The state of Illinois has reached a tentative $68 million settlement with
The eight Wall Street banks and Illinois Attorney General Kwame Raoul announced the proposed agreement in an emergency motion filed late Tuesday ahead of a key Wednesday morning hearing before Cook County Circuit Court Judge Thomas More Donnelly. The judge did not rule on the motion.
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 Fund LLC, the entity formed by Minnesota-based municipal advisor Johan Rosenberg, who filed this and other lawsuits on behalf of other states.
The banks and the state negotiated the settlement "in secret," charged Edelweiss attorney Todd Schneider of Schneider Wallace Cottrell Konecky LLP, in a court room packed with attorneys Wednesday.
Calling the $68 million figure "extraordinarily low," Schneider said the deal was contingent on the court's approval and argued that Donnelly would ultimately find it unreasonable, in part because the state AG is not authorized to estimate attorney fees.
"We believe this is a fake settlement; there's no way you're going to approve it and it's just to move the trial date," Schneider said.
The proposed settlement comes as a pair of summary judgment motions were set to be argued Wednesday and as the case heads toward a long-awaited Aug. 7 trial date.
The banks asked Donnelly to vacate the trial date due to the proposed settlement. Edelweiss objected. Donnelly scheduled a Monday hearing to consider the question.
The Illinois case is one of four state-level lawsuits brought by Edelweiss. The Illinois case is the first to near a trial. Cases in California, New York and New Jersey are pending.
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.
The Illinois Attorney General will file a settlement brief within 14 days, attorney Lara Flath with Skadden, Arps, Slate, Meagher & Flom LLP, who represents Barclays, told Donnelly.
The settlement marks "one of those moments" when "on the eve of the trial, parties come to their senses," Flath told the judge.
In asking the court to maintain the trial date, Schneider called the $15 million in Edelweiss attorney fees and expenses unreasonable, and said the law requires the defendant, not the state, to cover those costs.
The court can't approve the settlement unless "the AG agrees to a much smaller share of the $68 million or the defendant puts in more money," he said.
The state has the right to waive its interests, Donnelly responded. "As long as they're not complaining, who's going to complain?" the judge asked.
Noting that it's rare for courts to strike settlements, Donnelly said he was "looking favorably" on the motion because "it doesn't seem to be likely that the ultimate determination is going to be that the settlement was unfair or unreasonable."
But, he added if Edelweiss is "correct that this is a facially invalid settlement … I don't want to vacate the trial date."
The lawsuits accuse the banks of conspiring to keep VRDO interest rates high 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 RMAs and for providing letter of credit services without having to actually remarket the bonds.
Edelweiss based its claims in part on a forensic analysis of rate-resetting from 2009 to 2013 that showed the banks bucketed together VRDOs with different characteristics, and that credit ratings upgrades did not result in a decrease in interest rates. It also presented statements from former bank employees, including from a former Citi employee who called the VRDO market operated by remarketing agents "the biggest joke of a market of all time."
Newly filed court briefs describe for the first time a private, invitation-only variable-rate index that Edelweiss says the banks used to inflate weekly VRDO rates and even SIFMA's weekly rate index.
The so-called PARS Index, which was managed by S&P, included prospective weekly VRDO interest rates from five to seven different banks, which were exchanged each week before rates became public. The banks communicated, via Bloomberg, directly with each other in advance about the VRDO rates they were about to set, and tacitly agreed to inflate the rates, Edelweiss says.
"Through these collusive communications, the PARS defendants knew, in advance, both the range of 'base rates' their major competitors would set for their VRDOs the following day and – within a single basis point – where the bellwether SIFMA Index would end up the next day."
The PARS Index "crumbled" as the rate-rigging London Inter-bank Offered Rate scandal came to light in 2012, Edelweiss charges.
