks and the State of Illinois. The proposed settlement was announced in July, just weeks ahead of a long-awaited trial in August.

Market participants have been closely watching the VRDO suits, some filed as long as a decade ago, which call into question the integrity of the whole variable-rate market.

While the Edelweiss whistleblower suits brought to the market's attention a potential controversy in how VRDO interest rates have been reset, the municipalities' lawsuit seeks damages for losses that "thousands" of issuers may have suffered as a result of artificially high reset rates.

Furman heard oral arguments Aug. 1. In his 33-page decision released Thursday, the judge said the pair of experts hired by the cities offered strong evidence of a conspiracy. Testimony from business professor William Schwert showed what the judge deemed "stark" results that "99.3% of weekly-reset VRDOs and 98.8% of daily-reset VRDOs were reset during a week with inflated rates."

The ruling certifies as a class "all persons and entities who directly paid interest expenses on VRDOs that had interest rates reset on a weekly or daily basis pursuant to remarketing agreements with the named banks at any point from February 1, 2008 to November 30, 2015." Furman also allowed a subclass of entities that was "party to a remarketing agreement with any counterparty defendant that applies to VRDOs that had interest rates reset on a weekly or daily basis" during the same period.

Furman also granted the cities' motion to appoint Quinn Emanuel Urquhart & Sullivan, LLP; Wollmuth Maher & Deutsch LLP; and Susman Godfrey LLP as class counsel, and ordered the municipalities to file a proposed order outlining how class members will be provided notice and an opportunity to opt out of the class.

The banks named in the lawsuit are: the Bank of America, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, the Royal Bank of Canada, and Wells Fargo.

Meanwhile, in Illinois, a dispute over attorney fees threatens to derail the settlement that state Attorney General Kwame Raoul forged with the banks in July.

The terms call for the banks to pay $68 million to Illinois, which would cover $15 million in attorney fees and costs, reducing a final payout to $53 million. Of that, 30% would go to Edelweiss.

The state is urging Cook County Circuit Court Judge Thomas Donnelly to approve the settlement.

The $53 million piece that would go to the state would mark the largest recovery Illinois has received under the Illinois False Claims Act, according to the Sept. 15 brief.

But the $15 million attorney fee would cover less than half of the actual fees that accrued over the course of a decade, Edelweiss argued.

Furthermore, the state is not legally allowed to settle a relator's fee claim, and the state's interpretation of the IFCA is "incompatible with the statute's text, undermines the law's core purpose, and leads to absurd results," the brief said.

The attorneys asked the judge to convene a conference to try to hammer out a fresh deal that keeps the bulk of the settlement in place but retains jurisdiction over the attorney fee.

Raoul's response is due on Oct. 6. A hearing on the issue is set for Oct. 25.

The accused banks in the Illinois case are, or are affiliates of, JPMorgan Chase & Co.; Citigroup Inc.; William Blair & Company, LLC; Bank of America, N.A.; Merrill Lynch.; Morgan Stanley; BMO Financial Corp.; Barclays Capital Inc.; Fifth Third Bancorp; Fifth Third Bank; and Fifth Third Securities, Inc.