RBC among banks that lose appeal in U.S. municipal bond lawsuit

Royal Bank of Canada and other banks named in a class action regarding U.S. municipal bonds include Bank of America Securities, Barclays Capital, Citigroup Global Markets, Goldman Sachs, J.P. Morgan Securities, Morgan Stanley and Wells Fargo Bank. Photo by Cole Burston /Bloomberg

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A United States appeals court has refused to throw out a class action lawsuit against the units of several banks, including the Royal Bank of Canada, that have been accused of keeping interest rates of certain long-term municipal bonds intentionally high for their own benefit.

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The charges against the banks were brought about by a group led by the City of Philadelphia and included the San Diego Association of governments and the mayor and city council of Baltimore. This group issued long-term bonds called variable rate demand obligations (VRDO), which generally help cities raise money for infrastructure development.

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The bonds pay interest to investors at a rate that is periodically reset and the group hired the banks to act as remarketing agents to set the interest rates on more than 12,000 VRDOs.

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As part of their contracts, the banks are required to set the interest rate at the lowest possible rate. If an investor decides to redeem a VRDO, the bank is required to pay the investor and then either remarket the bond or, if it cannot sell it for a satisfactory price, hold it among its own investments.

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If a bank sets higher interest rates than the market, cities, or the issuer can replace that bank with another agent.

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However, the group in 2021 alleged that the banks worked together to not compete against each other and keep the interest rates on the VRDOs artificially high.

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It said the banks worked together from Feb. 1, 2008, to Nov. 30, 2015, by sharing “proprietary information used to calculate VRDO interest rates and by channelling prospective rate information through third-party services to other banks.”

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RBC declined to comment on the allegations.

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The group said the inflated rates made it easier for banks to place the VRDOs with an investor instead of holding it among its own investments, so the cities ended up paying more to their investors.

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A court initially granted the group’s motion to certify the class action, but the banks appealed on the grounds that the “wrong legal standard” was applied. The appeal was rejected by a court on Monday.

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Aside from RBC, the banks named in the class action include Bank of America Securities LLC, Barclays Capital Inc., Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and Wells Fargo Bank N.A.

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