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Baltimore files potential class action against banks, alleges rate fixing

Baltimore filed a potential class action lawsuit in New York Monday against a group of banks the city says conspired to fix interest rates of variable rate demand obligations, or VRDOs.

The complaint, filed in U.S. District Court for the Southern District of New York, alleges Bank of America, Barclays, BMO, Citi, Fifth Third, Goldman Sachs, JP Morgan, Morgan Stanley, RBC and Wells Fargo violated federal antitrust law. Baltimore seeks to be the lead plaintiff in a class action on behalf of other city and state governments.

VRDOs, tax-exempt municipal securities issued by local governments to raise revenue, are primarily held by tax-exempt money market funds that are typically owned and managed by the defendant banks, according to a news release from the city.

VRDOs should benefit the city by behaving like long-term securities, allowing the city to borrow money for long periods of time with short-term interest rates. However, Baltimore alleges the banks “colluded to keep interest rates high” instead of competing with each other.

Baltimore and other issuers were overcharged billions of dollars due to the alleged conduct of the defendants, according to the lawsuit.

The defendant banks are remarketing agents, hired to perform periodic rate resets and to exercise best efforts to remarket bonds, according to the complaint. They commit to setting rates at the lowest possible level and are paid fees by issuers like Baltimore. Rather than fulfilling this obligation, the complaint said, “Defendants conspired in a coordinated and confidential scheme to fix rates at elevated levels.”

The alleged conspiracy came to light when a whistleblower filed suits in at least four states, one of which — Illinois — unsealed and made public the suit, according to the complaint. The Illinois lawsuit alleges the banks used a coordinated program to mechanically set VRDO interest rates without considering the individual circumstances of the bonds as required.

It is believed that the U.S. Department of Justice and state governments have launched investigations into the defendants’ VRDO practices, according to Baltimore’s lawsuit.

Though the scheme is alleged to have begun in 2007, the complaint claims the banks actively concealed it, so the statute of limitations should not affect their suit.

Baltimore is joined by attorneys from Susman Godfrey LLP in New York.

The case is Mayor and City Council of Baltimore v. Bank of America Corp. et al., 1:19-cv-02667.


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