City of Philadelphia sues financial institutions for 'billions' in alleged overcharging on bond interest rates

By Nicholas Malfitano | Feb 26, 2019

Philadelphia City Hall  

PHILADELPHIA – The City of Philadelphia filed an antitrust class action lawsuit in a New York federal court last week, charging seven prominent financial institutions with conspiracy in forcing it and other municipal borrowers to pay steep sums of interest on variable-rate bonds over an eight-year period spanning 2008 to 2016.

The City filed suit in the U.S. District Court for the Southern District of New York on Feb. 20 versus Bank of America, Citigroup, Goldman Sachs, JPMorgan, Merrill Lynch, Royal Bank of Canada, Wells Fargo and several related companies.

The City says it - along with countless municipal agencies, educational and medical institutions - was overcharged “billions” of dollars in interest payments for nearly a decade, through the defendants’ conspiring not to compete with one another and keep interest rates artificially inflated.

Subsequently, the City argues it had less funds to use for critical services, due to the financial “cartel” formed by the defendants and their retention of hundreds of millions of dollars in fees they weren't entitled to keep.

“As a result of plaintiff counsel’s investigation, plaintiff has further learned that, as early as February 2008, defendants were agreeing among themselves not to compete against each other in the market for remarketing services, and instead to keep variable-rate demand obligation (VRDO) rates artificially high, to the detriment of their customers, including plaintiff here,” the suit states.

“Defendants conspired by communicating with each other in person, via telephone, and through electronic communications. In these inter-defendant communications, they repeatedly shared highly sensitive information about the ‘base rates’ that defendants used to make initial determinations of the interest rates they set for VRDOs as well as the levels of VRDO inventory defendants held on their books.”

The lawsuit, sought to be a class action so that other borrowers may have the opportunity to join it, specifically points to VRDOs, often sold as municipal bond investments that are exempt from taxation. They are also bonds whose valuation fluctuates along with interest rates on the stock market.

Illustrating the allegedly illegal inflation, the lawsuit raises comparisons of what the City paid for VRDO-related debt compared to other municipal debt during with a similar bond rating from 2008 to 2016.

Such debt included $1.6 billion in refund and revenue bonds sold for the City, Philadelphia International Airport, Philadelphia Gas Works and the City’s water and sewer system, which the banks then resold.

Philadelphia paid these banks $1.6 million per year, about 0.1 percent of the bonds’ value each year, and the banks pledged to have the City earn savings by offering the VRDOs for resale to money-market mutual funds and other investors looking to pay less money

But the lawsuit alleges that the “cartel” of financial defendants shuffled the City’s VRDO-related debt into their own investment funds, where they would pay the banks’ clients’ inflated interest rates, instead of comparably lower rates from different investors.

The U.S. Securities and Exchange Commission and the Department of Justice acted on a tip from a whistleblower working for one of the defendant banks and each launched investigations, which began in 2015 and remain ongoing.

The plaintiff is represented by Daniel Lawrence Brockett, Steig D. Olson, Sami H. Rashid, Thomas Lepri and Jeremy D. Andersen of Quinn Emanuel in New York City and Los Angeles; David H. Wollmuth, William A. Maher and Brant Duncan Kuehn of Wollmuth Maher & Deutsch in New York City; and Diana Cortes, Eleanor Ewing and Dimitrios Mavroudis of the City of Philadelphia Law Department.

U.S. District Court for the Southern District of New York case 1:19-cv-01608

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com

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