Last week, the City of Philadelphia filed a proposed antitrust class action in the Southern District of New York. The action alleges that a number of major banks–Bank of America, Merrill Lynch, Citibank, Goldman Sachs etc.–conspired to artificially inflate the interest rates for a type of tax-free municipal bonds called Variable Rate Demand Obligations (VRDOs). The complaint alleges that the defendants were engaged by particular issuers as re-marketing agents (RMAs), and were required to (1) set weekly interest rates for each VRDO, and (2) repurchase and resell any VRDOs investors redeemed. Each issuer could discharge its RMA and choose another, so in theory the RMAs were competing for issuers’ business and were incentivized to set interest rates as low as possible for the issuers’ benefit. However, the RMAs colluded with one another in setting higher interest rates, which was to the detriment of the issuers who had to pay the interest, but to the benefit of the RMAs because higher rates would result in fewer investor redemptions. The complaint further alleges that this collusion was exposed by an industry whistleblower and that an SEC criminal investigation is also underway. More information about the whistleblower suit and the SEC investigation are available on line. The SDNY action is before Judge Lewis Kaplan.
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