Philadelphia has sued seven of the largest Wall Street investment banks, alleging conspiracy to force the city and other local-government and nonprofit borrowers to pay “billions of dollars in inflated interest rates” on variable-rate municipal bonds from 2008 to 2016.
The city’s lawsuit, filed in federal court in New York, accuses Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Royal Bank of Canada, Wells Fargo and several affiliates of costing cities and public agencies, colleges and hospitals “billions” in extra interest payments.
The city, represented by Quinn Emanuel Urquhart & Sullivan LLP and Wollmuth Maher & Deutsch LLP, is seeking its share of actual damages, triple damages for antitrust-law violation, and punitive damages. Spokespeople for Wells Fargo, Goldman and JPMorgan said they don’t comment on pending legal cases.
Why sue now?
“The alleged misconduct only recently came to light” after a whistleblower alerted the SEC and Justice Department, said Mike Dunn, a spokesman for Mayor Jim Kenney. Finance Director Rob DuBow “fully supports” the suit, he added.
The city may have ended up “paying above-market interest rates” because of the banks’ “anticompetitive conduct,” said city solicitor Marcel Pratt.
The action is the latest in a long series of complaints against Wall Street and London banks accused of ripping off clients by manipulating variable rates and credit market indices.
The suit, which asks for class-action status so it can include other borrowers, focuses on variable-rate demand obligations; These are bonds whose prices are reset every week as market interest rates rise and fall. They are sold as tax-exempt municipal-bond investments, among the cheapest kind of financing available.
According to the city lawsuit, the seven banks formed a “cartel" to keep bond interest rates “artificially high” so investors would find them more attractive — at the city’s expense.
“Rates were artificially inflated for several years”, according to the suit, citing comparisons of what the cities paid for variable-rate debt, compared to other, similarly-rated municipal debt during the periods that are the subject of the lawsuit.
The banks also kept “hundreds of millions of dollars” in fees they weren’t entitled to, the suit asserts. Because the city was paying extra interest and fees, it had less money for “critical projects and services."
The overpriced debt included a total of $1.6 billion in refunding and revenue bonds sold for the city, Philadelphia International Airport, Philadelphia Gas Works, and the city’s water and sewer system, and offered for resale by the banks, according to the suit.
Philadelphia typically paid these banks 0.1 percent of the bonds’ value each year — about $1.6 million a year, for all the bonds listed above — in exchange for the banks’ promise to offer these adjustable-rate bonds for resale to money-market mutual funds and other investors willing to pay a bit less, which would save the city money.
Instead, according to the suit, the banks tended to stuff Philadelphia’s debt into their own investment funds, where they would pay the banks’ clients relatively high interest rates, instead of the lowest rates available from other investors.
And, the banks “conspired not to compete against each other” in finding buyers willing to accept lower interest rates, which is what they had promised the city. The people running the bond desks responsible for finding lower-rate buyers “regularly met face to face” at the Municipal Bond Club of New York and other venues, making it “easy” to conspire against the city and other clients to keep their interest rates high.
A whistleblower from one of the firms sparked investigations by the Securities and Exchange Commission and the U.S. Department of Justice, starting in 2015 and “still going on,” according to the suit.
The Quinn Emanuel firm was also lead counsel for the city in a lawsuit against some of the same banks in 2013, alleging manipulation of the London interbank offer rate (Libor), a key variable-rate bond pricing benchmark. That suit is still pending, said city spokesman Dunn.
Last June, state attorneys general said they had recovered a total of $420 million from Barclays, Deutsche Bank and Citigroup, including $1.1 million to the University of Pittsburgh, and much smaller settlements to borrowers including the state school pension system (PSRS) and the Lehigh Valley Hospital and Central Pennsylvania Teamsters retirement plans.
All told, global banks have paid over $9 billion since 2012 in fines for their role in manipulating bond interest rates and benchmarks to boost their fees at clients’ expense.