WASHINGTON – New York has joined the list of states to have unsealed whistleblower lawsuits alleging fraud in the variable rate demand obligation market, a group expected to grow as some of the suits move toward key court dates.
The lawsuit unsealed this week in New York County Supreme Court appears to be similar to other cases already filed in Illinois, Massachusetts, and California. It has been filed by Edelweiss Fund LLC under the False Claims Act and names as defendants JP Morgan Chase, Citigroup, Wells Fargo, Merrill Lynch, and Morgan Stanley Smith Barney.
While the text of the complaint had not yet become public as of Wednesday evening, a person familiar with the case said it alleges the same wrongdoing in the remarketing of VRDOs as the other cases already unsealed. Representing Edelweiss is the law firm of Constantine Cannon.
VRDOs are variable-rate bonds that are nominally long-term with 20- or 30-year maturities, but are considered short-term because their interest rates are reset periodically, typically weekly. They contain a “put” feature that allows investors to tender them back to tender agents or remarketing agents. The RMAs will then market the VRDOs at a par rate that is 100% of the face value of the security as well as accrued interest.
The suits charge the dealer firms with using a “Robo Resetting” device to fraudulently impose artificially high interest rates on the VRDOs so they would not have to be remarketed. All the cases so far unsealed were originally filed in 2014 by Edelweiss, an Delaware-based entity formed specifically to pursue this litigation and which has to this point become a pseudonym for an unnamed individual who stands to reap a share of any damages won on behalf of the states in which the suits are filed.
Edelweiss won an initial victory last week when a Cook County, Ill., Circuit Court judge ruled the suit there could proceed, denying the defendants’ motion to dismiss the case.
The Illinois case is now gearing up for trial, while significant rulings or further filings are expected in the next couple of weeks in both Massachusetts and California. The banks named have consistently declined to comment on the litigation, but the Illinois defendants’ joint motion to dismiss denied Edelweiss’ accusations.
An expert consulting witness for Edelweiss is Michael Lissack, the former Smith Barney banker who helped the government win hundreds of millions of dollars — and reaped tens of millions of dollars himself in the process — from filing whistleblower lawsuits against Wall Street and other firms in 1995 over charges they engaged in yield-burning.
