Final settlement reached in Illinois VRDO rate-rigging lawsuit

Illinois and Wall Street banks accused of rigging interest rates on the state’s variable-rate debt have reached a final deal after the state and the whistleblower who brought the case agreed to smaller payments to resolve a dispute over attorney fees.

The deal calls for the group of eight banks to pay $70 million to settle claims of conspiring to manipulate interest-rates on the variable-rate demand bonds issued by the state and its local governments.

Edelweiss Fund LLC, the entity formed by Minnesota-based municipal advisor Johan Rosenberg, who filed this and other lawsuits on behalf of other states, originally sued for damages of about $243 million, which, with “mandatory trebled damages and penalties” would climb to $730 million.

Under the $70 million deal, $48 million will go to the state, which will give Edelweiss a 30% cut, or $14.4 million.

The settlement allocates $22 million to Edelweiss’ attorney fees and expenses, resolving a dispute that had held up a tentative settlement reached in July.

Edelweiss attorneys had estimated their costs totaled at least $39 million.

The settlement reached over the summer, just days before the Aug. 7 trial date, called for the banks to pay $68 million. That included $37.1 million to the state, $15.9 million to Edelweiss and $15 million to cover attorney fees. Edelweiss’ attorneys argued that the state and banks had reached the original settlement in secret and that the $15 million attorney fee tab was unreasonably low.

Monday’s final settlement came after Cook County Judge Thomas More Donnelly personally oversaw negotiations in his chambers for several hours last Wednesday and Monday.

It will mark the largest settlement for Illinois under its False Claims Act, according to court proceedings. Illinois Attorney General Kwame Raoul’s office did not respond to requests for comment.

The Illinois case is one of four state-level lawsuits brought by Edelweiss. Cases in California, New York and New Jersey are pending.

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.

The lawsuits accuse 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 RMAs and for providing letter of credit services without having to actually remarket the bonds.

Edelweiss based its claims in part on a forensic analysis of rate-resetting from 2009 to 2013 that showed the banks bucketed together VRDOs with different characteristics, and that credit ratings upgrades did not result in a decrease in interest rates. It also presented statements from former bank employees, including from a former Citi employee who called the VRDO market operated by remarketing agents “the biggest joke of a market of all time.”