Wall Street banks avoid trial in Illinois rate-fixing VRDO case

A group of Wall Street banks are set to avoid a long-awaited trial in Illinois over charges of inflating interest rates on the state's variable-rate debt after a Cook County judge Monday granted the banks' motion to vacate the trial in light of a proposed settlement with the state.

The deal may not be done however, as the plaintiff that filed the lawsuit on behalf of Illinois opposes as insufficient the amount of attorney fees and expenses that would be paid off in the $68 million settlement.

The eight Wall Street banks and Illinois Attorney General Kwame Raoul announced the proposed agreement in an emergency motion filed last Tuesday. Cook County Judge Thomas Donnelly granted the motion Monday morning.

Natalia Merzlyakova AdobeStock

The deal on the table would have the banks pay $68 million to Illinois, which would cover $15 million in attorney fees and costs, reducing a final payout to $53 million. Of that, 30% would go to Edelweiss Fund LLC, the entity formed by Minnesota-based municipal advisor Johan Rosenberg, who filed this and other lawsuits on behalf of other states.

The whistleblower suit charges the banks of conspiring to keep VRDO interest rates high so investors would not exercise their rights to tender the VRDOs back to the banks serving as remarketing agents, thus allowing the banks to collect fees for serving as RMAs and for providing letter of credit services without having to actually remarket the bonds.

Recent court briefs describe for the first time a private, invitation-only variable-rate index that Edelweiss says the banks used to inflate weekly VRDO rates and even SIFMA's weekly rate index.

The lawsuit claimed damages to Illinois of roughly $340 million from overcharges on interest rates, remarketing agent fees and letters of credit.

The State of Illinois, ex rel., Edelweiss Fund LLC, v. JPMorgan Chase & Co., et al, is one of four lawsuits Rosenberg brought against Wall Street banks accusing them of rigging interest rates tied to VRDOs. The Illinois case was the first to near a trial. Cases in California, New York and New Jersey are pending.

At Monday's hearing, Donnelly gave the Illinois AG until July 26 to file a settlement application. Edelweiss has until September to file its response. The next hearing date is set for October 25.

The $15 million that the AG has allotted to plaintiff attorney fees and costs is "entirely insufficient," which the court is "virtually certain to conclude," Edelweiss argued in a July 14 response filed to the banks' emergency motion.

In the 10 years of pursuing the case, Edelweiss has incurred more than $39 million in expenses and attorney fees, Edelweiss said.

The accused banks in the Illinois case are, or are affiliates of, JPMorgan Chase & Co.; Citigroup Inc.; William Blair & Company, LLC; Bank of America, N.A.; Merrill Lynch.; Morgan Stanley; BMO Financial Corp.; Barclays Capital Inc.; Fifth Third Bancorp; Fifth Third Bank; and Fifth Third Securities, Inc.