New Jersey top court takes up VRDO rate-rigging case against banks

The New Jersey Supreme Court agreed to review a lower court's ruling against a whistleblower who sued a bevy of Wall Street banks over alleged rate-rigging on the state's variable-rate demand bonds.

The state's top court on Friday agreed to hear arguments over the Dec. 27 opinion by the Appellate Division panel that affirmed a lower court's dismissal of the lawsuit filed under the New Jersey False Claims Act.

The dismissal was based on the act's public disclosure bar, which requires the person bringing the claim to be an originator of the allegations, instead of relying on public information that has already been disclosed. In this case, the banks argued that the data offered by whistleblower Edelweiss had already been publicly disclosed through the Municipal Securities Rulemaking Board website and other sites.

The New Jersey case is one of several state-level False Claims Act lawsuits brought by Minnesota-based municipal advisor Johan Rosenberg, who filed them under the name of a Delaware-incorporated entity called Edelweiss Fund LLC. Edelweiss sued on behalf of the states and their entities that issued variable-rate debt and entered into contracts with banks as remarketing agents and liquidity providers.

Edelweiss accuses the banks of conspiring to keep VRDO interest rates high in a "robo-resetting" scheme so 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 as RMAs and for providing letter of credit services for a fee without having to actually remarket the bonds.

Edelweiss originally filed the New Jersey case in 2015, accusing JPMorgan Chase & Co., Citibank, Wells Fargo, Bank of America, and Morgan Stanley of defrauding the state of more than $100 million by rigging more than 200 separate VRDO issues.

The case was argued last October and on Dec. 27, 2024, the Appellate Division of the New Jersey Superior Court ruled in favor of the banks based on the public disclosure bar.

The supreme court is expected to hear the case in its next term, which begins on Sept. 1. The court typically hears arguments through April and then writes and releases opinions through the end of August, according to a court spokesperson.

Edelweiss also notched a win last week in the New York case. Judge Andrew Borrok granted the whistleblower's motion that argued it should be allowed penalties — but not damages — related to conduit-issued bonds. The decision follows Borrok's ruling in April that dismissed the claims involving conduit bonds, arguing that Edelweiss failed to establish that the State of New York incurred damages.

Borrok in April mostly ruled against the banks and they filed notices of appeal on April 9 and 10. Morgan Stanley, JPMorgan, Citi and Bank of America declined to comment.

The Illinois case was settled last October for $70 million, of which $48 million went to the state and $14.4 million to Edelweiss. The California case remains in discovery.