Kevyn Orr Indicates Big Banks Might Have Defrauded Detroit [View all]

[El_Johns]

Nathan Bomey of the Detroit Free Press reports that Detroit emergency manager Kevyn Orr testified in U.S. Bankruptcy Court Friday that he had asked the U.S. Securities and Exchange Commission to consider prosecuting two global banks over a disastrous debt deal from 2005 that helped plunge Detroit into bankruptcy.

Bomey wrote:

Orr said this morning that he had conversations with the SEC about filing actions against UBS and Bank of America Merrill Lynch, which collectively provided interest-rate swaps on a $1.4 billion pension debt deal originating in 2005.

He did not say how the SEC responded to his request. The Free Press reported in September that the deal might have been illegal.

Orr said he thought the city might have a potential fraud claim against the bank, but added that the city decided to settle the swaps debt in lieu of a legal battle.

http://www.deadlinedetroit.com/articles/7800/kevyn_orr_indicates_big_banks_might_have_defrauded_city


Today, Orr acknowledged "serious questions" about whether the city owes a dime on the deal, saying the city might have a "potential fraud claim" against the banks.

Still, he said the city decided to settle the swaps debt instead of pursuing a legal challenge, calling the chances of success 50-50.

The original swaps settlement collapsed last month after U.S. Bankruptcy Judge Steven Rhodes questioned the city’s decision to pay $230 million to settle the $293-million swaps debt, suggesting the deal might be too generous to the banks.

At the time, Rhodes also questioned the city’s decision not to disclose its legal assessment of the $1.4 billion pension obligation certificates of participation deal and related swaps.

Lawyers for Jones Day, the city’s bankruptcy law firm, told Rhodes that they were hiding the strategy because they might still sue the banks.

But this morning, Orr disclosed the city’s legal assessment in detail, marking an about-face from the city’s previous strategy.

Orr acknowledged:

--The city’s 2009 decision to pledge its casino tax revenue as collateral on the swaps might have been illegal because the Michigan Gaming Act may not allow the pledge.

--The original 2005 debt deal might have been illegal because it may have put the city over its legal debt limit.

--The city might have a fraud claim against the banks for effectively tricking the city into the swaps deal by leveraging "superior" information about future interest rates.

--UBS’ involvement in an interest-rate manipulation scandal might have led to a fraud claim for the city.

Problematic for the city is that City Council at the time secured legal opinions approving the pension debt and swaps deals. The City Council also secured a letter of approval from the state’s gaming board approving the use of casino tax revenues as collateral.

Orr said it would be too risky to pursue a legal challenge against the swaps because it would take too long, cost too much and raise a serious chance of defeat....

The city has argued that getting rid of the swaps would free up cash flow to reinvest in public safety and blight removal, while also removing restrictions over the use of its vital casino tax revenue.

http://www.freep.com/article/20140103/NEWS01/301030066/Kevyn-Orr-asked-SEC-about-prosecuting-banks-over-Detroit-debt-deal


Attorney Jerome Goldberg, appearing on behalf of City of Detroit retiree David Sole, questions Emergency Manager Kevyn Orr regarding the interest rate swaps deal, viewed by many as another gift to the very banks that destroyed Detroit’s neighborhoods using subprime mortgages and that have been charged and convicted of fraud of all sorts.

http://detroitdebtmoratorium.org/jerome-goldberg-questions-em-kevyn-orr-over-giveaway-to-bank-of-america-ubs-on-jan-3-2014/