Posted: June 23, 2021

San Diego County Files New Complaint Alleging VRDO Bond Price Fixing

In Board of Directors of the San Diego Association of Governments, acting as the San Diego County Regional Transportation Commission v. Bank of America Corporation et al., No. 1:21-cv-04893 (JMF), an organization representing the City Government of San Diego, California brought a class action suit against leading financial institutions alleging a conspiracy to manipulate interest rates for Variable Rate Demand Obligations (“VRDO’s”), and related misconduct.

The complaint was filed on June 2, 2021, together with a statement of relatedness to City of Philadelphia v. Bank of America Corp., No. 19-CV-1608.  Plaintiffs have different counsel, but refer expressly to the City of Philadelphia complaint in their own pleading, and the matter was accepted as related, and assigned to the Hon. Jesse M. Furman, on June 4.

Like City of Philadelphia – which was written up here on February 25, 2019 (filing of complaint) and December16, 2020 (partial denial of motion to dismiss) – Board of Directors of the San Diego Association of Governments alleges that a number of leading financial institutions conspired to artificially inflate the interest rates for a type of tax-free municipal bonds called Variable Rate Demand Obligations (VRDOs).  In their capacities as re-marketing agents for particular issuers like the City of San Diego, defendants are alleged to have colluded with one another in setting higher interest rates to the detriment of the issuers (who had to pay the higher interest), and to the benefit of themselves (because higher rates reduced redemptions.)

As in City of Philadelphia, the defendants in Board of Directors of the San Diego Association of Governments consist of various affiliates of Bank Of America, Merrill Lynch, Barclays Bank, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, The Royal Bank Of Canada, Wells Fargo and Wachovia Bank.

The Complaint alleges in detail, with reference to historical charts, that VRDO rates were inflated compared to other securities with similar characteristics and risk factors, particularly when the tax-advantaged status of VDRO’s, which ought to lead to lower rates, is taken into account.  Complaint ¶¶ 120-127.  It also alleges various other factors that led Judge Furman to sustain the anti-trust conspiracy claims in City of Philadelphia, including “forward-looking, price-bearing” communications among the defendants (Complaint ¶¶ 89-92); a common motive (Complaint ¶¶ 93-94), and the existence of closely-related government investigations (Complaint¶¶ 111-115, 160).

In addition to its claim under the Sherman Act (Complaint ¶¶ 177-181), Board of Directors of the San Diego Association of Governments also asserts claims under California law concerning restraint of trade (Complaint ¶¶ 172-176), unfair competition (¶¶ 182-188) , breach of contract (¶¶ 189-193), and breach of fiduciary duty (¶¶ 194-197).

As noted in our December 16, 2020  post, in City of Philadelphia Judge Furman had 1) dismissed a fiduciary duty claim under Pennsylvania law partly because plaintiff had not sufficiently plead a special relationship of trust with the Banks, and 2) sustained a like claim under Maryland law because the Maryland Supreme Court had recently confirmed that a breach of fiduciary duty could stand as an independent cause of action, and defendants had not argued Maryland  law in support of their motion to dismiss.

In apparent anticipation of a like motion, the Complaint alleges that defendants owed plaintiffs fiduciary duties, “including per 15 U.S.C. § 18o-4(c)(1) and California law”, when providing advice “concerning municipal securities and other financial matters (e.g., whether, how, and under which terms to issue, market, and remarket VRDOs)” (Complaint ¶ 195) and breached those duties “by, inter alia, entering into Remarketing Agreements knowing that Defendants would never seek the lowest VRDO rates, but would set artificially high rates.”  ¶ 196.

This post was written by Schlam Stone & Dolan partner Thomas A. Kissane.

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