Philadelphia sues seven banks over 'collusion' in municipal bond deals

Banks including JPMorgan and Bank of America conspired to fix prices on floating-rate municipal bonds, according to suit

Feb 21, 2019 @ 10:41 am

By Bloomberg News

Philadelphia sued seven banks, including JPMorgan Chase & Co. and Bank of America Corp., accusing them of costing local governments billions of dollars by colluding to fix the prices on floating-rate bonds issued to finance public works.

The city alleges the banks conspired to inflate the interest rates on the bonds from as early as 2008, according to a class action filed in federal court in Manhattan Wednesday.

According to the complaint, the Justice Department opened a preliminary criminal investigation into the banks' practices after meetings with a whistle-blower in 2015 and 2016. The Securities and Exchange Commission has contacted at least four banks "regarding their conduct in the VRDO market," according to the complaint.

Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., RBC Capital Markets and Barclays were the other banks named in the suit. Bill Halldin, a spokesman for Bank of America, declined to comment. Scott Helfman, a spokesman at Citigroup, declined to comment, while representatives at the other banks were not available for comment.

The lawsuit appears similar to several filed by Edelweiss Fund on behalf of California, Illinois, Massachusetts and New York that center around the pricing of variable-rate demand obligations, a type of long-dated bond that carries low interest rates because buyers have the option to sell them back to banks periodically. Edelweiss, which is backed by an anonymous principal with experience in the municipal-bond industry, is seeking at least $3.6 billion in damages and penalties as part of three of the suits.

The Philadelphia suit seeks to represent a group including municipalities, hospitals and universities, according to the complaint. The city is being represented by Quinn Emanuel Urquhart & Sullivan, a firm that says it has won $30 billion in settlements over the past five years.

(More: Why muni bond dealers welcome the tax-the-rich push)

Philadelphia and the purported class of issuers paid "billions of dollars" in inflated interest rates, according to the lawsuit.

"By artificially increasing the rates paid by plaintiff and the class, defendants' conduct necessarily decreased the amount of funding available for critical public projects and services, as well as the operations of 501(c)(3) organizations," the city said in the complaint.

Banks that are hired as remarketing agents on the bonds set the rates and often take securities that have been put back into inventory for resale, giving them an incentive to set the rates higher if they want to avoid holding them.

According to the Edelweiss suits, instead of "actively and individually" marketing and pricing bonds at the lowest possible interest rates, the banks "engaged in a coordinated 'Robo-Resetting' scheme where they mechanically set the rates en masse without any consideration of the individual characteristics of the bonds, the associated market conditions or investor demand."

"Defendants 'Robo-Reset' these rates in order to keep the bonds in the hands of their holders, and thus alleviate the need for defendants to remarket the bonds," Edelweiss claimed.

(More: The only certainty is death, taxes, and muni advantages)

In the early 2000s, issuers sold between $30 billion and $60 billion of such debt annually, often in conjunction with interest-rate swaps, according to Thomson Reuters Deals Intelligence.

In 2008, they sold more than $115 billion in such paper as they refinanced both auction-rate and insured floating-rate debt as the auction market froze and insurance companies were downgraded. Since then issuance has dwindled, totaling $7 billion in 2018. The total size of the outstanding VRDO market has been estimated at $150 billion.

The case is City of Philadelphia v. Bank of America Corp., 1:19-cv-01608, U.S. District Court, Southern District of New York (Manhattan).

(More: Muni bond funds return to Puerto Rico)


What do you think?

View comments

Recommended next

Upcoming event

Nov 20


Future of Financial Advice

An innovative conference dedicated to improving the client experience by enhancing digital technology, mainstreaming healthcare and optimizing wealth management strategies.The Future of Financial Advice will provide a forum for... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print