Judge trims federal lawsuit alleging VRDO conspiracy

BY SourceMedia | MUNICIPAL | 06/29/22 03:36 PM EDT By Caitlin Devitt

A federal judge Tuesday trimmed claims from cities pursuing damages from a group of major banks over an alleged conspiracy to inflate interest rates on variable-rate bonds.

Judge Jesse Furman in the U.S. District Court for the Southern District of New York also rejected for now the bank's argument that San Diego?s claims came too late. The judge in November 2020 dismissed the banks' same timeliness arguments against Philadelphia and Baltimore.

Furman dismissed San Diego and Baltimore?s claims that the banks violated fiduciary duties under California and Maryland laws. He ruled the cities lacked ?agency relationships? with the banks that subjected them to fiduciary duties.

Remaining claims include the cities' allegations that the banks violated federal antitrust laws and their contractual duties under state law.

Baltimore, the San Diego Association of Governments and Philadelphia brought the consolidated claims in federal court on behalf of themselves and a proposed class of local and state issuers against nine banks or their affiliates, including Bank of America (BAC), Merrill Lynch, Barclays (JJCTF), Citigroup (C), Goldman Sachs (GS), JPMorgan (JPM), RBC, Wells Fargo (WFC), and Morgan Stanley (MS).

The Department of Justice?s antitrust division is also included as an interested party.

The municipalities allege that between 2008 and 2016, remarketing agents at ?some of the world?s largest banks? conspired to fix the 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 a series of state-level false claims lawsuits by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund.

Market participants have been closely watching the VRDO suits ? brought in Illinois, Massachusetts, California, and New York ? 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.
The Biggest Trials Coming to Courts Around the World in 2021In November 2020, the federal court granted in part and denied in part the banks? first motion to dismiss by ruling that Philadelphia had failed to state a claim for breach of fiduciary duty, but did not dismiss Baltimore?s claim.

The court in 2021 granted the cities? request that the case be combined with an additional action brought by San Diego, and the municipalities filed an amended complaint that incorporated San Diego?s claims.

It's the Baltimore and San Diego claims of fiduciary duty breach and the banks? motion to dismiss San Diego?s claims as time-barred that Furman addressed in his ruling on Wednesday.

His decision tosses Baltimore?s claim of breach of fiduciary duty against JPMorgan (JPM) and San Diego?s claims against Barclays Capital, Inc., Citigroup Global Markets, Inc., Goldman Sachs & Co., LLC and JP Morgan Securities LLC.

Furman also rejected the banks? argument that San Diego had filed its claims too late. ?Defendants? argument may win another day, but it does not provide a basis for dismissal at this stage of the litigation,? he said in the 23-page opinion.

A trial date has not yet been set. The parties are in the midst of discovery briefings. Class certification briefing is set to be finished by April 2023.

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.