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Expert Opinions on Variable-Rate Demand Obligation Litigation Over Collusion Allegations and Resulting Damages

Expert Witness: Don Coker
Renowned Banking, Financial, and Securities expert witness Don Coker - who has served as an Expert for eighteen municipalities, states, and other taxing authorities nationwide, 115 banks, and over 1,000 other clients including the Internal Revenue Service (seven times), and as a trustee of a governmental taxing authority, and a banker and trust department executive that has bought and sold bonds of all types - explains some background and important nuances of municipal bond Variable-Rate Demand Obligations (or Variable-Rate Demand Notes) for litigation.

Variable-Rate Demand Obligations, also called Variable-Rate Demand Notes, ("VRDOs" or "VRDNs") are a class of municipal bonds. Their purpose and repayment can be tied to a particular project and its income stream, or they can be general obligation bonds. Either type of bond provides the bondholder with the tax advantages of a typical municipal bond, i.e., free from federal income tax, and usually free from state taxes in the state in which it was issued.

VRDOs are often enhanced by a letter of credit or a Standby Bond Purchase Agreement from another financial institution or entity.

The most unique feature
of VRDOs is that the interest rate resets daily or weekly based upon the index maintained by the Securities Industry and Financial Markets Association and published each trading day at 4:15 pm Eastern Time.

I have noticed that the yields on VRDOs fairly closely track the yields on one-month T-Bills.

The minimum investment is $100,000 and maturities may be as long as thirty years.

VRDOs are very liquid. Purchases are always at par, and bondholders can sell the bonds back into the market on any reset date and receive par plus accrued interest.

VRDOs can be issued to fund all types of municipal projects such as roads and highways, schools, healthcare facilities, mass transit systems, civic centers, or a municipality can sell bonds to raise funds to be used as general operating funds such as salaries, benefits, and overhead.

The borrowing capacity of a taxing authority is limited by the amount of taxes that the taxing authority can reasonably expect to raise from its tax base. Consequently, if a taxing authority is paying an artifically high rate of interest on some of its existing bonds, then there will be a smaller pool of tax inflows the taxing authority has on hand to pay out as interest and principal on new bonds. As a result, new municipal projects would be delayed or not pursued at all.

Recent lawsuits have alleged collusion among financial institutions that are active in the VRDO market, and that this collusion caused the taxing authorities to have to pay artifically higher interest rates than they otherwise would have had to pay for the funds but for the collusion between some of the financial institutions active in the VRDO market.

In order to determine if this collusion occurred and produced the results cited in the lawsuits, an independent unbiased expert would have to examine the supporting documents for each bond transaction including any agreements between the financial institutions. The information examined should also include all emails and logs of telephone communications and discussions between the financial institutions to see if any indicia of collusion exists.

If collusion is found to exist, then the extent of the financial damages can be measured by comparing what actually was paid in interest with what would have been paid in the free market but for the collusion. The difference could be present-valued to the date of the Complaint or some other reasonable and logical date.

Keep in mind that there certainly are valid reasons for financial institutions to communicate from time to time, so the mere existence of communications are not necessarily a problem.

Variable-Rate Demand Obligations are a useful fiscal tool for taxing authorities and a useful investment form for some investors, and they will continue to be used in the future.

© 2020 by Don Coker. Serving clients worldwide from his Atlanta metro area office.

Don Coker is a Banking, Financial, Real Estate, Embezzlement, Business Valuation, Expert Witness – Servicing Clients Nationwide – Worldwide from his metro Atlanta, Georgia office.

696 cases, 176 testimonies, plaintiffs & defendants. All areas of banking, finance, real estate, business & IP valuation, damages, embezzlement. Listed in expert databases recommended by DRI, AAJ members.

Clients: individuals, 77 of top 400 law firms, 115 banks, 65 insurance cos., government clients incl. IRS, FDIC. Clients in 39 countries, work in 66 countries.

Previous officer at Citicorp, other banks & 2 years as a high-level governmental bank regulator.

BA, postgrad, executive ed.- Alabama, Houston, SMU, Spring Hill, Harvard Business School.

1 book, 100 articles. Quoted often.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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