Illinois made a strategic decision on July 17th to accept a $68 million settlement, marking an apparent end to the highly controversial lawsuit that centers on allegations of municipal bond price-fixing. The case, originally filed in 2014 under seal by the Edelweiss Fund LLC, exposes grave accusations of major banks inflating interest rates on bonds, discouraging investors from redeeming them and, most significantly, engaging in collaboration to manipulate rate-setting. The unfolding legal conundrum has currently placed the state and the financial institutions at a perplexing crossroad, reflecting the weight of the “dilemma” that hangs in the balance.
The case accused several major banks of inflating interest rates on bonds financing public projects to discourage investors from cashing them in and engaging in rate-setting collusion.
The July settlement marks the first time any state has opted to settle in this landmark price-fixing case. Critics argue that not settling before the trial would have likely resulted in a loss for Illinois.
Attorney General Kwame Raoul defended the settlement, asserting that the actual language of the contracts in question does not require defendants to reset rates at the lowest possible rate, as Edelweiss often claims.
A central point of contention is the alleged lack of evidence supporting Edelweiss’ claims. The defendants have countered that testimony from state officials involved in managing and monitoring the bonds would refute the allegations of fraud.
Elliott Stein, a senior litigation analyst at Bloomberg Intelligence, pointed out that the weakness of the claims and the lack of evidence of any false claims act violations likely contributed to the comparatively low settlement amount.
“This certainly explains the low settlement amount and will embolden the defendant banks to keep fighting the similar cases in other states until they win outright or get a sufficiently low settlement amount,” Bloomberg quoted Stein as saying via email.
This outcome may embolden the defendant banks to challenge similar cases in other states until they achieve outright victory or secure relatively lower settlement amounts.
The Illinois case is just one of five price-fixing lawsuits filed under seal in 2014, with the remaining lawsuits seeking a collective $1.15 billion in damages and restitution triple that amount. Furthermore, antitrust litigation in New York involves an additional $6.5 billion in potential damages.
The banks, acting as remarketing agents for long-term bonds with variable-rate demand obligations (VRDOs), are accused of failing to secure the lowest possible interest rates for issuers on securities where rates were reset daily or weekly. This alleged practice aimed to deter investors from returning the bonds for cash.
In contrast, the July 12, 2023, report indicated that the banks had offered a $68 million settlement. This proposed resolution amounts to approximately 20% of the $349 million in damages initially sought by the Illinois plaintiff. It sends a strong signal that the other False Claims Act cases in California, New York, and New Jersey are also manageable for the banks if they are unable to prevail on some of their remaining defenses.
As the trial date of Oct. 11 approaches, the stakes remain high, with billions of dollars in potential damages hanging in the balance.