The city of Philadelphia, Pennsylvania is suing Bank of America (BAC), Goldman Sachs (GS), Citigroup (C), Wells Fargo & Co. (WFC), Barclays Plc (BAR), JPMorgan Chase & Co. (JPM), and Royal Bank of Canada (RBC) for allegedly rigging rates for variable-rate demand obligations (VRDOs). Philadelphia had issued over $1.6B of these bonds.
VRDOs are tax-exempt municipal securities that can be redeemed by investors early because they are tendered to banks. The banks can then remarket the bonds to other investors while charging issuers a fee.
According to InvestmentNews, the city is looking to represent a number of hospitals, municipalities, and universities with its lawsuit. The complaint contends that the banks worked with each other to manipulate the VRDO rates in secret so they could make hundreds of millions of dollars in unearned fees. The alleged rigging occurred between 2/2008 and 6/2016. The collusion purportedly involved the banks agreeing not to compete against each other for re-marketing services.
What this did, contends Philadelphia, is to allow VRDO rates to remain high so that investors would not use the bonds’ “put” feature. The put feature allows issuers to borrow at reduced short-term rates even though the bonds are long-term. This made it possible for the banks to get paid fees “for doing… nothing.”
Philadelphia contends that the city and the purported class ended up paying billions of dollars in inflated interest rates. This significantly reduced how much funding was then available for key public services and projects, including 501(C)(3) organizations.
According to an August report in Bond Buyer, the US Justice Department is conducting a preliminary criminal probe into the muni bond rigging allegations against the banks. Also, Philadelphia said that the Securities and Exchange Commission has already reached out to four of the banks over the claims.
Several of the banks named in Philadelphia’s complaint were also among the banks were sued last year by Edelweiss Fund LLC on behalf of the states of Illinois, Massachusetts, New York, and California. Once again involving variable rate securities, in that lawsuit Morgan Stanley (MS), Citigroup, JPMorgan Chase, Bank of America, William Blair & Co., Barclays Capital, Fifth Third Bancorp, and BMO Capital Markets Corp. were accused of taking part in a ‘Robo-Resetting” scam that allowed them to mechanically establish rates as a group without considering each bond’s unique traits, investor demand, or the market conditions. The coordinated rigging allegedly caused rates to be inflated and this cost issuers in Illinois alone about $349M. Edelweiss is asking for at least $3.6B.
SSEK Law Firm – Institutional Investor Fraud
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