Edelweiss VRDO case can proceed in New Jersey

BY SourceMedia | MUNICIPAL | 09/21/21 12:49 PM EDT By Kelley R. Taylor

A New Jersey Superior Court has ruled that a variable-rate demand obligation qui tam claim brought in the state of New Jersey by Minnesota-based municipal advisor Johan Rosenberg via Edelweiss Fund LLC, can continue to discovery.

In the Sept. 13 ruling, Judge Douglas H. Hurd denied the motion to dismiss proffered by defendants JPMorgan Chase & Co. (JPM), Citigroup, Inc.,Wells Fargo & Company, Bank of America Corporation (BAC) and Morgan Stanley (MS). Those financial institutions stand accused of conspiring to hold the interest rates of state-issued variable-rate debt artificially high for the banks? benefit.

In doing so, Hurd found that the banks had not met the standard for dismissing a False Claims Act case and that Edelweiss Fund?s fourth amended complaint, which is the basis of the present court action, ?clearly articulates viable causes of action against the defendants.?

?A plain reading...shows that the fourth amended complaint alleges with proper specificity that defendants engaged in fraud with respect to rate inflation for each New Jersey VRDO to which defendants served as remarketing agents,? Judge Hurd said.

This long-fought dispute stems from a time when the state of New Jersey hired defendants as remarketing agents who were required to reset rates at the lowest rates that would permit the sale of the whole series of VRDOs at par.

Edelweiss Fund alleged that the banks artificially inflated interest rates on the bonds and charged New Jersey millions of dollars for services they did not perform.

The banks have repeatedly denied the claims in court filings.

Edelweiss? initial sealed complaint was filed in April 2015. Amended complaints were filed in 2019 and 2020, The third amended complaint alleged fraudulent misconduct under the New Jersey False Claims Act.

Defendants moved to dismiss that complaint and their motion was granted by the court without prejudice in November 2020. However, Edelweiss Fund filed a fourth amended complaint in March of this year, which Judge Hurd determined in this ruling, was more than sufficient to withstand the latest motion to dismiss.

The fourth amended complaint ?contains new allegations and provided specific instances of improper rate inflation, bucketing of certain bonds and en masse rate movements for each defendant along with new and more detailed statements from defendants? own employees that support relator?s allegations,? Hurd said.

In support of their motion to dismiss, the Judge said that the defendants supplied an alternative explanation for their conduct with respect to the New Jersey VRDOs. They also contended that the public disclosure bar of the New Jersey False Claims Act should apply. However, the court rejected both notions.

?Alternative explanations are not appropropriate to support a motion to dismiss,?Judge Hurd said, adding, ?Rather, a contrary interpretation or an alternative explanation [of the allegations] simply presents a factual issue for discovery.?

Regarding the public disclosure bar, Hurd noted that the defendants raised significant issues in support of their motion to dismiss but found that Edelweiss Fund did the same in their opposition briefs.

?What is clear is that many of the supporting and opposing arguments rely on factual claims that have not been subject to discovery,? Jude Hurd said.

Those genuine issues of fact were the reason the court found that it would be inappropriate to rule on issues of public disclosure absent discovery.

As a result, the court denied the banks? motion to dismiss. Judge Hurd ordered Defendants to file an answer within 45 days.

The case is State of New Jersey ex rel. Edelweiss Fund, LLC v. JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C) Wells Fargo & Company (WFC), Bank of America Corporation (BAC), and Morgan Stanley (MS).

Other similar cases filed by Edelweiss fund are in the discovery phase in Illinois and New York, while a dismissed California complaint is on appeal. Several local governments are pursuing similar complaints alleging violations of federal antitrust law, but are not explicitly linked to the Edelweiss Fund claims.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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