Several major Wall Street banks including Bank of America, Barclays Capital, BMO Financial, William Blair & Co., Citigroup, Fifth Third Bancorp, JP Morgan Chase & Co., and Morgan Stanley are to face trial in Illinois next month. The banks are alleged to have inflated interest rates on municipal bonds to deter investors from cashing them in, and colluded in setting the rates. These charges stem from lawsuits originally filed under seal in 2014 by Minnesota financial adviser B.J. Rosenberg, who claims the banks caused a collective $1.5 billion in damages and is seeking three times this amount in restitution.
The lawsuits span across California, New York, and New Jersey, with around a dozen banks being defendants in the four lawsuits. It is alleged that from 2008 until recently, the banks acted as remarketing agents for long-term bonds with variable-rate demand obligations (VRDOs) and failed to secure issuers the lowest possible interest rates. The banks supposedly reset these rates on a daily or weekly basis to discourage investors from returning them for cash. A further $6.5 billion in damages is at stake in antitrust litigation in New York.
The first trial, filed on behalf of the state by an entity called Edelweiss Fund LLC, is scheduled to begin in Cook County Circuit Court on August 7 following a preliminary hearing on July 12. A settlement is highly probable, according to Elliott Stein, a senior litigation analyst with Bloomberg Intelligence. Stein suggests that the potential damages in these cases, which can be tripled, are a significant incentive to settle, as is the chance to avoid any damaging evidence or outcomes that could influence the other related cases.
According to Stein, the settlement for the four False Claims Act cases could be around $1.5 billion. The banks maintain that they exercised their judgment in setting the rates for VRDOs and that their decisions are "conclusive" and "binding". An additional antitrust lawsuit was filed in the Southern District of New York in 2019 by Philadelphia and Baltimore, also alleging manipulation of VRDO rates. This suit could result in claims of $6.5 billion in damages with the sought compensation again tripling. Stein estimates a settlement of about $1 billion, with Bank of America potentially liable for the most, at around $225 million.
