Illinois is defending its decision to accept a $68 million settlement from a cohort of Wall Street banks to conclude an almost decade-long lawsuit over municipal bond price-fixing by questioning the claims of the firm that filed the case on its behalf.
(Bloomberg) — Illinois is defending its decision to accept a $68 million settlement from a cohort of Wall Street banks to conclude an almost decade-long lawsuit over municipal bond price-fixing by questioning the claims of the firm that filed the case on its behalf.
The lawsuit, originally filed under seal in 2014 by an entity called the Edelweiss Fund LLC, sought around $349 million in pre-trebled damages and another $350 million in statutory damages. Edelweiss brought the False Claims Act lawsuit as a “relator,” or someone filing a lawsuit on behalf of an injured party — in this case, the state of Illinois — in return for a portion of any recovery.
Edelweiss alleged that a group of banks inflated interest rates on bonds that finance public projects to discourage investors from returning them for cash and also colluded in setting the rates. Bank of America Corp., Barclays Capital Inc., BMO Financial Corp., William Blair & Co. LLC, Citigroup Inc., Fifth Third Bancorp, JPMorgan Chase & Co. and Morgan Stanley were expected to go to trial in Illinois on Aug. 7 for this case.
While Illinois agreed to settle on July 17, this is the first time any state has defended its decision to do so. Not settling before the case went to trial “would almost certainly have resulting in a loss,” according to a filing by Attorney General Kwame Raoul.
The motion for approval of the settlement says that “the actual language of the contracts at issue does not require Defendants to reset ‘at the lowest possible rate,’” as Edelweiss occasionally implies.
The filing also says that “testimony from State officials involved in managing and monitoring the bonds at issue would very likely rebut Relator’s claim that the State was even defrauded in this case.”
And it says that “the evidence in the record does not support any version of the Relator’s argument, including its basic assertions about the expectations issuers would have had for how the rate-reset process and liquidity facilities worked together in practice.”
Edelweiss, which represents Minnesota financial adviser Johan Rosenberg, has objected to the settlement, saying the $15 million stipulated for expenses and attorneys’ fees is insufficient.
Daniel W. Levy, a principal with McKool Smith PC, counsel to Edelweiss, said “I will respond when able.”
Barclays, Citigroup, Morgan Stanley and William Blair & Co. all declined to comment. The other banks didn’t respond to emailed requests for comment.
‘Highlights Weakness of Claims’
While it is common in motions seeking approval for a settlement to highlight the risk of not recovering, the one Illinois put forward “really seems to go beyond that in highlighting the weakness of the claims and the lack of evidence of any false claims act violations,” Elliott Stein, a senior litigation analyst with Bloomberg Intelligence, said in an email.
“This certainly explains the low settlement amount and will embolden the defendant banks to keep fighting the similar cases in other states until they win outright or get a sufficiently low settlement amount,” Stein said.
The Illinois lawsuit was the first of five such cases originally filed under seal in 2014. One of them, in Massachusetts, has been dismissed. The remaining lawsuits — in California, New Jersey and New York — seek a collective $1.15 billion in damages and restitution of triple that amount. Another $6.5 billion in damages is at stake in antitrust litigation in New York.
A dozen banks are defendants across the four lawsuits, which allege that from 2008 until relatively recently the banks — acting as remarketing agents for long-term bonds with periodic rate adjustments, called variable-rate demand obligations or VRDOs — failed to get issuers the lowest possible interest rates on securities where rates were typically reset on a daily or weekly basis to discourage investors from returning them for cash.
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