Bonds

A California appellate court Thursday resurrected a lawsuit accusing prominent Wall Street banks of conspiring to manipulate the variable-rate debt market.

The 1st District Court of Appeal reversed a lower court ruling less than two days after hearing arguments in the case, which dates back nearly 10 years.

It’s the latest turn in a series of state-level lawsuits brought by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC.

The lawsuits accuse a number of major Wall Street banks of conspiring to keep VRDO interest rates high with a “robo-resetting scheme” so that 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.

The California complaint seeks damages of more than $641 million, the largest among the state lawsuits.

The Illinois litigation is gearing up for trial on August 7. The New York case remains in discovery until next year, while a New Jersey court is weighing the banks’ motion to dismiss.

In Massachusetts, the litigation was dismissed in 2019 after the court declared that the Electronic Municipal Market Access website was considered news media under the public disclosure bar of the state’s false claims act.

“We look forward to continuing to seek a recovery on behalf of the taxpayers of California, just as Edelweiss is doing in Illinois, New York, and New Jersey, where additional cases are ongoing,” said attorney Ari Yampolsky of Constantine Cannon, who argued the case last week on behalf of the plaintiff.

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.”

The accused banks are, or are affiliates of, Bank of America, Barclays, Citigroup, JPMorgan Chase, Morgan Stanley, Piper Jaffray, RBC and Wells Fargo. The banks all served as remarketing agents for between 54 and 408 California issuers, either the state or local governments.

The California appellate court determined that the trial court’s decision to throw out the case applied an improperly stringent particularity standard, which requires a complaint to allege sufficient facts to state a claim that’s plausible on its face.

Edelweiss’ “allegations satisfy the dual purposes of the particularity requirement: to put defendants on notice of the alleged fraudulent conduct and deter fishing expeditions for unknown wrongs,” the court said.

The judge also rejected the banks’ argument that the claims should be tossed based on the public disclosure bar, a legal standard that exists to prevent whistleblowers from filing lawsuits supported by information that was already known to the public, in this case through EMMA, which the banks argued functions as either as a report of the state or as news media.

“We are not persuaded,” the court said, calling EMMA “an online repository containing defendants’ daily or weekly submission of interest rate reset data.”

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