Illinois Whistleblower suit charges widespread fraud with VRDO
According to an article in Bond Buyer yesterday, eight Wall Street and regional banks and broker-dealers have been accused in a whistleblower suit of fraud and collusion in connection with remarketing the variable rate demand obligations (VRDO) of state and local issuers in Illinois.
Edelweiss Fund LLC is filing suit on behalf of Illinois under the Illinois False Claims Act in the Circuit Court of Cook County Ill. The suit was filed against JPMorgan Chase & Co, Citigroup, Inc., Bank of America Corp., Barclays PLC, Morgan Stanley, William Blair & Co., BMO Financial Group, and Fifth Third Bancorp, claiming the firms used a “Robo Resetting” device to fraudulently impose “artificially high interest rates” on the VRDOs so they would not have to be remarketed.
A variable rate demand obligation (VRDO) is a municipal security for which the interest rate resets on a periodic basis and holders are able to liquidate their security through a “put” or “tender” feature, at par often through a remarketing agent.
The suit claims that these firms collected tens of millions of dollars of remarketing fees each year from issuers in Illinois, without really providing remarketing services. According to the allegations, the banks also collected fees from issuers for serving as liquidity providers for the VRDOs.
The firms allegedly set high rates ensuring the VRDOs would remain as holdings of tax-exempt money market funds, some of which were owned or managed by these firms, according to the suit.
According to the lawsuit, the eight firms purportedly overcharged issuers on interest rates by $202.48 million; remarketing agent fees by $65.32 million; letter of credit fees by $72.66 million for a total of $340.46 million in estimated damages.
The whistleblower suit is seeking damages and penalties from the eight firms.
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