Wall Street banks face $8bn in municipal bond price-fixing claims

After almost a decade and untold millions of dollars in legal fees, some of Wall Street’s biggest banks will finally get their day in court on allegations of price-fixing in the municipal bond market — that is if they don’t settle first.

Bank of America, Barclays Capital, BMO Financial, William Blair & Co. LLC, Citigroup, Fifth Third Bancorp, JP Morgan Chase & Co. and Morgan Stanley are expected to go to trial in Illinois next month to face allegations they inflated interest rates on bonds to finance public works to discourage investors from returning them for cash and colluded in setting the rates.

It is the first of four such cases originally filed under seal in 2014 by a Minnesota financial adviser, B.J. Rosenberg, saying that the banks caused a collective $1.5 billion in damages and seeking restitution for triple that amount. Another $6.5 billion in damages hangs in the balance in antitrust litigation in New York.

A dozen banks are defendants across the four lawsuits which also span California, New York and New Jersey. The lawsuits 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.

After a preliminary hearing on July 12, the Illinois 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.

A settlement is likely, according to Elliott Stein, a senior litigation analyst with Bloomberg Intelligence.

“One critical reason to settle is that potential damages in these cases can be tripled, so settling can mitigate the potential fallout,” said Stein in an email Friday. “Settling can also avoid bad evidence coming out or a bad outcome, which could potentially then be used in the other related cases.”

Settlement of the four False Claims Act cases could run to about $1.5 billion, Stein estimated. Barclays and Citigroup declined to comment; the other banks haven’t responded to requests for comment.

In their most recent motion for summary judgment, the banks said they exercised their judgment in setting rates for VRDOs, and that “cannot be second guessed; it is ‘conclusive’ and ‘binding.’” They also said that since the lawsuit was unsealed in 2017, issuers “have continued to pay Defendants to perform the very remarketing services attacked” under the lawsuit with no evidence suggesting issuers are conditioning payment on any specific interest-rate standards.

In addition to the four False Claims Act lawsuits, an antitrust lawsuit was filed by Philadelphia and Baltimore in 2019 in the Southern District of New York, also alleging manipulation of VRDO rates. The New York suit is likely to produce claims of $6.5 billion in damages with compensation sought again tripling, according to BI’s Stein.

He expects a settlement of about $1 billion, with Bank of America on the hook for the most — about $225 million.

The market for VRDO debt has been shrinking since the financial crisis when in 2008 more than $115 billion of debt was sold to refinance both auction-rate and insured floating-rate debt, as the auction market froze and insurance companies were downgraded amid the chaos.

In the early years of this century, issuers sold between $30 billion and $60 billion of VRDO debt annually. In 2022, they sold around $6 billion in such debt, according to data compiled by Bloomberg.

So far this year, issuers have sold $4.2 billion. There are currently around $128 billion in VRDOs outstanding.