Baltimore files antitrust suit against 10 major banks, alleging illegal rate inflation costing cities billions

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Baltimore is suing 10 major banks, alleging they illegally inflated interest rates for particular bonds for public works — overcharging Baltimore and other municipalities by billions of dollars.

The city is seeking class-action status for the federal antitrust lawsuit, saying the banks inflated costs for the city and other local governments, which Baltimore seeks to represent. That takes money away that could be spent on schools, police, roads, sewer lines and the like.


The lawsuit, filed in the Southern District of New York, alleges that Bank of America, Barclays Bank, BMO Financial Group, Citibank, Fifth Third Bank, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Royal Bank of Canada and Wells Fargo Bank colluded to fix interest rates of the tax-exempt bonds, known as variable rate demand obligations (or VRDOs), from 2007 until 2016.

Baltimore, which has issued more than $260 million of the bonds, said the banks “conspired in a coordinated and confidential scheme” from at least August 2007 to June 2016 to collect billions in unearned fees from the city and others on the bonds, which are used to pay for major, long-term city infrastructure projects.


“While Defendants enjoyed the benefits of their rate-fixing scheme, Plaintiff and similarly situated VRDO issuers suffered to the tune of billions of dollars in overcharges during the Class Period by paying inflated, collusively set interest rates,” the complaint says. “Defendants’ scheme inevitably reduced the funds available for public works, services, and organizations.”

Bank of America, Goldman Sachs, JP Morgan, Citibank and RBC declined to comment Tuesday; spokespeople for the five other banks did not respond to requests for comment.

Baltimore is joining a growing group of municipalities and states suing over how banks handle variable rate demand obligations. Philadelphia sued a group of banks in February with much the same arguments and also seeking class-action status, according to a Reuters report. The state of New York, as well as California, Illinois and Massachusetts, all have sued banks, too, according to a report in The Bond Buyer trade publication.

VRDOs are long-term municipal bonds that allow cities, counties, states and other issuers to borrow large amounts of money at lower, short-term rates because they feature a “put” or “tender” option that allows investors to sell the bond back at face value, plus accrued interest.

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Because of this feature, cities often pay expensive fees to remarketing agents — such as the banks being sued — to set the interest rates and re-sell or purchase any tendered bonds. The remarketing agents are required to set the rates at the lowest possible market rate.

The interest rates generally are reset weekly.

If Judge Jesse M. Furman allows Baltimore’s class action suit to move forward or merges it with another suit, it could become a massive case. As of November 2013, there were approximately 9,000 VRDOs outstanding in the United States with a collective balance of roughly $223 billion, the lawsuit said.

Bank of America, JPMorgan and Wells Fargo alone accounted for approximately 40 percent of the VRDO market in 2011, 2012 and 2013.


Baltimore’s complaint cites a whistleblower analysis that showed interest rates were “grouped together in ‘buckets’ in a manner that would be statistically impossible had the banks actually priced VRDO interest rates individually.” It also noted a report that the Department of Justice has opened a criminal investigation of VRDO remarketing practices.

Maintaining artificially high interest rates discouraged investors from exercising their “put” option, meaning the banks did not have to buy the bonds back and re-sell them, while simultaneously allowing them to charge higher fees for those services, the complaint claimed.

The city is represented by outside counsel, Susman Godfrey LLP.