Bonds

A pair of recent state court decisions have ruled that EMMA is not the news media for the purposes of the public disclosure bar to whistleblower lawsuits, a question that has been a key part of the defense argument of Wall Street banks accused in a series of lawsuits of conspiring to set variable-rate bond rates artificially high.

On Tuesday, an Illinois court denied the banks’ motion that the claims should be tossed based on the public disclosure bar, a legal standard that exists to prevent whistleblowers from filing lawsuits supported by information that was already known to the public, in this case through EMMA, which the banks argued functions as either as a report of the state or as news media.

Information in the news media precludes the fraud action under the Illinois False Claims Act.

The decision advances the case toward a trial set for August 7.

The Illinois case is part of a series of state-level lawsuits brought by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC.

The lawsuits accuse a group of major Wall Street banks of conspiring to keep VRDO interest rates high so that investors would not exercise their rights to tender the VRDOs back to the banks serving as remarketing agents, thus allowing the banks to collect fees for serving RMAs and for providing letter of credit services without having to actually remarket the bonds.

Edelweiss had asked the Illinois court for a summary judgement finding that the news media did not disclose the fraud and that he was an original source for the claims. While granting the first part of the motion, the court declined to address the second question.

The Illinois ruling echoes an April ruling by a California court that made substantially the same determination regarding EMMA, an opinion that helped advance the case in that state.

The banks on June 6 asked the California Supreme Court to weigh in on the litigation.

The Illinois ruling noted that federal and state courts differ as to the definition of news media, and “those that have addressed whether EMMA qualifies as news media starkly disagree.”

In Massachusetts, the litigation was dismissed in 2019 after the court declared that EMMA was considered news media under the public disclosure bar of the state’s false claims act.

The Illinois opinion finds that EMMA fails to be news media because the information published “on the 2.8 million weekly [VRDO] rate resets are not newsworthy; (2) EMMA has no ‘editorial independence’ or accuracy verification; (3) EMMA prohibits creating databases and prevents mass data downloads; (4) EMMA fails to function like a traditional news outlet; and (5) EMMA does not “fall within the ‘broad ordinary meaning’ of news media.”

The New York case remains in discovery until next year, while a New Jersey court is weighing the banks’ motion to dismiss.

Edelweiss based its claims in part on a forensic analysis of rate-resetting from 2009 to 2013 that showed the banks bucketed together VRDOs with different characteristics, and that credit ratings upgrades did not result in a decrease in interest rates. It also presented statements from former bank employees, including from a former Citi employee who called the VRDO market operated by remarketing agents “the biggest joke of a market of all time.”

The accused banks in the Illinois case are, or are affiliates of, JPMorgan Chase & Co.; Citigroup Inc.; William Blair & Company, LLC; Bank of America, N.A.; Merrill Lynch.; Morgan Stanley; BMO Financial Corp.; Barclays Capital Inc.; Fifth Third Bancorp; Fifth Third Bank; and Fifth Third Securities, Inc.

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