Posted: December 16, 2020

VRDO-Bond Price Fixing Claims Survive Motion to Dismiss

This post reports on S.D.N.Y. Judge Jesse M. Furman’s recent decision largely denying a motion to dismiss a proposed class-action complaint alleging a conspiracy to fix interest rates on Variable Rate Demand Obligations (VRDO) bonds.


As previously described here, the City of Philadelphia filed a proposed class action alleging that a number of major banks had colluded to inflate interest rates for VRDO bonds, which are issued by municipalities and other public entities.  The bonds’ unique feature is that they can be redeemed at any time for face value plus accrued interest.  The issuing entities would contract with banks, who would serve as remarketing agents (RMAs).  The RMAs were obliged to (1) adjust interest rates to the lowest rate possible that would permit the bond to trade at par, and (2) to repurchase and resell any redeemed bonds.  The complaint alleged that the RMAs—a who’s who of investment banks, including Bank of America, Merrill Lynch, JPMC, Citibank, Goldman Sachs, RBC, Wachovia, and Wells Fargo—conspired to inflate the interest rates in order to eliminate competition between each other, and to minimize repurchases, while leaving the issuers to pay the higher interest rates and corresponding fees.  The complaint alleged that the conduct had been exposed by whistleblowers, and that an SEC/DOJ investigation was under way.

In March 2019, the Mayor and City Council of Baltimore filed a second action alleging the same conduct, and the two were consolidated for pre-trial purposes in April 2019.  The defendants moved to dismiss both actions, and that motion was decided on November 2, 2020, and, as noted above, was largely denied.

The Anti-Trust Conspiracy

A horizontal anti-trust conspiracy “may be inferred on the basis of conscious parallelism, when such interdependent conduct is accompanied by circumstantial evidence and plus factors.” (Op. at p. 11.)  The court found that parallel conduct was adequately pleaded by allegations that the defendants had adjusted interest rates in a unified pattern, and by a statistical analysis showing that “interest rates for VRDOs were nearly seventy five percent higher than rates would have been in a ‘but-for’ world,” and that this pattern “abruptly” ended soon after the SEC and DOJ investigations began.  (Id. at p. 12.)  The court rejected the defendants’ attack on the statistical analysis, on the grounds that it was not required to engage in “a Daubert-like analysis” at the pleadings stage. (Id. at p. 13.)  The court also found that plaintiffs had sufficiently pleaded plus-factors, including a high level of “forward-looking, price-bearing” communications between the defendants (id. at p. 16), a common motive to inflate interest rates, and the existence of closely-related government investigations.  The mere fact that defendants were able to offer “plausible non-collusive explanations for many of the facts alleged in the Complaint,” (id. at p. 20), was insufficient because the court was not permitted to choose between competing plausible inferences on a 12(b)(6) motion.  The anti-trust claims were therefore sustained.

The Common-Law Claims

Plaintiffs also alleged a series of common-law claims, including breach of contract, breach of fiduciary duty, and unjust enrichment against particular defendants.  These claims were reviewed under Maryland or Pennsylvania law as to each particular plaintiff.

The breach of contract claim was the most straightforward, sustained against the defendants who had signed contracts with the plaintiffs, and dismissed against those who did not.

The Maryland breach of fiduciary duty claim was sustained, because an intervening decision by the Supreme Court of Maryland decisively held that “a breach of fiduciary duty may be actionable as an independent cause of action,” (op. at p. 25), and because defendants had failed to argue any Maryland law in support of their motion to dismiss.  On the other hand, the Pennsylvania claim was dismissed on the grounds that Philadelphia did not sufficiently plead that “it had a special relationship of trust with the Banks that would give rise to a fiduciary duty,” (id. at p. 26), and also because the “type of conduct that allegedly contravened Counterparty Defendants’ fiduciary duty — that is, their alleged failure to set the bonds at the lowest possible rates to allow the bonds to trade at par — [ ] essentially duplicate a breach of contract claim.” (Id. at p. 28.)

The unjust enrichment claims were dismissed because a contractual relationship existed between plaintiffs and some of the defendants, and as to the rest, plaintiffs had failed to allege that they were in fact enriched at plaintiffs’ expense; “proof of a direct benefit is required; absent a basis to treat a Non-Counterparty Defendant as the alter ego of a Counterparty Defendant, the mere fact that they are affiliated is not enough.” (Id. at p. 30.)[1]

The Statute Of Limitations

Finally, the court briefly addressed the statute of limitations, rejecting the defense because “Plaintiffs plausibly allege that Defendants concealed their conspiracy,” (op. at p. 31), and that requiring “a showing of reasonable diligence would be premature,” (id. at p. 32) at the pleading stage.

The action therefore survived the motion to dismiss stage almost entirely, and the next step will presumably be class certification.  Any further decisions of note will be reported here.

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[1] One procedural point worth noting here—the court reminded the parties that “a party may not raise an argument in a footnote alone,” (op. at p. 29), and that any such argument is waived.

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