Philadelphia Sues 7 Big Banks Over 'Muni' Bond Collusion

Joining the long series of lawsuits filed against major global banks related to past business misconducts, the city of Philadelphia has sued seven banks including JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) . These banks are accused of colluding to rig the price of floating rate bonds that led to extra interest payments for the city.

The complaint filed in the U.S. District Court in Manhattan accused the above-mentioned banks and Bank of America (NYSE:C) , Barclays (NYSE:C) , Goldman Sachs (NYSE:GS) , Royal Bank of Canada (NYSE:RY) and Wells Fargo (NYSE:C) of manipulating rates for tax-exempt bonds, variable-rate demand obligations (VRDOs) between 2008 and 2016.

The lawsuit, seeking a class-action status to represent a group that includes municipalities, hospitals and universities, stated that the city of Philadelphia had issued VRDOs worth more than $1.6 billion during the aforesaid time frame.

City Solicitor Marcel Pratt said, “The alleged misconduct of the defendants potentially resulted in Philadelphia - and entities across this country -paying above-market interest rates for years.”

Allegation Details

VRDOs, long-term bonds that allow issuers borrow at short-term rates, have a “put” feature that permits investors for early redemption of bonds by tendering them to banks. The banks then remarket these bonds to other investors and earn fees for their services from issuers.

Per the complaint, these seven banks, which at that time controlled nearly 70% of VRDO remarketing, agreed not to compete with each other for remarketing services. The banks did this to keep the rates “artificially high”, ensuring that investors would not exercise their put options.

The lawsuit said, “This allowed defendants to continue to collect remarketing fees for doing, essentially, nothing.” As the city was allegedly paying extra interest and fees, this lowered “the amount of funding available for critical public projects and services, as well as the operations of 501(c)(3) organizations.”

Long Road Ahead

The banks are being investigated by the U.S. Department of Justice for these practices following a meeting with a whistle blower. Further, the Securities and Exchange Commission has contacted nearly four banks “regarding their conduct in the VRDO market.”

Notably, similar lawsuits have been filed in Massachusetts, California, Illinois and New York accusing major banks of colluding to “robo-reset” the rates of VRDOs in the respective states. The plaintiffs in these four cases are seeking to recover more than $1 billion in fees from the banks.

Though the lawsuit filed by the city of Philadelphia, at present, doesn’t specify the amount it plans to recover, it will definitely have an adverse impact on the banks’ financials.

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Of the above-mentioned major global banks, Royal Bank of Canada carries a Zacks Rank #2 (Buy) while the others carry a Zacks Rank #3 (Hold). You can see Zacks Investment Research

Written By: Zacks Investment Research