US cities push banks over “intentionally high” VRDO rates in landmark class action
A US$12bn class action alleging major banks, including Royal Bank of Canada, inflated interest costs on US municipal bonds will proceed after courts refused to halt the case.
According to Reuters, the US Supreme Court on Monday declined to hear a bid by Bank of America and seven other major financial institutions to stop American cities from banding together in a US$12bn class action.
The justices left in place a lower-court ruling that upheld a judge’s decision to certify the lawsuit brought by Baltimore, Philadelphia, San Diego and other cities as a class action, which allows the case to move forward on a class-wide basis.
Separately, a United States appeals court refused to dismiss a class action against units of several banks, including Royal Bank of Canada.
According to the Financial Post, investors claim the banks held interest rates on certain long-term municipal bonds “intentionally high” to benefit themselves.
A court initially granted the group’s motion to certify the class action, but the banks appealed on the grounds that the “wrong legal standard” was applied; the appeal was rejected.
The lawsuit focuses on variable rate demand obligations (VRDO), long-term bonds that help cities raise money for infrastructure development and pay interest at rates that reset periodically.
The group led by the City of Philadelphia, and joined by the San Diego Association of governments and the mayor and city council of Baltimore, issued more than 12,000 VRDO and hired the banks as remarketing agents to set the interest rates.
Under their contracts, the banks are required to set the interest rate at the lowest possible rate and must either remarket redeemed bonds or hold them among their own investments.
The plaintiffs alleged in 2021 that, from February 1, 2008, to November 30, 2015, the banks colluded to avoid competing and to keep VRDO interest rates artificially high.
According to the Financial Post, they claim the banks exchanged “proprietary information used to calculate VRDO interest rates” and routed prospective rate information to one another through third-party services.
They said the inflated rates made it easier for banks to place the VRDO with an investor instead of holding them among their own investments, so cities ended up paying more to their investors.
Reuters separately reported that the cities contended banks drove up interest rates on thousands of VRDO from 2008 to 2016, reducing available municipal funding for hospitals, schools and other outlets.
The banks argued in Manhattan federal court that the cities should be required to sue for damages individually, not as a group, and they have denied any wrongdoing.
In their appeal, they contended that the New York-based 2nd US Circuit Court of Appeals was wrong to uphold certification of a nationwide class of municipal bond issuers and warned that the ruling would encourage overly broad class actions, dramatically raising potential liability and coercing settlements.
The cities and other municipal issuers argued that the banks were attempting to “transform class certification into a mini-trial on the merits of a lawsuit.”
They said courts should decide certification based on whether common issues can be resolved for the whole class, rather than on the plaintiffs’ chances of success.
Aside from Royal Bank of Canada, the banks named in the class action include Bank of America Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and Wells Fargo Bank N.A.
RBC declined to comment on the allegations, Financial Post said.
