City of Philadelphia Sues Wall Street Banks Over Alleged Interest Rate Conspiracy

Philadelphia. Photo: Shutterstock

Philadelphia has filed a lawsuit against several Wall Street investment banks over an alleged conspiracy to set interest rates on city borrowing, costing public institutions like public colleges and hospitals to pay billions in "inflated interest."

The lawsuit says JPMorgan, Goldman Sachs, Wells Fargo, Bank of America, Citigroup, Barclays, Royal Bank of Canada and affiliates conspired to fix rates for tax-exempt bonds called variable rate demand obligations or VRDOs.

Philadelphia is seeking class action status for the antitrust lawsuit, which is filed in the U.S. District Court for the Southern District of New York. JPMorgan, Goldman Sachs, Citigroup and Bank of America declined to comment on the case. The others did not respond to request for comment.

“The alleged misconduct of the defendants potentially resulted in Philadelphia—and entities across this country—paying above-market interest rates for years,” said Philadelphia City Solicitor Marcel Pratt in a statement Thursday. “This conduct potentially decreased the amount of funding available for critical public projects and services. This litigation is necessary to ensure that anti-competitive conduct does not harm the city at the expense of Philadelphia’s taxpayers and residents.”

Rates for VRDOs vary from week to week. The bonds are used to help municipalities fund infrastructure and raise money for public institutions and can be used long term while short-term interest rates are paid.

According to the city, public entities like Philadelphia hire banks to act as re-marketing agents, or RMAs, which are contractually obligated to re-market the bonds each week to ensure the lowest possible interest rate given market climate. The RMAs are paid fees by the issuers for this service.

The lawsuit said that the defendants made up 70 percent of all RMAs starting from the time of the financial collapse in 2008 up until 2016.

"Since about late 2015, various government authorities have been investigating defendants’ practices in the market for VRDO remarketing services, based on facts that were first brought to their attention by a whistleblower," the complaint said. "Among other things, the whistleblower alleges that RMAs (including defendants here) were not actively and individually marketing and pricing VRDOs at the lowest possible interest rates, but instead were setting artificially high rates without regard to the individual characteristics of VRDOs, market conditions, or investor demand."

It added, "The whistleblower also alleges that RMAs (including defendants here) were improperly coordinating the rates they set for VRDOs. These allegations were based on the whistleblower’s extensive analysis of data available to the whistleblower due to that person’s role in the marketplace."