Wall Street’s Projected Tab on Muni Price-Fixing Suits Expected to Plunge

Wall Street banks’ potential bill to settle bond price-fixing lawsuits has been slashed, falling to around $900 million from about $2.5 billion penciled in just a month ago.

(Bloomberg) — Wall Street banks’ potential bill to settle bond price-fixing lawsuits has been slashed, falling to around $900 million from about $2.5 billion penciled in just a month ago.

That’s the thinking of Elliott Stein, senior litigation analyst at Bloomberg Intelligence, after Illinois settled for $68 million, roughly 20% of damages last month, likely setting a template for other settlements of the three remaining False Claims Act lawsuits. 

Stein estimates that lawsuits in California, New Jersey and New York will cost the dozen banks involved — including Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. — around $220 million in total. A class action case filed in New York with similar allegations could be resolved for as much as $600 million. Before the Illinois settlement, Stein had estimated the tab on all five suits at $2.5 billion.

The settlements would bring to a close almost a decade of litigation about how the interest rates were determined by banks on variable-rate demand obligations. The long-term bonds, dubbed VRDOs, have their rates periodically reset and offer investors the opportunity to return the securities for cash if they think the yields are reset too low. The lawsuits alleged that the banks — acting as remarketing agents on the securities — failed to get the best rates for issuers.

“Illinois’ arguments for settlement suggest a weak case, giving the banks incentive to test their factual defenses until they can reach a sufficiently low settlement,” Stein wrote in a note Tuesday. 

“The difference in cost stems from what is being sought in the actions,” he said in an email. “The class action is brought on behalf of a proposed class of municipalities seeking about $4 billion before tripling.” 

The Illinois case was one of five similar lawsuits originally filed under seal by an entity called Edelweiss Fund LLC beginning in 2014. Edelweiss, created by Minnesota financial adviser Johan Rosenberg, was a “Relator” suing on behalf of Illinois and its municipalities, which it said had been injured by the banks. A Relator brings a lawsuit on behalf of injured parties in return for a share of any recovery.

Read more: Mystery Man Behind $3.6 Billion in Muni Lawsuits Steps Forward

The Edelweiss litigation has its critics. 

“Relator’s expert witnesses never directly explained why any specific rate resets for any particular bond were inflated to a level above where they should have been had Defendants’ judgment been used as Relator believes it should have been,” Illinois Attorney General Kwame Raoul said in court documents arguing for the $68 million settlement. “This gap almost certainly forecloses any ability to remedy this defect in Relator’s case.”

Illinois Treasurer Michael Frerichs declined to comment via a spokesperson.

Issuers have largely been silent on the VRDO price-fixing lawsuits. That’s likely because they were satisfied with the product, according to David Erdman, a managing director at Chicago-based Baker Tilly Municipal Advisors, who also served 32 years on the bond-issuer side in Wisconsin, most recently as the state’s capital finance director.

When news of the litigation broke around April 2018, “the weekly SIFMA index just finished a nearly 10-year run that saw weekly resets below 1.00%, averaged less than 0.30%, and even had weekly resets at 1bp,” Erdman wrote in an email. “In other words, it was difficult for issuers and advisors to appreciate the findings in the litigation after a long run of very infinitesimal rates.”  

Also, “issuers were appreciative of efforts the dealers and remarketing agents took so that issuers did not have any draws on lines or letters of credit that provided liquidity for these variable-rate programs,” he added, noting the efforts are not a contractual requirement in dealer or remarketing agreements.

Such draws, he said, would have had a negative impact on both the variable-rate component and on all capital borrowing by issuers, and were to be avoided at all costs.  

Neither the eight defendant banks, nor Edelweiss Fund have commented upon the Illinois settlement or the chances of additional resolutions.   

–With assistance from Shruti Date Singh.

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