Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 1 of 96
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`Exhibit 1
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`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 2 of 96
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`JUL. 2 /3 'OH
`CLERK OF
`COURT
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`eputy Clerk
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`Jeffrey F. Keller, Esq. (Bar No. 148005)
`fkellerakellerarover.com
`Kathleen R. Scanlan, Esq. (Bar No. 197529)
`kscanlanCiiikellergrover.com
`KELLER GROVER LLP
`1965 Market Street
`San Francisco, CA 94103
`Telephone: (415) 543-1305
`Facsimile: (415) 543-7861
`
`Gordon Schnell, Esq. (N.Y Bar I.D. 2502136)
`gschne110,constantinecannon.com
`Marlene Koury, Esq. (N.Y. Bar I.D. 4423471)
`mkourvaconstantinecannon.com
`CONSTANTINE CANNON LLP
`335 Madison Avenue
`New York, NY 10017
`Telephone: (212) 350-2700
`Facsimile: (212) 350-2701
`
`Attorneys for Relator
`EDELWEISS FUND, LLC
`
`SUPERIOR COURT OF THE STATE OF CALIFORNIA
`
`IN AND FOR THE COUNTY OF SAN FRANCISCO
`
`STATE OF CALIFORNIA, ex rel.,
`EDELWEISS FUND, LLC
`
`CASE NO. CGC-14-5407 t
`
`COMPLAINT FOR VIOLATIONS OF
`THE CALIFORNIA FALSE CLAIMS
`ACT
`
`JURY TRIAL DEMANDED
`
`TO BE FILED IN CAMERA AND
`UNDER SEAL PURSUANT TO CAL.
`GOV. CODE § 12652(c)(2)
`
`Plaintiff,
`
`v.
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`JPMORGAN CHASE & CO.; CITIGROUP,
`INC.; WELLS FARGO & COMPANY;
`MERRILL LYNCH & CO., INC.;
`MORGAN STANLEY SMITH BARNEY
`LLC; BARCLAYS; ROYAL BANK OF
`CANADA; PIPER JAFFRAY
`COMPANIES; STIFEL, NICOLAUS &
`COMPANY, INC.; WESTHOFF CONE &
`HOLMSTEDT; RED CAPITAL MARKETS
`LLC; GATES CAPITAL CORPORATION;
`and STERN BROTHERS & CO.,
`
`Defendants.
`
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
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`KELLER GROVER LLP
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`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 3 of 96
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`Edelweiss Fund, LLC brings this qui tam action as Relator on behalf of the state of
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`California against JPMorgan Chase & Co. ("JPMorgan"); Citigroup, Inc. ("Citigroup"); Wells
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`Fargo & Company ("Wells Fargo"); Merrill Lynch & Co., Inc. ("Merrill Lynch"); Morgan
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`Stanley Smith Barney LLC ("Morgan Stanley"), Barclays; Royal Bank of Canada ("RBC"), Piper
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`Jaffray Companies ("Piper Jaffray"); Stifel, Nicolaus & Company, Inc. ("Stifel"); Westhoff Cone
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`& Holmstedt ("Westhoff Cone"); Red Capital Markets LLC ("Red Capital"); Gates Capital
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`Corporation ("Gates Capital"); and Stern Brothers & Co. ("Stern Brothers"), under the California
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`False Claims Act, Cal. Gov. Code §§12650-12656, and alleges -- upon personal knowledge with
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`respect to first-hand industry experience, analysis and expertise, and upon information and belief
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`with respect to all other matters -- as follows:
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`INTRODUCTION
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`1.
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`This case is about defendants' widespread fraud in the fees they charge and the
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`13
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`interest rates they set for variable rate, tax-exempt bonds -- known as Variable Rate Demand
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`Obligations ("VRDOs") -- issued by the state of California or its various political subdivisions,
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`agencies and public institutions ("California").
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`2.
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`California has hired defendants as so-called "remarketing agents" to actively and
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`individually market and price these bonds at the lowest possible interest rates. Instead of doing
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`that, however, defendants have engaged in a "robo-resetting" scheme where they mechanically set
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`the rates en masse without any consideration of the individual characteristics of the bonds or the
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`associated market conditions or investor demand.
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`3.
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`Defendants have engaged in this scheme so they can collect tens of millions of
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`dollars per year in remarketing fees without providing any of the remarketing services for which
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`California pays them. But even more egregiously, defendants are employing the robo-resetting
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`device to impose artificially high interest rates on California VRDOs, the exact opposite of what
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`California hires them to accomplish.
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`4.
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`Defendants benefit from keeping the VRDO interest rates artificially high because
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`it causes VRDO investors (typically tax-exempt money market funds) to hold onto the bonds
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`rather than redeem them from defendants at face value plus interest. This "put" option is one of
`
`COMPLAINT FOR VIOLATIONS OF THE
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`KELLER GROVER LLP
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`

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`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 4 of 96
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`the defining features of a VRDO security. So is the responsibility of the remarketing agent to
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`find another investor when the "put" option has been exercised. If the remarketing agent is
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`unable to find another investor, a liquidity provider -- often the remarketing agent itself -- must
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`step in and purchase the VRDO from the redeeming investor.
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`5.
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`Defendants' robo-resetting scheme thus allows defendants to extract from
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`California substantial fees for remarketing services they do not provide. And it allows them to
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`extract even greater fees as the liquidity provider, typically through guaranteeing the VRDO with
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`a letter of credit, when the risk of needing to draw on that letter of credit is essentially
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`nonexistent.
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`6.
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`As a result of defendants' fraudulent rate-setting activity, California since at least
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`April 2009 has paid hundreds of millions of dollars in overcharges by paying (i) remarketing fees
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`for remarketing services defendants do not actually provide, (ii) inflated VRDO interest rates, and
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`(iii) excessive letter of credit fees for letter of credit services that are rarely, if ever, called upon.
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`7.
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`Relator brings this case on behalf of California to recover the money California
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`has paid in excessive or unsupported fees and inflated interest rates due to defendants' fraudulent
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`rate-setting scheme. Relator also brings this case to stop defendants from continuing with this
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`fraudulent scheme and to ensure that California receives the proper interest rates and remarketing
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`services it pays for in the future.
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`PARTIES
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`8.
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`Relator Edelweiss Fund, LLC is a limited liability company located in Delaware.
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`Through its principal, Relator has more than 20 years of experience advising municipalities and
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`other clients on issuing securities, particularly VRDOs and other types of municipal bonds.
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`Through its work in the industry, Relator became suspicious that defendants and other VRDO
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`remarketing agents ("RMAs") were systematically robo-resetting VRDO interest rates,
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`maintaining artificially high rates for these securities and charging California and other states
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`improper or excessive fees for remarketing and letter of credit services they were not actually
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`providing. Relator confirmed its suspicions after performing an extensive forensic analysis of the
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`interest rates and other market data -- for the April 1, 2009 through November 14, 2013 period —
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
`
`KELLER GROVER LLP
`
`

`

`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 5 of 96
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`for the California VRDOs (and VRDOs issued by other states) for which defendants have served
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`as the RMA.
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`9.
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`Defendant JPMorgan is a financial services company that does business in the
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`State of California and nationally. It is headquartered in New York City and since April 1, 2009
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`has served as the RMA for 178 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $10.3 billion.
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`10.
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`Defendant Citigroup is a financial services company that does business in the State
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`of California and nationally. It is headquartered in New York City and since April 1, 2009 has
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`served as the RMA for 408 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $12.8 billion.
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`11.
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`Defendant Wells Fargo is a financial services company that does business in the
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`State of California and nationally. It is headquartered in San Francisco and since April 1, 2009
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`has served as the RMA for 86 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $2.6 billion.
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`12.
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`Defendant Merrill Lynch is a financial services company that does business in the
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`State of California and nationally. It is headquartered in New York City and since April 1, 2009
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`has served as the RMA for 323 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $13.5 billion.
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`13.
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`Defendant Morgan Stanley is a financial services company that does business in
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`the State of California and nationally. It is headquartered in New York City and since April 1,
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`2009 has served as the RMA for 130 VRDOs issued by California, which collectively had a value
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`at issuance of roughly $7.6 billion.
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`14.
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`Defendant Barclays is a financial services company that does business in the State
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`of California and nationally. It is headquartered in London and since April 1, 2009 has served as
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`the RMA for 93 VRDOs issued by California, which collectively had a value at issuance of
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`roughly $5.1 billion.
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`15.
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`Defendant RBC is a financial services company that does business in the State of
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`California and nationally. It is headquartered in Toronto and since April 1, 2009 has served as the
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
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`KELLER GROVER LLP
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`RMA for 54 VRDOs issued by California, which collectively had a value at issuance of roughly
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`$1.4 billion.
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`16.
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`Defendant Piper Jaffray is a financial services company that does business in the
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`State of California and nationally. It is headquartered in Minneapolis and since April 1, 2009 has
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`served as the RMA for 86 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $1.1 billion.
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`17.
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`Defendant Stifel is a financial services company that does business in the State of
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`California and nationally. It is headquartered in St. Louis and since April 1, 2009 has served as
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`the RMA for 89 VRDOs issued by California, which collectively had a value at issuance of
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`roughly $2.1 billion.
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`18.
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`Defendant Westhoff Cone is a financial services company that does business in the
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`State of California and nationally. It is headquartered in Walnut Creek, California and since April
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`1, 2009 has served as the RMA for 140 VRDOs issued by California, which collectively had a
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`value at issuance of roughly $1.7 billion.
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`19.
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`Defendant Red Capital is a financial services company that does business in the
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`State of California and nationally. It is headquartered in Columbus, Ohio and since April 1, 2009
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`has served as the RMA for 74 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $1.1 billion.
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`20.
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`Defendant Gates Capital is a financial services company that does business in the
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`State of California and nationally. It is headquartered in New York City and since April 1, 2009
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`has served as the RMA for 64 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $500 million.
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`21.
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`Defendant Stern Brothers is a financial services company that does business in the
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`State of California and nationally. It is headquartered in St. Louis and since April 1, 2009 has
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`served as the RMA for 50 VRDOs issued by California, which collectively had a value at
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`issuance of roughly $620 million.
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`22.
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`Altogether, defendants since April 1, 2009 have served as the RMA for 1,775
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`VRDOs issued by California, which collectively had a value at issuance of roughly $60.5 billion.
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
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`4
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`Tel. 415.543
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`KELLER GROVER LLP
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`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 7 of 96
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`This represents approximately 80 percent of the VRDOs California has had outstanding during
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`this period.
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`JURISDICTION AND VENUE
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`23.
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`This Court has jurisdiction over the subject matter of this action under Cal. Gov.
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`Code § 12652(c).
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`24.
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`This Court has personal jurisdiction over defendants because they can be found,
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`reside and/or transact business in California and San Francisco County.
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`25.
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`Pursuant to Cal. Civ. Proc. Code § 395 and 395.5, venue is proper because
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`defendants can be found in and transact business within San Francisco County. Throughout the
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`time period relevant to the allegations of this Complaint, defendants engaged in substantial
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`business transactions within the state of California and committed many of the violations
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`proscribed by Cal Gov. Code § 12651 in the state and this county, and continue to do so today.
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`BACKGROUND
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`26.
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`VRDOs are tax-exempt, variable rate bonds with interest rates reset on a periodic
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`basis, typically weekly. From an investor's perspective, they are considered short-term securities
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`because they include a "put" feature that allows the investor at each periodic reset date to tender
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`the security back to the RMA at face value ("par") plus any accrued interest. VRDOs are
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`attractive to issuers because they allow them to borrow money for long periods of time while
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`paying short-term interest rates. They are likewise attractive to investors because they are a low-
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`risk, high-liquidity and tax-free investment. This tax advantage is the key feature that
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`distinguishes VRDOs from the most closely analogous short-term debt instrument, 7-day AA
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`non-financial commercial paper, and why investors historically have been willing to invest in
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`VRDOs at an interest rate significantly lower than that of commercial paper.
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`27.
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`VRDOs are individually identified by their Committee on Uniform Securities
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`Identification Procedures ("CUSIP") number, which is a 9-character alphanumeric code assigned
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`for tracking and trading purposes to U.S. and Canadian registered stocks and U.S. government
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`and municipal bonds. VRDOs are tracked by CUSIP number on the Securities Industry Financial
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`Markets Association ("SIFMA") swap index. The SIFMA index tracks the average interest rate
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
`
`5
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`KELLER GROVER LLP
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`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 8 of 96
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`for highly-rated VRDOs reset on a weekly basis.
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`28.
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`VRDOs are primarily issued by state and
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`local public entities such as
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`municipalities, agencies and public universities and hospitals to raise money to fund various long-
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`term projects or infrastructure. They also are issued by public entities on behalf of various
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`501(c)(3) organizations. Tax-exempt money market funds are the largest holders of VRDOs.
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`29.
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`As of November 30, 2013, there were approximately 9,000 VRDOs outstanding in
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`the United States with a collective balance of roughly $223 billion. California is the issuer of
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`roughly 1,050 of these bonds.
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`30.
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`VRDOs typically receive liquidity and are secured by letters of credit provided by
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`highly-rated commercial banks to protect investors in the event the RMA is unable to find new
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`investors for tendered bonds_ In that instance, the obligation to purchase the tendered bond falls
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`on the letter of credit provider, which in many cases, is the RMA itself. Issuers currently pay
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`letter of credit providers an annual fee of generally between 50 and 150 basis points of the VRDO
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`debt balance for this liquidity and credit enhancement feature (one basis point equals one
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`hundredth of one percent). Defendants JP Morgan, Citigroup, Wells Fargo and Merrill Lynch
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`serve as both the RMA and letter of credit provider for a sizeable number of VRDOs.
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`31.
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`VRDO issuers contract with RMAs to manage the bonds on an individual basis.
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`RMAs have two basic jobs. First, they are required to reset (typically on a weekly basis) the
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`VRDO interest rate at the lowest possible rate. This must be based on an individual
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`determination of what rate the specific VRDO will bear considering the unique characteristics of
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`the bond, the relevant market conditions and the particular investor demand for the specific bond
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`at issue. See, e.g., SIFMA's Model Risk Disclosures (RMA "is required to set the interest rate at
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`the rate necessary, in its judgment, as the lowest rate that permits the sale of the VRDOs at 100%
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`of their principal amount (par) on the interest reset date.") (emphasis added).
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`32.
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`Second, RMAs are required to actively "remarket" at the lowest possible rate the
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`VRDOs to other investors when the existing investor "puts" the bond back to the RMA for a
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`return of its investment (at face value plus interest).
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`33.
`These twin obligations are set forth in the various documents and agreements
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
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`6
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`KELLER GROVER LLP
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`detailing the rights and responsibilities surrounding the VRDO issuer/RMA relationship. Issuers
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`currently pay RMAs on average an annual fee of roughly 10 basis points of the VRDO debt
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`balance to provide this service.
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`34.
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`In addition to the obligation they owe VRDO issuers to actively reset interest rates
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`and remarket tendered bonds at the lowest possible rates, RMAs are required under Municipal
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`Securities Rulemaking Board ("MSRB") Rule G-17 to deal "fairly" with the issuers and "not
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`engage in any deceptive, dishonest, or unfair practice."
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`35. MSRB Rule G-18 likewise requires RMAs to "make a reasonable effort to obtain a
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`price for the customer that is fair and reasonable in relation to prevailing market conditions." As
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`the MSRB explains it, this means that RMAs "will exercise the same level of care as the
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`professional would if acting for its own account, including the exercise of diligence in
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`ascertaining prevailing market conditions."
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`36.
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`Defendants have not complied with their obligation to actively and individually
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`reset and remarket California's VRDOs at the lowest possible rate. Instead, they have engaged in
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`their robo-resetting scheme to secure artificially high VRDO rates, extract from California
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`improper and excessive remarketing and letter of credit fees, and ultimately cause California to
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`pay hundreds of millions of dollars in VRDO-related overcharges.
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`DEFENDANTS HAVE ENGAGED IN ROBO-RESETTING
`TO COLLECT IMPROPER AND EXCESSIVE FEES AND CAUSE
`ARTIFICIALLY HIGH CALIFORNIA VRDO INTEREST RATES
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`37.
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`Since at least April 1, 2009, California has paid defendants hundreds of millions of
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`dollars to actively and individually reset and remarket its VRDOs at the lowest interest rate
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`possible. However, defendants have not performed the services for which California has paid
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`them. Instead of resetting the VRDO rates, and remarketing them on an individual basis and with
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`the purpose of finding the lowest possible interest rate, defendants have engaged in a practice of
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`setting their VRDO rates mechanically and collectively, without any consideration of the unique
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`attributes of each particular bond.
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`38.
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`Relator's forensic analysis of defendants' rate-setting practices for the four-and-a-
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`half year period of April 1, 2009 through November 14, 2013 reveals that for the vast majority of
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
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`7
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`KELLER GROVER LLP
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`the VRDOs they manage -- and likely for all of them -- defendants group into "buckets"
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`collections of unrelated bonds and set their interest rates collectively. They do this by applying to
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`each VRDO in a particular bucket an identical pricing spread which moves the interest rate of
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`each bond in the bucket up or down in lock-step fashion. In no case are defendants making an
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`individual determination of what the appropriate rate should be for a particular bond. Nor are
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`they making any effort to secure the lowest possible rate for the bond.
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`39.
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`For the purposes of this pricing analysis, a particular bond was considered to be
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`part of a bucket if it had the identical week-over-week rate change as the other bonds in the
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`bucket for at least twenty-six weeks (but typically much longer) and at least 80 percent of the
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`time (but typically much higher). These two bucket threshold "qualifiers" were necessary to
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`account for the periodic sale of the bonds or their departure from the market from being paid off
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`or converted to fixed rates. They were also necessary to most accurately capture the extent of the
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`robo-resetting in which defendants have engaged.
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`40.
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`Relator's pricing analysis for each defendant included all VRDOs they managed
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`with weekly reset dates and for which there were at least twenty rate resets within one twenty-six
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`week interval during the April 1, 2009 through November 14, 2013 period.' This represents the
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`lion's share of each defendant's total VRDO portfolio for the period. To avoid double-counting,
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`once a VRDO was identified as part of a particular bucket, it was removed from the data set even
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`though many of these bonds fell into more than one bucket over the four-and-a-half-year study
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`period.
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`41. As shown immediately below, Relator's detailed pricing analysis unequivocally
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`demonstrates that since at least April 1, 2009 each defendant has engaged in robo-resetting for its
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`entire California VRDO portfolios (as well as for its VRDO portfolios of other states). This is
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`evident from the pervasiveness of defendants' bucketing practices and the statistical impossibility
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`VRDOs with daily reset dates were excluded from the analysis because they represent a small
`percentage of VRDOs and would have greatly increased, with little incremental gain, the already
`significant burden of conducting the forensic bucketing analysis. Likewise, VRDOs in the market
`for less than twenty-six weeks were excluded because of the twenty resets in twenty-six weeks
`threshold qualifier discussed above.
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`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
`
`8
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`KELLER GROVER LLP
`
`

`

`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 11 of 96
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`that any bucketing would have occurred -- even for only two VRDOs -- had defendants actively
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`and individually priced the VRDOs they managed as they were obligated to do.
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`JPMorgan
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`42.
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`Relator's JPMorgan analysis included 1,377 VRDOs, which had a collective value
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`at issuance of $49.3 billion. California has been the issuer of 100 of these bonds (with a
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`collective value at issuance of $5.1 billion). The analysis shows JPMorgan used bucketing to set
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`the VRDO interest rates for at least 95 percent of the JPMorgan portfolio studied, including at
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`least 93 of the 100 California VRDOs in the study.
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`43.
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`JPMorgan's pricing for these VRDOs can be broken down into four buckets, with
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`the vast majority of the bonds -- 1,083 of them -- residing in a single bucket. 57 of the bonds in
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`this single bucket were issued by California, representing 57 percent of the California VRDOs in
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`the JPMorgan study. Attached hereto as Exhibit A is a listing of JPMorgan's entire California
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`VRDO portfolio which identifies for each VRDO: the issuer, CUSIP number, letter of credit
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`provider, and whether it fell into a bucket under Relator's pricing analysis.2
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`44. While each of the VRDOs in these JPMorgan buckets had the identical interest
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`rate change as the other bonds in the bucket for at least twenty-six weeks, 80 percent of the time,
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`the majority of the bonds were in their respective buckets for significantly longer than twenty-six
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`KELLER GROVER LLP
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`weeks and at a significantly higher percentage than 80 percent of the time.
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`45.
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`For example, with respect to the 1,083 VRDOs in JPMorgan's largest bucket, 941
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`of them had the identical interest rate change (at least 80% of the time) for a full year; 744 6f
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`them had the identical interest rate change (at least 80% of the time) for two years; and 634 of
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`them had the identical interest rate change (at least 80% of the time) for the entire time they were
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`in the market during the four-and-a-half-year study period.
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`46.
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`Similarly, 1,004 of the VRDOs in this bucket had the identical interest rate change
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`• The California VRDO listing for JPMorgan and each of the other defendants (Exhibits A
`through M) breaks out the VRDOs by whether they are reset on a weekly or daily basis. As noted
`above, only the weekly reset bonds in the market for at least twenty-six weeks -- which account
`for the majority of defendants' California VRDO portfolios -- were included in the pricing study.
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
`
`9
`
`

`

`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 12 of 96
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`90 percent of the time (for at least twenty-six weeks); 947 of them had the identical interest rate
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`change 95 percent of the time (for at least twenty-six weeks); and 785 of them had the identical
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`interest rate change 100 percent of the time (for at least twenty-six weeks).
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`Citigroup
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`47.
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`Relator's Citigroup analysis included 1,114 VRDOs, which had a collective value
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`at issuance of $44.2 billion. California has been the issuer of 360 of these bonds (with a
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`collective value at issuance of $10.5 billion). The analysis shows Citigroup used bucketing to set
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`the VRDO interest rates for at least 94 percent of the Citigroup portfolio studied, including at
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`least 340 of the 360 California VRDOs in the study.
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`48.
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`Citigroup's pricing for these VRDOs can be broken down into six buckets, with the
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`vast majority of the bonds -- 898 of them -- residing in two buckets. 302 of the bonds in these
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`two buckets were issued by California, representing 84 percent of the California VRDOs in the
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`Citigroup study. Attached hereto as Exhibit B is a listing of Citigroup's entire California VRDO
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`portfolio which identifies for each VRDO: the issuer, CUSIP number, letter of credit provider,
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`and whether it fell into a bucket under Relator's pricing analysis.
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`49. While each of the VRDOs in these Citigroup buckets had the identical interest rate
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`change as the other bonds in the bucket for at least twenty-six weeks, 80 percent of the time, the
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`KELLER GROVER LLP
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`majority of the bonds were in their respective buckets for significantly longer than twenty-six
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`weeks and at a significantly higher percentage than 80 percent of the time.
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`50.
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`For example, with respect to the 487 VRDOs in Citigroup's largest bucket, 435 of
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`them had the identical interest rate change (at least 80% of the time) for a full year; 390 of them
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`had the identical interest rate change (at least 80% of the time) for two years; and 335 of them had
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`the identical interest rate change (at least 80% of the time) for the entire time they were in the
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`market during the four-and-a-half-year study period.
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`51.
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`Similarly, 442 of the VRDOs in this bucket had the identical interest rate change
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`90 percent of the time (for at least twenty-six weeks); 426 of them had the identical interest rate
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`change 95 percent of the time (for at least twenty-six weeks); and 373 of them had the identical
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`interest rate change 100 percent of the time (for at least twenty-six weeks).
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
`
`10
`
`

`

`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 13 of 96
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`Wells Fargo
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`52.
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`Relator's Wells Fargo analysis included 1,502 VRDOs, which had a collective
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`value at issuance of $28.8 billion. California has been the issuer of 60 of these bonds (with a
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`collective value at issuance of $1.7 billion). The analysis shows Wells Fargo used bucketing to
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`set the VRDO interest rates for at least 95 percent of the Wells Fargo portfolio studied, including
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`at least 48 of the 60 California VRDOs in the study.
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`53. Wells Fargo's pricing for these VRDOs can be broken down into seven buckets,
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`with the vast majority of the bonds -- 1,167 of them -- residing in a single bucket. 30 of the bonds
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`in this single bucket were issued by California, representing 50 percent of the California VRDOs
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`in the Wells Fargo study. Attached hereto as Exhibit C is a listing of Wells Fargo's entire
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`California VRDO portfolio which identifies for each VRDO: the issuer, CUSIP number, letter of
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`credit provider, and whether it fell into a bucket under Relator's pricing analysis.
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`54. While each of the VRDOs in these Wells Fargo buckets had the identical interest
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`rate change as the other bonds in the bucket for at least twenty-six weeks, 80 percent of the time,
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`the majority of the bonds were in their respective buckets for significantly longer than twenty-six
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`weeks and at a significantly higher percentage than 80 percent of the time.
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`55.
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`For example, with respect to the 1,167 VRDOs in Wells Fargo's largest bucket,
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`1,097 of them had the identical interest rate change (at least 80% of the time) for a full year; 949
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`of them had the identical interest rate change (at least 80% of the time) for two years; and 1,022
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`of them had the identical interest rate change (at least 80% of the time) for the entire time they
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`were in the market during the four-and-a-half year study period.
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`56.
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`Similarly, 1,141 of the VRDOs in this bucket had the identical interest rate change
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`90 percent of the time (for at least twenty-six weeks); 1,127 of them had the identical interest rate
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`change 95 percent of the time (for at least twenty-six weeks); and 1,106 of them had the identical
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`interest rate change 100 percent of the time (for at least twenty-six weeks).
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`Merrill Lynch
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`57.
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`Relator's Merrill Lynch analysis included 1,959 VRDOs, which had a collective
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`value at issuance of $65.6 billion. California has been the issuer of 217 of these bonds (with a
`COMPLAINT FOR VIOLATIONS OF THE
`CALIFORNIA FALSE CLAIMS ACT
`
`1 1
`
`KELLER GROVER LLP
`
`

`

`Case 1:19-cv-01608-JMF Document 233-1 Filed 09/14/21 Page 14 of 96
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`collective value at issuance of $9.4 billion). The analysis shows Merrill Lynch used bucketing to
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`set the VRDO interest rates for at least 68 percent of the Merrill Lynch portfolio studied,
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`including at least 126 of the 217 California VRDOs in the study.
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`58. Merrill Lynch's pricing for these VRDOs can be broken down into four buckets,
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`with a majority of the bonds -- 1,089 of them -- residing in a single bucket. 97 of the bonds in
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`this single bucket were issued by California, representing roughly 45 percent of the California
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`VRDOs in the Merrill Lynch study. Attached hereto as Exhibit D is a listing of Merrill Lynch's
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`entire California VRDO portfolio which identifies for each VRDO: the issuer, CUSIP number,
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`letter of credit provider, and whether it fell into a bucket under Relator's pricing analysis.
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`59. While each of the VRDOs in these Merrill Lynch buckets had the identical interest
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`rate change as the other bonds in the bucket for at least twenty-six weeks, 80 percent of the time,
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`the majority of the bonds were in their respective buckets f