8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 1/29

Daniel J .

C o l l i n s

Dri nker

Biddle

ReathLLP

D a n

C o l l i n s i s an

e x p e r i e n c e d

t r i a l

a t t o r n e y , h a v i n g

t r i e d more

t h a n

20

c a s e s

t o

v e r d i c t

i n

c r i m i n a l

and c i v i l

p r o c e e d i n g s

i n

b o t h

f e d e r a l

and s t a t e c o u r t .

As a

former

f e d e r a l

p r o s e c u t o r ,

D a n

i s

w e l l

p o s i t i o n e d

t o

a d v i s e

c o r p o r a t e

and i n d i v i d u a l

c l i e n t s

i n r e s p o n d i n g t o

government

and r e g u l a t o r y

i n q u i r i e s , c o n d u c t i n g

i n t e r n a l

i n v e s t i g a t i o n s ,

and

h a n d l i n g o t h e r

complex

l i t i g a t i o n m a t t e r s .

B e f o r e

j o i n i n g

D r i n k e r

B i d d l e , D a n s e r v e d a s an A s s i s t a n t

U n i t e d S t a t e s

A t t o r n e y

f o r t h e

N o r t h e r n

D i s t r i c t

of

l l i n o i s

f o r

10 y e a r s , where he i n v e s t i g a t e d and

p r o s e c u t e d a

wide a r r a y

of

w h i t e c o l l a r

c r i m e s ,

n c l u d i n g

commodities and

s e c u r i t i e s

f r a u d ,

bank

f r a u d ,

m a i l

and w i r e

f r a u d ,

computer

a c c e s s f r a u d , h e a l t h

c a r e f r a u d ,

e x p o r t c o n t r o l s

and

s a n c t i o n s ,

p u b l i c

c o r r u p t i o n , t a x

e v a s i o n

and money

l a u n d e r i n g .

I n p a r t i c u l a r , D a n

d e v e l o p e d

s u b s t a n t i a l

e x p e r i e n c e

c o n d u c t i n g

p a r a l l e l

i n v e s t i g a t i o n s w i t h

t h e

S e c u r i t i e s and Exchange

Commission

(SEC),

t h e

Commodity

F u t u r e s

T r a d i n g

Commission

(CFTC),

nd

o t h e r

r e g u l a t o r s .

D a n

h e l d m u l t i p l e s u p e r v i s o r y

p o s i t i o n s

w h i l e

a t

t h e

U n i t e d

S t a t e s A t t o r n e y s

O f f i c e .

Most

r e c e n t l y ,

he was

Deputy

Chief

of

h e F i n a n c i a l Crimes and

S p e c i a l

P r o s e c u t i o n

s e c t i o n , where

he

oversaw

t h e

work

of e v e r a l

s e n i o r

AUSAs

n

t h e

i n v e s t i g a t i o n

of more

c o m p l i c a t e d w h i t e c o l l a r

m a t t e r s .

B e f o r e t h a t ,

D a n

s e r v e d a s

A c t i n g

Chief

and

Deputy

Chief of

t h e

G e n e r a l

Crimes

S e c t i o n ,

where he

s u p e r v i s e d and t r a i n e d AUSAs n f e d e r a l c r i m i n a l p r a c t i c e and r i a l

a d v o c a c y .

James L. Kopec ky

Kopecky

Sc hu m ac h er B l e a k l e y Rosenburg

PC

E a r l y

i n

h i s c a r e e r , Jim

r e p r e s e n t e d d e f e n d a n t s i n commercial d i s p u t e s ,

i n c l u d i n g

complex,

f e d e r a l

c o u r t m u l t i   d i s t r i c t l i t i g a t i o n

m a t t e r s .

Jim

j o i n e d t h e

U n i t e d

S t a t e s S e c u r i t i e s and

Exch a n ge

Commission

( SEC )

n

1999,

i s i n g

t o

t h e

l e v e l

of

Branch Chief

n

t h e D i v i s i o n

of

E n f o r c e m e n t .

At

t h e

S E C ,

Jim

l e a d a

team of

a t t o r n e y s and

s t a f f

t h a t

i n v e s t i g a t e d

and

p r o s e c u t e d

s e c u r i t i e s

f r a u d ,

i n c l u d i n g

i n s i d e r

t r a d i n g ,

a c c o u n t i n g

f r a u d ,

c o m p l i c a t e d m a r k e t

m a n i p u l a t i o n

a c t i o n s ,

Ponzi schemes,

f f e r i n g

f r a u d s and

s a l e s p r a c t i c e a c t i o n s .

Jim

l e a d s

h i s f i r m s

r e g u l a t o r y

s e r v i c e s p r a c t i c e , a n d

f r e q u e n t l y

l i t i g a t e s m a t t e r s

on

b e h a l f

of

i n d i v i d u a l s , p u b l i c companies, r o k e r - d e a l e r s , and

hedge

fund managers

i n

b o t h s t a t e and f e d e r a l

c o u r t s

a c r o s s

t h e

c o u n t r y ,

a s w e l l

a s a r b i t r a t i o n s

b e f o r e

t h e

F i n a n c i a l I n d u s t r y

R e g u l a t o r y

A u t h o r i t y

( FINRA ), t h e N a t i o n a l

F u t u r e s

A s s o c i a t i o n ,

and

t h e American

A r b i t r a t i o n

A s s o c i a t i o n .

Jim

a c t s a s an

i n d e p e n d e n t

i n v e s t i g a t o r f o r i n v e s t i g a t i o n s u n d e r

S a r b a n e s

Oxley

and a s an

i n d e p e n d e n t e x p e r t c o n s u l t a n t t o companies d i s c i p l i n e d

by

S e l f R e g u l a t o r y

O r g a n i z a t i o n s . I n

a d d i t i o n , f e d e r a l

d i s t r i c t

c o u r t j u d g e s ,

upon

recommendation

from

t h e

s t a f f

of

t h e

U n i t e d

S t a t e s S e c u r i t i e s and Excha nge Commission, have

a p p o i n t e d Jim

t o

a c t

a s R e c e i v e r

on

b e h a l f

of

v i c t i m s

of

s e c u r i t i e s f r a u d . Jim

a l s o

a c t s a s

a

H e a r i n g O f f i c e r f o r

t h e

I l l i n o i s

S e c u r i t i e s

Department,

p r e s i d i n g o v e r

and

maki ng recommendations r e g a r d i n g a c t i o n s

a g a i n s t

b r o k e r

- d e a l e r s ,

i n v e s t m e n t

a d v i s e r s

and i n d i v i d u a l s .

77779967.2

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 2/29

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 3/29

ANA

LYSIS

 OFPOT

ENTIAL

 LEGAL

CHA

LLENG

ES

TO

THE 

CITY

OF

CHICAG

O S INT

ERESTRA

TESW

AP 

TRAN

SACTIO

NS

I

.

EXECUT

IVESU

MMARY

W

e ere

 a s k e d t o

i n d e p e n d

e n t l y r e v

i e w

t h e C i

t y

of

h i c a g

o s i n

t e r e s t

r a t e swap

a

g r e e m e n t

s t o

d e t

e r m i n e

w h e t h

e r

t h

e r e

i s

a

ny

e v i d e n

c e  

t h

a t

t h

e a g r e e

m e n t s

were

p r o c

u r e d by

f r

a u d and

t o

d

e t e r m i n e

 

w h e t

h e r

t h e r e

a r e

a

ny

g r o u n d s

 

f o r

 

t h e

 C i t y t o

c h a l l e n g e

 t h o s e

 

a g

r e e m e n t s

b a s e d

on

f r a

u d , m

i s r e p r e s e n

t a t i o n s ,

o m i s

s i o n s ,

o r u n f a i r

d e a

l i n g t

h r o u g h

a r b i t r

a t i o n

o r

i n c

o u r t .

To  

c o m p l e

t e

o u r

 

r e

v i e w ,

we  n a l y z e d  

t h e

t r a n

s a c t i o n doc

uments

o r

t h e s e sw

ap

a g

r e e m e n t s ,

co

mmunicat

ions betwe

en t h e C i

t y and

t s sw

ap c o u n t

e r p a r t i e s

,  

a

nd o t h e r document

s 

e l a t i

n g

t o

t h e

C i t y s

sw a

p t r a n s a c t

i o n s .

I

n

t o t a l w

e  e v i e w e d  

a p p r o x i m a

t e l y

50 boxes

 

of

a r d

copy

documen

ts

an

d

a n a l

y z e d

t h o u s a n

d s

of

a g e s

of l e c t r o n i c

 

docume

nts.

We

l s o i n t

e r v i e w e d

n i n e

c u

r r e n t an d form

er C i t y

 

empl

oyees i n c l u d

i n g  c u

r r e n t

and

former

 

Chief

  i n a n c

i a l

O f f i c e r s ,

C

o m p t r o l l e

r s , an d 

D

eputy

C o m p t

r o l l e r s )

 who

were r e s p

o n s i b l e f o r

n e g

o t i a t i n g ,

 

e x e c u t i n

g ,  an

d

ma

nag ing

t h e  s

wap

a g r e e m e

n t s .

Our

n v e s t i g a t i

o n

f

ound no

e v i

d e n c e

t h a

t

would

s u p p o r

t a c l a i

m

t h a t

t h

e  C i t y

s swa

p

a g r

e e m e n t s  

were

p r

o c u r e d b

y r a

u d

o r  

t h a t any of h e

C i t y s

swap c o u n t e r

p a r t i e s

m a

d e any

m a t e

r i a l  

m i s r e p r e s

e n t a t i o n s

 

o r

o m i s s i o n

s

of

a

c t .

N

or

d i d

we i n d

 

e v i d

e n c e

t o

s u p p o r

t a c l a i

m

t h a t t h e C i t

y s sw

ap

c o u n t e r p

a r t i e s

f a i l

e d

t o

 

d e a l

 f a i r l y

 

w i t h

t h e

C i t y

w h e n n e g

o t i a t i n g

and

e x e c u t i

n g

t h e

swap a g r e e m e n

t s .

 n

s

s e n t i a l

el

ement of any c a

u s e of c

t i o n f o r f r

a u d

i s

a

m a t e

r i a l  m

i s r e p r e s e

n t a t i o n  o r

an

o m i s s i

o n

of

 

a t e r i a

l

f a

c t .

We

ou

nd

no

e v i d e n c

e

t h a t

any

 

o

f

h e

C i t y   s

swap c o u n t e r

p a r t i e s

m i s r

e p r e s e n t

e d

o r

o

m i t t e d

m a t e r i a l

 

f a c t

s r e

l a t i n g t o t h e t r

a n s a c t i o n s

.

Nor

 were

 

an

y

of

 

h e

i n

d i v i d u a l s

 we

n t

e r v i e w e d

aware

 

of

an

y m a t e r i a

l m i s r e p

r e s e n t a t i

o n

o r o

m i s s i o n .

 

A l l

o

f h e

i n d i v i d

u a l s

we

n t

e r v i e w e d ,  i n c l u d i n g t h o s e

r e s p o n s i b l e f o r  n e g o t i a t i n g  

and

e x e c u t i n g t h e

swap

t r a n s a c t i

o n s , w er

e 

w

e l l

i n f

o r m e d an

d aware

o

f

h e

v a r i

o u s

r i s k s a s s o c

i a t e d  

w

i t h

swa

ps.

None  

o

f

them b e l i e v e d

 t h a t

a

ny

s

wap

c o

u n t e r p a r t

y  e

ngaged  i n

 f r a u d u l

e n t

c o n

d u c t ,

and s e v e r a l s

t a t e d

t h e i r

b e l i e f t h a t t h e C i

t y

b e n e f i t t e

d

fro

m

t

h e sw a

ps.

F u r t h

e r ,

we

fou

nd

n

o documen

ts a

u t h o r e d

o

r

p r e s e n t

e d

by

c o u n t e r p a r

t i e s

o r

 

u n d e r w

r i t e r s ,

o r

o

t h e r co

mmunicat

ions h a t a t t

e m p t e d  t o m i s s

t a t e

t h e

r i s k s

 

a

s s o c i a t e d w i t h

 

swaps.

Ou

r n v e s

t i g a t i o n

d i

s c l o s ed a

nu m

ber of

a c t s

t h a t

w

ould m ak

e t

c h a l

l e n g i n g ,  

f

n o t

i m p o s s i

b l e , t o  

c

l a i m

t h a

t

t h e

C i t y   s c o u

n t e r p a r t i

e s d i d n o

t

d e

a l f a

i r l y

w i t

h t h e

C i t y  

o r t h a t

 

t h e

C i t y d i d

 

n o

t  u n

d e r s t a n d

 

t h e

 

r i s k s

a s s o c i a t e

d

w i t h

 

swap

r a n s a

c t i o n s .

The C i t y  

employe

d a

t a l e n t e d ,

 

e x

p e r i e n c e

d ,

a

nd

k n o w l e d g

e a b l e

d

e b t mana

ge ment

team a s w e

l l a s  o

u t s i d e a d

v i s o r s a

nd

o u t s i d e  

c o u n s e l  

t o

a d v i s e

on

t h e s e  

t r a n s a c t i o n s .

Th e

C i t y

and

t s

c o u n s e l

and

p r o f e s s i o n a l

a d

v i s o r s n e g o t

i a t e d and

 

docu

mented

e

ac h

of

  h e

swap r a n s a

c t i o n s .

More

over n t h e

sw ap

t r a n s a c t i

o n d o c u m e n t

a t i o n i t s

e l f

t

h e  

C i t y

makes a num

be r of e

p r e s e n t a t

i o n s

r e g a r d i

n g i t s

kn o

wledge

and

 s o p h i s t i c

a t i o n and ac k

nowledge

s t h e l i m i t e

d ,

n

on

- f i d u c i a r y

 

r o

l e p l a y e d

by

h e

sw ap c

o u n t e r p a r

t y . F i

n a l l y , and

 

p e r h a

p s mos

t e l l i n g , t h

e C i t y n o t

 

o n l y ackn

owledged

  u t  

a l s o

p u b l i c l

y

d i s c

l o s e d t h e

r i s k s a s s o c i

a t e d  

w

i t h

swap

 

a g

r e e m e n t s

 i n i t s

Comp

rehensi v

e

An

nual

F i n a n c i a l

 

R e p

o r t s  

CAFR

s)

o i n g back

t

o

2

004

and

i n

 

i t s

I n t e r

e s t a t e Sw ap

P o l i c y ,

implem

ented 

i n  2

004

and

  i r s t p o s t e

d o n l i

n e

i

n

2

006.

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 4/29

The C i t y

a l s o would

have

an

e x t r e m e l y d i f f i c u l t time

e s t a b l i s h i n g t h a t

t

r e l i e d on a

r e p r e s e n t a t i o n

m a de by

any swap

o u n t e r p a r t y ,

which

s a

e q u i r e d

element

of

e c u r i t i e s

f r a u d

c l a i m .

I n

a d d i t i o n

t o t h e

d i s c l o s u r e s

i n t h e C i t y ' s CAFRs,

h e

C i t y ' s 2006

SWAP

o l i c y ,

and t h e

C i t y ' s

e x p e r i e n c e d

and knowledgeable

e b t

management

eam

—each

of

which

a l o n e

c r e a t e s

an

o b s t a c l e

t o

e s t a b l i s h r e l i a n c e —the

n t e r n a t i o n a l Swap e a l e r s

A s s o c i a t i o n , n c .

(ISDA) aster

Agreements, which

governed

l l

of

h e

C i t y ' s

swap

g r e e m e n t s ;

o n t a i n e d

a

non

- r e l i a n c e

c l a u s e ,

i n which

h e

C i t y

s t a t ed t h a t

t

had

m ade

t s

own e c i s i o n

t o

e n t e r i n t o

each

r a n s a c t i o n

u s i n g

i t s

own udgment and r e l y i n g

upon

h e

a d v i c e

of

t s own

d v i s o r s . The

i t y

a f f i r m a t i v e l y

acknowledged t h a t t

was

not

e l y i n g on any

r e p r e s e n t a t i o n

by a

swap

o u n t e r p a r t y

and h a t

t h e

c o u n t e r p a r t y

was

o t

a c t i n g

a s t h e

C i t y ' s

f i d u c i a r y o r a s

t h e

C i t y ' s

a d v i s o r w i t h r e s p e c t t o t h e

t r a n s a c t i o n .

As

a r t

of

ur n v e s t i g a t i o n ,

we l s o

reviewed h e

v a r i o u s

a s s e r t i o n s

i n two r e c e n t

l e t t e r s

from

t h r e e

u n i o n s

u r g i n g t h e C i t y t o f i l e

a r b i t r a t i o n

b e f o r e t h e

F i n a n c i a l

I n d u s t r y

R e g u l a t o r y

A u t h o r i t y

(FINR.A) t o seek a e f u n d

of ums

t h a t

t h e C i t y ]

expended

on

r a u d u l e n t i n t e r e s t

r a t e

swaps, s

w e l l

a s

a

e g a l m e m o r a n d u m from

a

New ork law

i r m

t h a t ,

w h i l e

acknowledging

t h a t

i t

cannot

d v i s e

on any p e c i f i c

f i n a n c i n g w i t h o u t c l o s e l y

r e v i e w i n g t h e

f i n a n c i n g and

l l

r e l a t e d

t r a n s a c t i o n s ,

a s w e l l a s

r e p r e s e n t a t i o n s m a de by

n d e r w r i t i n g banks and o t h e r s

t o

i s s u e r

p e r s o n n e l , n e v e r t h e l e s s

s p e c u l a t e s a s t o what

such

a

review might

show

and

t h e

remedies

an

i s s u e r

m a y

have

f

an n d e r w r i t e r d i d

v i o l a t e t h e f a i r

d e a l i n g r u l e s . N o t

n l y

d i d we

i n d no

e v i d e n c e

t h a t

t h e

C i t y

was m i s l e d , d e f r a u d e d ,

o r

d e a l t

w i t h

u n f a i r l y , b u t

t h e

r e l e v a n t

documents

we

eviewed and

t h e

t e s t i m o n y

of

h e

w i t n e s s e s we

n t e r v i e w e d

a f f i r m a t i v e l y

r e f u t e

any

such

c l a i m

and

e s t a b l i s h

t h a t t h e C i t y

was

u l l y

aware

of h e

r i s k s

of

uch r a n s a c t i o n s . Our

review

showed t h a t t h e C i t y

used

swaps s

a

t r a t e g y

t o r e d u c e

t h e c o s t s

of

t s

d e b t

and

hedge h e

i n t e r e s t

r a t e

and

o t h e r

r i s k s

a s s o c i a t e d

w i t h t h a t

d e b t .

A c c o r d i n g l y , even

f

FINRA

r b i t r a t i o n

were e g a l l y a v a i l a b l e

(which, s

we

x p l a i n below,

t

i s n o t ) ,

i l i n g a

l a i m

a l l e g i n g f r a u d

o r

u n f a i r d e a l i n g would be m e r i t l e s s , and

o u l d s e r v e t o

damage

h e

C i t y ' s

c r e d i b i l i t y i n

i t s

c u r r e n t

and u t u r e

d e a l i n g s w i t h

f i n a n c i a l

i n s t i t u t i o n s and

t s

a b i l i t y t o

f i n a n c e t h e

C i t y ' s

needs

going

f o r w a x d .

I I .

BACKGROUND

A.

I n t e r e s t

Rate Swaps

The

Municipal

S e c u r i t i e s

Rulemaking

Board

MSRB)

e f i n e s

an I n t e r e s t

Rate

Swap

C o n t r a c t

o r Agreement s :

A p e c i f i c

d e r i v a t i v e

c o n t r a c t

e n t e r e d

i n t o

by

an i s s u e r

o r

o b l i g o r w i t h a

swap

p r o v i d e r t o exchange

p e r i o d i c

i n t e r e s t

payments.

T y p i c a l l y , one

p a r t y

a g r e e s

t o

m a k e

payments

t o t h e o t h e r

b a s e d

upon

a

f i x e d

r a t e

of

i n t e r e s t

i n

exchange f o r

payments

b a s e d

upon

a v a r i a b l e

r a t e .

The swap

c o n t r a c t

m a y

p r o v i d e

t h a t

t h e

i s s u e r

w i l l pay t o t h e

swap

c o u n t e r

- p a r t y

a

f i x e d r a t e

of

n t e r e s t

i n exchange

f o r t h e

c o u n t e r - p a r t y

m a k i n g v a r i a b l e

payments q u a l t o

t h e amount

a y a b l e

on

h e

v a r i a b l e

r a t e

d e b t .

MSRB, l o s s a r y

of

Terms, v a i l a b l e

a t

h t t p : / / w w w . m s r b . o r g /

l ~ o s s a r

~ ~ a s p x ( l a s t v i s i t e d

October

28, 014). The

MSRB l s o

d e f i n e s

a

F l o a t i n g

- t o - F i x e d Rate

Swap

s :

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 5/29

An

greement whereby

an

i s s u e r s y n t h e t i c a l l y

c o n v e r t s v a r i a b l e r a t e

d e b t

t o

f i x e d

r a t e d e b t

t h r o u g h a n i n t e r e s t r a t e swap o r

s i m i l a r

a g r e e m e n t .

I n

t h i s

p r o c e s s , t h e i s s u e r makes

payments

t o

t h e c o u n t e r p a r t y

a t

a f i x e d

r a t e

a c c o r d i n g

t o

t h e

t e r m s

of h e swap and t h e

c o u n t e r p a r t y

makes

payments

on a

v a r i a b l e

r a t e

o r

r a t e s

a c c o r d i n g

t o

t h e

t e r m s of

h e swap, which

m a y

be

e q u i v a l e n t

t o t h e

r a t e s

p a y a b l e t o b o n d h o l d e r s

u n d e r

t h e

bond

c o n t r a c t .

I d .

I n

a

l o a t i n g

- t o

- f i x e d r a t e swap,

payments m a d e

by

one

c o u n t e r p a r t y

t y p i c a l l y

a r e b a s e d

on

a

f l o a t i n g r a t e

of

n t e r e s t ,

such

a s t h e

L ondo n

I n t e r b a n k

O f f e r e d

R a t e

(LIBOR)

r

t h e

S e c u r i t i e s

I n d u s t r y

and F i n a n c i a l

Markets

A s s o c i a t i o n

(SIFMA)

u n i c i p a l

Swap

I n d e x ,

w h i l e payments

m a d e

b y

h e o t h e r

c o u n t e r p a r t y a r e

b a s e d on

a i x e d

r a t e

of n t e r e s t .

H i s t o r i c a l l y ,

m u n i c i p a l i t i e s

have

u s e d i n t e r e s t

r a t e

swaps

n

c o n n e c t i o n w i t h t h e i s s u a n c e

of

o n d s .

A

wap agreement y p i c a l l y i n v o l v e s

t w o

c o u n t e r p a r t i e s : t h e

m u n i c i p a l i t y

and

a

b a n k .

W h e n

a

m u n i c i p a l i t y i s s u e s a

v a r i a b l e ,

o r f l o a t i n g ,

r a t e

bond,

t

m a y

n t e r

i n t o

a

o n t r a c t

w i t h

a

bank

c o u n t e r p a r t y t o

swap

h e

f l o a t i n g v a r i a b l e )

r a t e of

n t e r e s t

f o r

a

i x e d

r a t e

of

n t e r e s t i n

o r d e r t o , a m o n g

o t h e r

b e n e f i t s ,

r e d u c e i n t e r e s t

r a t e

r i s k . The swap

changes

h e

r i s k p r o f i l e

of

h e

d e b t by

e s s e n t i a l l y

c o n v e r t i n g t h e

f l o a t i n g r a t e d e b t i s s u e i n t o

a i x e d r a t e d e b t ,

r e f e r r e d

t o a s a

s y n t h e t i c f i x e d r a t e .

The m u n i c i p a l i t y p a y s t h e f i x e d r a t e

on

t h e swaps, l u s

t h e d i f f e r e n c e

between t h e

f l o a t i n g

r a t e

on h e

bonds and h e

f l o a t i n g

r a t e

on

h e

swaps, l u s

s u p p o r t

c o s t s .

I f n t e r e s t r a t e s

r i s e a f t e r t h e swap s

e x e c u t e d

such

t h a t t h e

m a r k

- t o- m a r k e t

v a l u e

of h e

swap

r i s e s

f o r

t h e

m u n i c i p a l i t y , t h e m u n i c i p a l i t y m a y

x e r c i s e t h e

o p t i o n

t o

t e r m i n a t e

t h e

agreement

a n d

r e c e i v e a

t e r m i n a t i o n

payment.

C o n v e r s e l y , i f

i n t e r e s t r a t e s

f a l l a f t e r

e x e c u t i o n of

h e swap

agreement an d

t h e c o u n t e r p a r t y e x e r c i s e s

i t s o p t i o n

t o t e r m i n a t e t h e

a g r e e m e n t ,

h e

m u n i c i p a l i t y w i l l

pay a

t e r m i n a t i o n payment.

T e r m i n a t i o n payments a k e p l a c e

o n l y

w h e n

h e

agreement

s

t e r m i n a t e d

b e f o r e

i t s

e x p i r a t i o n

d a t e .

Where

a n agreement

x p i r e s

on t h e d a t e

a g r e e d

upon,

n o

t e r m i n a t i o n

pay ment s m a d e b y e i t h e r s i d e .

C o r p o r a t i o n s ,

n o n p r o f i t

o r g a n i z a t i o n s , and

u n i t s

of t a t e

and

l o c a l

go ve r n m e n t

have

u s e d

i n t e r e s t r a t e swaps

w i d e l y

f o r d e c a d e s .

For example ,

h e

c i t i e s

o r

c i t y

a g e n c i e s

of Mi ami,

B a l t i m o r e , P h i l a d e l p h i a ,

Los A n g e l e s ,

Houston,

New

ork

C i t y ,

Albuquerque, a n d

P i t t s b u r g h

a l l

have

u s e d i n t e r e s t

r a t e swaps s

f a r

back

a s

t h e 1 9 9 0 s .

So

have

h e

s t a t e s

a n d / o r

s t a t e

b o r r o w i n g

a g e n c i e s of a s s a c h u s e t t s ,

I n d i a n a ,New

ork,

o n n e c t i c u t ,

Texas,

North C a r o l i n a ,

M i c h i g a n ,

W i s c o n s i n ,

Oregon , Kentucky, and l l i n o i s .

L o c a l l y ,

t h e C i t y

of

h i c a g o ,

Chicago P u b l i c

S c h o o l s , Chicago T r a n s i t A u t h o r i t y , S t a t e

of

l l i n o i s

R e g i o n a l

T r a n s p o r t a t i o n A u t h o r i t y ,

a n d

I l l i n o i s

Tollway l l have

u s e d

i n t e r e s t r a t e swaps.

M a n y

m u n i c i p a l i t i e s have

i s s u e d v a r i a b l e r a t e bonds

n s t e a d

of

i x e d r a t e

b o n d s , a n d

t h e n

e n t e r e d

i n t o

a f l o a t i n g - t o - f i x e d

r a t e swap

o

m a n a g e

t h e

i n t e r e s t

r a t e r i s k

of

h e

v a r i a b l e r a t e

bonds

and t o

lower

c o s t s .

W h e n

a

m u n i c i p a l i t y i s s u e s a

v a r i a b l e r a t e

bond

a n d

t h e n e n t e r s

i n t o a

swap

a g r e e m e n t , h e

s y n t h e t i c a l l y

- c r e a t e d f i x e d r a t e t h a t

r e s u l t s

t y p i c a l l y i s l e s s

t h a n t h e

i n t e r e s t

r a t e t h a t would have

been p a i d had t h e

m u n i c i p a l i t y

s i m p l y

i s s u e d a i x e d

r a t e

bond.

Over h e

t e r m of

h e bond, h e m u n i c i p a l i t y m a y

e n e f i t

from c o s t s

s a v i n g s

t h a t r e s u l t

from

e a c h

pay ment

 

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 6/29

of h e lower

n t e r e s t r a t e .

These

o s t s s a v i n g s

a r e

r e a l i z e d

over

time,

and can

be

u b s t a n t i a l

depending on

h e

term of

h e

bond and

subsequent changes

n

i n t e r e s t

r a t e s .

Th e

C i t y

of hicago e n t e r e d i n t o

i t s f i r s t

i n t e r e s t r a t e

s wa p

agreement

more than

20 e a r s

ago.

Th e

C i t y

Council of hicago, by

w a y

of h e

C i t y ' s

o r d i n a n c e

p r o c e s s , g r a n t s t h e CFO

r

Comptroller

h e

a u t h o r i t y t o e n t e r i n t o

such swaps.

I f h e

CFO

r Comptroller wishes

o e n t e r

i n t o a

s wa p

o r which

h e o r d i n a n c e

a u t h o r i z i n g

t h e

i s s u a n c e of h e

u n d e r l y i n g bonds i d

not

a u t h o r i z e

a s wa p r a n s a c t i o n , then u t h o r i t y m u s t be g r a n t e d

through t h e passage of

new

o r d i n a n c e . In

each

n s t a n c e

t h a t we

eviewed,

h e

C i t y

p r o p e r l y

o b t a i n e d

a u t h o r i z a t i o n by

ordinance

from t h e

C i t y

C o u n c i l .

T y p i c a l l y ,

t h e C i t y

e n t e r e d i n t o i n t e r e s t

r a t e

swaps

n c o n n e c t i o n

w i t h

an

u n d e r l y i n g

v a r i a b l e

r a t e

d e m a nd

o b l i g a t i o n

bond

o f f e r i n g .

Often,

t

t h e

s a m e

time, h e

C i t y a l s o

i s s u e d

f i x e d r a t e bonds. Th e C i t y used t h e combination of

i x e d

r a t e

and

v a r i a b l e r a t e o f f e r i n g s a s

a

i s k

m a n a g e m e n t

o o l .

Th e

C i t y

used i n t e r e s t r a t e swaps

n

c o n n e c t i o n w i t h

t h e

v a r i a b l e r a t e

o f f e r i n g s t o

s y n t h e t i c a l l y

c o n v e r t

f l o a t i n g r a t e s

t o f i x e d

r a t e s

t o

reduce

n t e r e s t r a t e r i s k s .

These

swaps

e s u l t e d

i n

s y n t h e t i c a l l y f i x e d c o s t s

(or f i n a n c i n g

c o s t s )

h a t were

lower than

t h e

comparable e v e l of i x e d r a t e s a v a i l a b l e

i n

t h e primary

municipal

bond market

t t h e

t i m e .

I n

a d d i t i o n

t o

t h e f l o a t i n g - t o- f i x e d r a t e s wa p agreements, h e C i t y a l s o has

n t e r e d

i n t o

swaps o

c o n v e r t

t h e b a s i s

upon

which

h e

i n t e r e s t r a t e s

were

a l c u l a t e d , c a l l e d

b a s i s swaps.

T h e

C i t y

has n t e r e d

i n t o

t h e s e b a s i s swaps

n

exchange

o r

s u b s t a n t i a l

u p f r o n t payments o

t h e

C i t y .

C e r t a i n b a s i s swaps

i d

not

extend

f o r

t h e e n t i r e l i f e

of h e

u n d e r l y i n g

v a r i a b l e r a t e d e b t .

T h e C i t y l a t e r extended

so m e

a s i s swaps o m o r e

l o s e l y

match

h e m a t u r i t y of h e

u n d e r l y i n g

v a r i a b l e r a t e

bonds, r

a l t e r e d

t h e

d u r a t i o n

of

h e

s wa p

o

f u r t h e r

m a n a g e

i s k .

Th e

swaps

c o n v e r t e d

t h e i n t e r e s t

b a s i s ,

f o r example, rom

SIFMA o LIBOR

T h e C i t y used t h e s e b a s i s

swaps

o

o b t a i n

funds from c o u n t e r p a r t i e s

and

as o o l s

t o

f u r t h e r

m a n a g e

h e C i t y ' s r i s k

exposure:

Th e

C i t y

e n t e r e d

i n t o

i t s

s w a p

agreements through e i t h e r

a

o m p e t i t i v e

o r n e g o t i a t e d

p r o c e s s .

In

a

o m p e t i t i v e p r o c e s s , t h e C i t y

o r

i t s

f i n a n c i a l a d v i s o r i s s u e d a s wa p b i d

form and

term

s h e e t

t o m u l t i p l e

f i n a n c i a l

i n s t i t u t i o n s

s e t t i n g

f o r t h

t h e

g e n e r a l

s p e c i f i c a t i o n s

and

terms of

t h e a n t i c i p a t e d

s wa p

r a n s a c t i o n .

For example,

h e

form

and

term s h e e t

o f t e n

e x p l a i n e d

t h a t

while

c o u n t e r p a r t i e s

were o b l i g a t e d t o p o s t

c o l l a t e r a l

i n

connection with

t h e

swap,

h e

C i t y

would not

be

e q u i r e d

t o

p o s t c o l l a t e r a l . In

a

e g o t i a t e d p r o c e s s ,

t h e

C i t y n e g o t i a t e d

d i r e c t l y

w i t h

one,

r

m u l t i p l e ,

p o te n t i a l c o u n t e r p a r t i e s .

T h e d v i s o r ' s

r o l e

i n a

e g o t i a t e d

p r o c e s s w a s

o

e n s u r e t h a t

t h e p r i c i n g

r e c e i v e d

by h e

C i t y

w as

a i r

and

c o n s i s t e n t

with p r e v a i l i n g

market

c o n d i t i o n s . T h e d v i s o r a l s o

n e g o t i a t e d

s w a p

e l a t e d

c r e d i t

terms,

analyzed

i s k

v e r s u s

reward,

and

m a d e p e c i f i c

recommendations.

B. C i t y ' s Comprehens ive Ann u a l

Financial

Reports

Th e

C i t y ' s

a c c o u n t i n g

p o l i c i e s a r e

based

upon c c o u n t i n g p r i n c i p l e s

p r e s c r i b e d

by h e

Governmental

Accounting Standards Board GA SB).

In

2008, h e

GASB s s u e d

GASB

Statement No.

3, i t l e d

Accounting a n d

Financial

Reporting

or e r i v a t i v e

I n s t r u m e n t s ,

which

r e q u i r e d

t h a t

t h e C i t y ' s

f i n a n c i a l

r e p o r t s i n c l u d e

s p e c i f i c

d i s c l o s u r e s on

e r i v a t i v e s ,

n c l u d i n g t h e

v a r i o u s

r i s k s

a s s o c i a t e d w i t h s wa p

r a n s a c t i o n s .

These

i s k s

i n c l u d e t h e

f o l l o w i n g :

  ~

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 7/29

C r

e d i t

r i s k

—th

e

o s s i b i l

i t y t h a t

 

t h e

swap 

c o u n t e r

p a r t y

w i l l n o t make

good on

t s

p r

o m i s e

t

o  

pay

t h e

l o c

a l gove

rnment;

2 .

I

n t e r e s t r a

t e

r i s k —the 

i s k t h a

t changes n t h e

i n t e r

e s t r a t e

c o u l d

r e d u c e  t h e

v a l u e

o

f

h e

s

wap a g r e e m e n

t ;

3

.

B a s i s

r i

s k

—the

o s s i

b i l i t y t h a t

 

t h e

l o c a l

 governm

ent o u l d  hav

e

o

pay

h

i g h e r

amou

nts

b e c a u s e  

o

f

i f f

e r e n c e s

i n

t h e i

n d e x e s

u

pon

which

 

t h e

swap

 

a

g r e e m e n t

s

a r e b a s e d

; and

4 .

T e r m i n a t i

o n r

i s k  

—t

he o s

s i b i l i t y t h a

t

a swap

agre

ement ma

y end

 

a r

l i e r t h a n

e x p e c t e

d an d t h u s

p

o t e n t i a l l y

 

r e q u i r e

t h e

l o c a l

 govern

ment o make a

i g n i f i

c a n t

t e r m i n

a t i o n  paym

ent.

A

lthough G SB

 

3

we

nt n t o

 

e f f

e c t

i n

 

June

200

9, h e

C i t y  

had been 

maki

ng

h e s e

d i s

c l o s u r e s

p

u b l i c l y

s i n

c e

200

4.

T

he C i t y , i n

f a c t ,

 

h a s i n c l u d e d

 a

e t a i l e d

 s

t a t e m e n t

 of

h e

r i s k s

a s s o c i a t

e d w i t h

i t s

sw

ap a g r e e m e

n t s

i n

e v e r

y

C

FR 

i n c e

 

t h

e

2 0

03 i s c a l

y e

a r

( p u b l i s h

e d  

i

n

2 0 0 4

) .

Althoug

h i r s t

p u b

l i c l y  

d i s c l o s e

d

i n

2004,

  u r

i n t e r v i e w

s r e v e a

l e d

t h a t

 

t h e C i t y

o f f i c i

a l s

w

h o

e

g o t i a t e d

and

 

e x e c u t e d

 

t h e

swa

p

a g r e e m e

n t s on t

s

b e h a l

f

were aware

 

of h

e r i s k s

mu c h

e a

r l i e r , i n

c l u d i n g

a t t h e  t

i m e t h a t

 

t h e C i t y  

e x e

c u t e d  

i t s

e x i s t i n g  

swap r a n s a

c t i o n s .  

I n

t

h e CA

FRs,

t

h e C i t y

d i s c l o s e d

: 1) r

e d i t

r i s k

( e . g . ,

 

c o u n t e

r p a r t y r i

s k ) ; 2)

n t e r e s t

r a t e r i s k

;

3) a s

i s

r i s k

( i

n c l u d i n g r

i s k s

t i e d

t o

c

hanges

n

m a r g i n a

l

t a x  

r a t e s ,

 

t a x

- e x e m p t

s t a t u

s

of

o

n d s an d 

s u p

p l y

and

dema

nd f o r v

a r i a b l e

r

a t e

b o n d

s ) ; 4 ) a x

r i s k

;

a

nd

5

) 

e r m i n a t

i o n  

r i s k ( i n c l u d i

n g r i s k s

t i e d t o

r a t i

n g s downgr

ades, 

o v e n a n t

 

v i o l

a t i o n s ,

b a n k r

u p t c y , paymen

t e f a

u l t  an

d

o t h e r

e

v e n t s

of

d e f a u l

t ) .

The

C

 FRs l s

o h i g h l

i g h t e d any

 

m a

t e r i a l

c h a n

g e s

t o

t h e  

swap

a g r e e m e n

t s i n c l u d i n

g

c

o u n t e r p a r

t y d

owngrade

s)

n d / o r

t

e r m i n a t i o

n s .

A c c o

r d i n g l y ,

 

e

v e r y  y

e a r

f o r

more

h a n 10

y

e a r s  t h e

C i t y

h a

s

been

d i s

c l o s i n g t h e  v e r y

r i s k s

t h e  

Septemb er and

O c t o b e r u n i o n

l t t r s

a l l e g e

t h e

C i t y s  

swap

c o u n t e r p a r t i e s  

may

hav e

m i s r e

p r e s e n t e d

, f a

i l e d

t o

d i s c l o

s e , o r downpl

ayed.

The C i t y s

d i s c

l o s u r e s

a f f i r m

a t i v e l y

e x p l a i n

e d t h e

r i s k

of

n t e

r e s t r a t e mov em

ents,

h e

r i s k

 

t h a t a

r e d i t  

e v e n t

a f f e c t i n g

t h e

c r e d i

t

r a t i

n g s

of

h e

C i

t y

woul d

o c c u r ,

a

nd

t h e

r i s k t h a t

a

swap

 

c

o u l d  

be  e r m i n a t

e d

a s a

e s u l t

of

e r

t a i n

e v e n t s ,

i n c l u d i n g

 

a

 

a t i n g s downgra

de

of

h

e

C i t y .

The

C

i t y s

d i s c l o

s u r e s d e

m o n s t r a t e

 i t s

knowled

ge

and

u n

d e r s t a n d

i n g of

 h e v a r i o

u s r i s k s

 t h a t c o u l d

imp

ac t 

t s

swaps

r a n s

a c t i o n s .

C.

I n t e r

e s t

Ra

te Swa

p 

o l i c y

The

 

C

i t y a l

s o  d

i s c l o s e d  t h e v

a r i o u s r i

s k s

a s s o c i a t

e d w i t h

swap

r

a n s a c t i o n

s  i

n  

i t s

 

I n t

e r e s t

R a t e S wap

 

P o

l i c y ,

whi

ch i r s t

 was implem

ented 

i

n

2

0 0 4 and

 

l a t e r

p u b l

i s h e d

i n

 

2

006.

The

I n t e r e s t

R a t e

S wap

P o l i c y   2 0 0 6

S wap

o l i c y )

s t a b l i s h e d

g u i d e l i n e s

f o r

e x e c u t i o n

and

managem

ent

of

h e

C i t y

  s i n t e r e

s t r a t e swaps

, d

e n t i f i e d

e l e v e n

 

s e p a r a t e

 

an

d

s

p e c i f i c  

r i s

k

f a c t o r s

t h a

t

t h e

C

i t y

w

ould examin

e b e f

o r e

e n t e r i n g

i n t o

 a

sw

ap a g r e e

m e n t

an

d

p

r o p o s e d

w

ays o

m i

t i g a t e

each

 

of h

e s e r

i s k s :

T

e o f  R i s k

D e s c r

i t

i o n o f

R

i s k

W

a  t o

M i t i a t

e

R i s

k

B a s i s

 

r i s k

B

a s i s

r i s k

r e f e r s  

t o

t

h e

m

ismatch

T

he

i t y an d t s

f i n a n c i a

l

a d v i s o r s

w i l l

b

etween

t h e

v a r i a b l e r a t e

pay

ments r e v i e

w

h i s

t o r i c a l

t r a d i n

g

d i f f e r e n t

i a l s

r e c e i v e d on a swa

 

c o n t r a c t

 an d

between

 

t h e

v a

r i a b l e

r a t e

b

onds 

and

t h e

 

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 8/29

T

e

of

Risk

Descri t i o n of Risk

Wa o

M i t i

a t e

Risk

t h e i n t e r e s t payment

c t u a l l y

owed i n d e x .

The C i t y

w i l l s e e k t o

minimize b a s i s

on

t h e b o n d s .

The

two i g n i f i c a n t r i s k

by

t r u c t u r i n g swaps

i t h s m a l l

components d r i v i n g

t h i s r i s k

a r e d e v i a t i o n s between

c a s h

i n f l o w s and

c r e d i t

and

SIFMA/LIBOR

a t i o s . o u t f l o w s .

The

C i t y

w i l l

n o t

s e e k t o

maximize

u p f r o n t

b e n e f i t

by

t r u c t u r i n g

swa

s w i t h u n d u l

h i

h

b a s i s

r i s k

embedded.

Tax i s k

The

i s k

of

a

change i n U.S.

a x

The

i t y

and

t s

c o u n s e l

w i l l

r e v i e w

t h e

t a x

law s u c h

t h a t t h e

f e d e r a l

t a x

e v e n t s i n p r o p o s e d

swap

a g r e e m e n t s . The

exemption

on m u n i c i p a l

d e b t s C i t y w i l l

e v a l u a t e

t h e

i m p a c t

of o t e n t i a l

e l i m i n a t e d

o r

i t s

v a l u e i s

r e d u c e d .

changes

i n t a x

law

on LI OR n d e x e d

The C i t y

i s

n e g a t i v e l y

i m p a c t e d by swaps.

r e d u c t i o n s

i n t a x r a t e s .

C o u n t e r p a r t y r i s k

The

i s k t h a t

a

o u n t e r p a r t y

w i l l

The

i t y w i l l m o n i t o r

e x p o s u r e

l e v e l s ,

n o t

p e r f o r m

p u r s u a n t t o

t h e

r a t i n g s

t h r e s h o l d s ,

and

c o l l a t e r a l i z a t i o n

c o n t r a c t s t e r m s t h u s e x p o s i n g t h e

r e q u i r e m e n t s

on a p o r t f o l i o wide b a s i s . The

C i t y

t o

t h e

r i s k

of

unwinding

h e C i t y w i l l o f t e n r e q u i r e two

o u n t e r p a r t i e s on

swap

a n d / o r

a

e r m i n a t i o n

swaps

o

m i t i g a t e

c o u n t e r p a r t y

r i s k .

a ment.

T e r m i n a t i o n

r i s k

The

i s k

t h a t

t h e swap o u l d

be

The C i t y

w i l l

compute

t s

C o u n t e r p a r l y

t e r m i n a t e d

a s a

e s u l t

of e r t a i n

mark- t o

- m a r k e t

e x p o s u r e . The C i t y

always

e v e n t s i n c l u d i n g

a

a t i n g s

r e t a i n s

t h e

r i g h t

t o t e r m i n a t e swaps t m a r k e t

downgrade o r

t h e

i s s u e r o r

swap

r a t e s .

The

C i t y does n o t

a l l o w c o u n t e r p a r t i e s

c o u n t e r p a r t y , c o v e n a n t v i o l a t i o n ,

t o

t e r m i n a t e u n i l a t e r a l l y ,

e x c e p t

i n

t h e

e v e n t

b a n k r u p t c y ,

payment e f a u l t o r of weakening of

h e

C i t y s c r e d i t

o r i f

o t h e r

o t h e r d e f i n e d e v e n t s of e f a u l t .

t e r m i n a t i o n

e v e n t s

have

o c c u r r e d .

R o l l o v e r r i s k

The i t y m a y be exposed

t o

The i t y

w i l l d e t e r m i n e ,

i n

a c c o r d a n c e

w i t h

r o l l o v e r

r i s k

i f h e

swap e r m i n a t e s

i t s

Debt

o l i c y ,

t s

c a p i t a l

s t r u c t u r e

i n

l i g h t

e a r l y

o r i f

t h e

t e r m of

h e

swap

s

of swap e r m i n a t i n g e a r l y .

The

C i t y w i l l

s h o r t e r t h a n

t h a t

of h e b o n d s .

a l s o

e v a l u a t e e n t e r i n i n t o

a n o t h e r

swa

L i q u i d i t y

r i s k

The

n a b i l i t y

t o c o n t i n u e

o r

renew

The

i t y

w i l l e v a l u a t e t h e

e x p e c t e d

a i q u i d i t y f a c i l i t y a v a i l a b i l i t y

of

i q u i d i t y

s u p p o r t f o r

swapped

and

unhed ed

v a r i a b l e

r a t e

d e b t .

R a t i n g s

R i s k

The

i s k t h a t

t h e C i t y s c r e d i t The i t y

w i l l c o n t i n u e an open d i a l o g u e w i t h

r a t i n g

would

b e

a d v e r s e l y

a f f e c t e d

t h e r a t i n g

a g e n c i e s

s o

t h a t

a l l t h e b e n e f i t s

and

by

e n t e r i n g

i n t o a

swap r i s k s

of

a swap

a r e

u n d e r s t o o d . I n

a d d i t i o n ,

t r a n s a c t i o n .

t h e

C i t y w i l l

s e e k

c o n f i r m a t i o n

t h a t

t h e

swap

w i l l

n o t

a d v e r s e l y a f f e c t

t h e

u n d e r l y i n g

c r e d i t

r a t i n

s .

R i s k of For

C i t y p u r p o s e s , swaps

m a ke

h e

The

C i t y and t s f i n a n c i a l a d v i s o r s

w i l l

R e s t r u c t u r i n g u n d e r l y i n g

bonds non- c a l l a b l e e v a l u a t e t h e

b e n e f i t s of

swap

n

r e l a t i o n

t o

F l e x i b i l i t y

b e c a u s e

t h e C i t y

w i l l

n o t

have

a

t h e

l o s t b e n e f i t

of

u t u r e

s a v i n g s

and

swap w i t h o u t

an

u n d e r l y i n g

b o n d .

r e s t r u c t u r i n g o p p o r t u n i t i e s .

This a c t o r

n o t o n l y

e l i m i n a t e s

t h e

o p p o r t u n i t y

t o r e f u n d t h e s e bonds

f o r s a v i n g s ,

b u t

a l s o e l i m i n a t e s t h e

a b i l i

t o

r e s t r u c t u r e t h i s d e b t .

A m o r t i z a t i o n

Risk h a t

t h e

swap a m o r t i z a t i o n

The C i t y

matches

h e

a m o r t i z a t i o n s c h e d u l e s

R i s k

s c h e d u l e

w i l l

n o t

match

t h e

of bonds and swaps.

The

C i t y and

t s

a m o r t i z a t i o n s c h e d u l e of

h e

f i n a n c i a l a dv i s o r s :

i l l c o n t i n u e t o a s s e s s t h e

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 9/29

T

e

of Risk Descri t i o n of

Risk

Wa

o

Miti

a t e

Risk

b o n d s .

A m o r t i z a t i o n

mismatches

C i t y ' s

o v e r a l l

bond

p o r t f o l i o t o

d e t e r m i n e t h e

c o u l d

a l s o

r e s u l t

i n

t e r m i n a t i o n s

of

b e s t

p r a c t i c e

i n

e a c h

p a r t i c u l a r

i n s t a n c e .

p o r t i o n s

of

h e

swap

p r i o r

t o

m a t u r i t y

and

u n d e r

u n f a v o r a b l e

c o n d i t i o n s

t o

t h e

C i t y .

I n t e r e s t R a t e R i s k

R i s k

t h a t m ov e me n t

of

n t e r e s t

The

b s o l u t e l e v e l

of

n t e r e s t

r a t e s

and t h e i r

r a t e s

o v e r

t i m e

c o u l d a f f e c t t h e

e f f e c t on

t h e

m a r k e t

w i l l

be

a k e n i n t o

v a l u e of

n

o u t s t a n d i n i n s t r u m e n t . a c c o u n t

b e f o r e t h e

Ci e n t e r s

i n t o

a

sw a

C r e d i t

R i s k

Risk

h a t a r e d i t e v e n t

c o u l d The

C i t y

w i l l

m o n i t o r

t h e

r a t i n g s of t s

o c c u r t h a t would a f f e c t

t h e

c r e d i t

c o u n t e r p a r t i e s and

i n s u r e r s .

r a t i n g s of h e C i t y o r

of

ne

of t s

c o u n t e r

a r t i e s .

S i m i l a r

t o

t h e C i t y ' s

r i s k

d i s c l o s u r e s i n i t s

CAFRs, h e C i t y ' s

2006 Sw ap o l i c y

d e m o n s t r a t e s t h e

C i t y ' s

knowledge and

u n d e r s t a n d i n g

of

h e

r i s k s

a s s o c i a t e d

w i t h

swap

t r a n s a c t i o n s .

I t

a l s o

a d o p t s

c e r t a i n p o l i c i e s

a nd

p r o c e d u r e s t o a d d r e s s

and minimize

t h e s e

r i s k s ,

and

p r o h i b i t s

t h e

C i t y

from e n t e r i n g

i n t o

swaps

h a t

were

viewed

a s t o o

r i s k y o r

l a c k i n g i n

t r a n s p a r e n c y .

D .

T h e

n t e r e s t

Rate

Swap

greements

The

2006

Swap P o l i c y

a l s o s e t s

f o r t h

t h a t

t h e

C i t y ' s

c o n t r a c t u a l r e l a t i o n s h i p s

w i t h

i t s

swap c o u n t e r p a r t i e s be g o v e r n e d , o t h e

e x t e n t p o s s i b l e ,

by h e

t e r m s

and c o n d i t i o n s

s e t f o r t h i n

t h e

I n t e r n a t i o n a l

Sw ap

D e a l e r s A s s o c i a t i o n , n c .

(ISDA)

a s t e r Agreement.

The

y p i c a l C i t y

swap r a n s a c t i o n

a l s o

i n c l u d e d

t h e

f o l l o w i n g

a d d i t i o n a l documents:

a

S c h e d u l e

t o

t h e

M a s t e r

Agreement,

r e d i t

S u p p o r t

Annex,

Swap

C o n f i r m a t i o n ,

l e g a l

o p i n i o n s , and

a i r n e s s o p i n i o n s .

T he

ISDA M a s t e r Agreement,

l o n g w i t h

t h e

S c h e d u l e and

C o n f i r m a t i o n ,

i d e n t i f y t h e

swap

c o u n t e r p a r t i e s i . t h e

C i t y and a

b a n k ) ,

and

s p e c i f y t h e

p a r t i c u l a r i n t e r e st

r a t e s

b e i n g

swapped,

payment e r m s , and

t h e

o t h e r

m a t e r i a l

t e r m s

of h e

t r a n s a c t i o n .

The ISDA

M a s t e r

Agreements, s s e t

f o r t h

i n

t h e

S c h e d u l e s

t h e r e t o ,

c o n t a i n a

n on-

r e l i a n c e c l a u s e

p u r s u a n t t o which t h e C i t y

a g r e e s

t h a t

t

h a s

m a d e

t s

o w n

d e c i s i o n t o e n t e r i n t o

each

t r a n s a c t i o n u s i n g i t s o w n udg men t and

r e l y i n g

upon

a d v i c e

from

a d v i s o r s

of

t s

c h o o s i n g .

T he C i t y a l s o

a f f i r m a t i v e l y

acknowledges

h a t

t

i s n o t

r e l y i n g o n

any

communication o r

recommendation

r e p r e s e n t a t i o n s ) by h e

swap

c o u n t e r p a r t y , and

t h a t

t h e swap

c o u n t e r p a r t y

i s

n o t

recommending t h e t r a n s a c t i o n .

I n

a d d i t i o n ,

e a c h

T r a n s a c t i o n

C o n f i r m a t i o n

c o n t a i n s

t h e

f o l l o w i n g a d d i t i o n a l

r e p r e s e n t a t i o n s by

h e C i t y :

[ t h e

C i t y ' s ]

c o u n s e l , a c c o u n t a n t s and

t a x

a d v i s o r s

a r e

f a m i l i a r

w i t h

t h i s

T r a n s a c t i o n ...and

r e l y i n g on h e a d v i c e

of

uch

p r o f e s s i o n a l s and

a d v i s o r s t h e

[ C i t y ] h a s

m a d e a n

i n d e p e n d e n t a n a l y s i s

a nd

d e c i s i o n

r e g a r d i n g

t h i s

T r a n s a c t i o n ;

a nd

 

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 10/29

[ t

h e

C i t y ]

h a s

d e t

e r m i n

e d t h e

 econ

omic

i s k s and

 

m e

r i t s ,

 a s

w e

l l a s

l e

g a l , t a x ,

 and

a c c

o u n t i

n g

c h a r a c

t e r i z

a t i o n s

 

a

nd c o

n s e q u

e n c e s

 

...a

nd

i s  c a p a b l

e

of

ssu

ming

such

i s k s

 

w i t

h o u t

r

e l y i n

g on

t

h e a d v i c

e

of

c o u n

t e r p a r

t y

b a n k

] .

Th

e

C

i t y  

a l s o

 

a

cknow

ledge

s

h r o u

g h  

t h e

 

ISD

a s t e r

 

A

gree

ment

h

a t

t h e

 

c o

u n t e r

p a r t y bank

 

s

n o t

a c t i n g

a s t h e  

C i t y ' s  f i d u c i a r y  

o r  a s

t h e

C i t y ' s  

a d v i s o r

w i t h

r e s p e c t t o

t h e

t r a n s a c t i o n .

I n

 a

d d i t i

o n

t

o t h e  

no n- r e l

i a n c e

  c l a u

s e s , t h e

 

ISD

  a s t

e r Agree

ments

, s s

e t

f o r

t h

i

n  

t h e

S c h

e d u l e

s t h

e r e t o ,

 

c o n

t a i n

e x c l u s

i v e

d i s p u

t e

r e s o l u

t i o n

c l

a u s e s

 

r e q

u i r i n

g

t h e

 

p a r

t i e s t o  

sub

mit

any e g a l

c l a i m

s o r

d i

s p u t e s

 t o t h e e x c

l u s i v e

 j

u r i s d i

c t i o n of

h e C

o u r t s

 

of

 

h e

S t a t e

of

 

l l

i n o i s

o r

t h e

 

U n i

t e d

S t

a t e s

D i s t r i

c t Co

urt

o r

t h e

 

N o r t h

e r n  

D i

s t r i c t

 of

 

l l i n o

i s

T

h e I

SD M

aster

 

Ag ree

ment

 

l s

o p r

o v i d e

s

t

h a t t h e  C

i t y  

may

e r m i n

a t e

t h e  

i n t e r

e s t r

a t e

s wa

ps

t

any

 

t i m e  

f

o r

marke

t 

v a l u e

, o r

u p

on

t

h e o c c u

r r e n c

e of

e r t

a i n

e v e n t s

. Wh

ile t h e

C i t y

m a

i n t a i

n s an u n

l i m i t e

d  

r i g h t  of

a r l y

 t e r

m i n a t

i o n ,

t h

e

ban

k

c

o u n t e r

p a r t i

e s ' t e r m

i n a t i

o n r

i g h t s

a r e

l i m i t

e d . T

h e

s

w ap a

g r e e m

e n t s a l s o

 e s t a

b l i s h

 c e r t a i

n e a r l y

t e

r m i n a

t i o n

e

v e n t s .

 Th e

 

C i

t y ' s  

s w a p

a g r e

e m e n t

s

c

o n t a i n

 

c r e d i t

 r a t i n

g s t h r

e s h o l d

s t h a

t

r e q u i

r e

b o t

h

t h e

C

i t y  and

 

t s

c o

u n t e r p

a r t i e

s t o

m a i n

t a i n

c e r t a

i n c r e

d i t

r a t i n

g s .

n

 a r l

y  t e r m

i n a t i o

n e v

e n t

i s

 

t

r i g g e

r e d

i

f t h e

c r e d i

t r a t i

n g

of

 

h e

C i

t y o r a

o u n t

e r p a r

t y

i s downg

raded

 

below

 suc

h 

a g r e e

d u po

n

h r e s h

o l d .

On

c e

r i g g

e r e d ,

 

t h e

o t h e r

 

c o

u n t e r

p a r t y

h

a s t h e  

r i g h t

 

t o

t e r m i n

a t e

t

h e s wa

p. 

Up o

n

e r m

i n a t i

o n , o

ne

p a r t y ma

y o w e  

h e

o t h

e r

a

  e r m i

n a t i o

n  

payme

nt.

E. E x i

s t i n g

 

Swa

p r a

n s a c t

i o n s

A s

 

of

h e

d a t

e

of

h i s r e p

o r t ,

t h e

 

C i t y

r e m a

i n s

i

n v o l v e

d i

n

s w a p

 

a

g r e e m

e n t s  

r e l a t

i n g

t o

n i n e b

ond

d e

a l s .

Th e

 C i t y

c e

a s e d

i s s u i

n g n e w

 

v a r i

a b l e r a

t e

d e m a

nd

b

onds

 

n  

2

007.

Th

e

a

s t

s w a

p m a d

e n

 

c o n n

e c t i o

n w i t h

 

t h

e  i s s

u a n c e o

f

n

u n d e r

l y i n g

 

bon

d

w a s

 

e x e

c u t e d

 i

n 2008.

 Ea c

h

of

 

h

e s e d e

a l s

i n

v o l v e

d t h e

 i s s

u a n c e of

 

a r i

a b l e r a

t e

d e

m a n d  

b o n

d s .  

Th e

 

C i

t y r

e m a i n

s

i n v o

l v e d

i n

 

16 s wa ps

h a t

were

e n t e r e d

i n t o

i n  

c o n n e c t i o n  w i t h

one

of 

h e s e

n i n e u n d e r l y i n g  

v a r i a b l e

r a t e

d

e m a n

d

bo

nd s

u n

d e r l y

i n g

s w

a p s   )

, and

 

i n n i n e

 s wa

ps n

t e r e d  

i n t o

a f t

e r

t h

e

u

n d e r l

y i n g bo

nd

d e a l s

 

t o

c

o n v e r

t t

h e

b a s i s

 

u

pon w

hich

 

t h e

i n t

e r e s t r a t

e s w

ere c a l c

u l a t e d

 

(

  b a s i s

 

s w a p

s ) .

Th e

C i t y

 

r

e c e n t

l y  

h a s r e n

e g o t i a

t e d t h e

 t e

r m s

o

f

e r t a i

n

of

 

t s s w a p

 

a g r

e e m e n

t s

t

o (1)

 e d u c e

 t h e

c r e d i t

r a

t i n g

t h r e s

h o l d s  

t h a t a l l o

w t h e

 C i t y

' s c o u n

t e r p a r

t i e s t

o t e r m i

n a t e

t h e  s w a p

s

f

t h e

C i t y

e x p e r

i e n c e

s

f u r

t h e r

down

grade

s 

n

i t s

c r

e d i t

r a

t i n g ,

and

 

(2) od

ify t h e

m a

t u r i t y

 of

h e

s w a

p

a g r e e

m e n t s

.  See

 

C i t y

 

of

 

Ch

icag

o

R e o f

f e r i n

g C i r c

u l a r

f o r

i t s

G

e n e r a

l O b l i g

a t i o n

 

V a r i a

b l e

R a t

e

De

m a n d

 Bo

n d s r

o j e c t

 and

 

Ref

undin

g S e

r i e s

2

003B

,

S

epte

mber

2014

.

Th e

 

f

o l l o w

i n g

c h a r

t s h o

w s

h e C i t y ' s

 

e x

i s t i n g

 

s w

a p

a g r

e e m e n

t s ,

h e

u n d e

r l y i n

g

o f f e

r i n g s

t o

wh i

ch e a

c h s

w a p a

greem

ent e l a

t e s t h e

s w

a p c o u n t e

r p a r t

i e s o

n

e

ach t r a

n s a c t i

o n ,

w h e t h

e r

t h e

s w a p 

r e l a t e s

t o  

t h e u n d e r l y i n g

bond

t r a n s a c t i o n  

(  U  ) 

r

w a s a

a s i s

s w a p

B ),

h e

n o t i o n a l

a mo

u nt

of

h e

s wa p

, n

d t

s

t r a d

e a

nd e f f e

c t i v e

d a t e s

:

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 11/29

Bond

s s u e

Name

Par

Amount)

I s s u e D a t e d

Swap Counterparty

Bond S e n i o r

Manager

U/ B

N o t i o n a l

Amount

Trade Date

E f f e c t i v e

Date

Lehman B r o t h e r s

 202,500,000 e n e r a

O b l i g a t i o n S p e c i a l

F i n a n c i n g

I n c .

V a r i a b l e

R a t e

Demand

Bonds,

r o j e c t ( C o u n t e r p a r t y i s

no w

W i l l i a m

B l a i r

U

 ]

1 , 8 7 5 , 0 0 0

8 / 6 / 2 0 0 3 8 / 7 / 2 0 0 3

and

Refunding

e r i e s

2 0 0 3 B

Well s Fargo

Bank,

Company,

LLC

[ 8 / 7 / 2 0 0 3 ]

N a t i o n a l A s s o c i a t i o n )

Bear Steams

F i n a n c i a l

P r o j e c t s I n c .

( C o u n t e r p a r t y i s now U $ 5 0 , 6 2 5 , 0 0 0 8 / 6 / 2 0 0 3

8 / 7 / 2 0 0 3

JPMorgan Chase

Bank,

.A.)

The

Bank of

B  1 44,570,000 1 / 3 0 / 2 0 1 3 1 1 / 1 / 2 0 1 4

New ork Mellon

PNC

ank,

B

$ 4 8 , 1 9 5 , 0 0 0

1 / 3 0 / 2 0 1 3

3 / 1 / 2 0 1 4

N a t i o n a l

A s s o c i a t i o n

PNC

ank,

N a t i o n a l A s s o c i a t i o n

B

 1 44,570,000

2 / 9 / 2 0 1 2 3 / 1 / 2 0 1 4

 222,790,000 G e n e r a l O b l i g a t i o n

V a r i a b l e Rate Demand

Bonds,

r o j e c t

and

Refunding

S e r i e s

2 0 0 5 D

[ 8 / 1 7 / 2 0 0 5 ]

Goldman

Sachs

Bank

USA

Loop

i n a n c i a l

P r o d u c t s

I I

LLC

( C o u n t e r p a r t y

i s

no w

Bank of

o n t r e a l )

Loop

F i n a n c i a l

P r o d u c t s

I I I

LLC

( C o u n t e r p a r t y

i s

no w

Deutsche Bank

AG

New

ork

Branch)

RFPC

a p i t a l

S e r v i c e s ,

LLC

( C o u n t e r p a r t y i s now

The Bank

of

New

York

Mellon)

J e f f r i e s

Funding LLC

( C o u n t e r p a r t y i s

no w

Deutsche Bank

AG

New

ork

Branch)

PNC ank,

N a t i o n a l

A s s o c i a t i o n

Loop

a p i t a l

U 155,953,000 8 / 2 / 2 0 0 5

8 / 7 / 2 0 0 5

M a r k e t s , LLC

U

$ 6 6 , 8 3 7 , 0 0 0

8 / 2 / 2 0 0 5 8 / 1 7 / 2 0 0 5

B $ 6 1 , 3 9 5 , 0 0 0

1 2 / 1 7 / 2 0 1 0

1 / 1 / 2 0 1 4

1 2 / 1 6 / 2 0 1 0

B

100,000,000 (Amended

1 / 1 / 2 0 1 4

4 / 3 0 / 2 0 1 4 )

B $ 6 1 , 3 9 5 , 0 0 0

1 2 / 1 7 / 2 0 1 0

1 / 1 / 2 0 1 4

B 207,880,000 2 / 9 / 2 0 1 2 1 / 1 / 2 0 3 1

 200,000,000 e n e r a l O b l i g a t i o n

Loop

F i n a n c i a l

V a r i a b l e

R a t e

Demand

Bonds, efunding

P r o d u c t s I I LLC

Loop

a p i t a l

( C o u n t e r p a r t y

i s

no w

U

 150,000,000

1 0 / 2 4 / 2 0 0 7 1 1 / 8 / 2 0 0 7

S e r i e s

2 0 0 7 E F G

M a r k e t s , LLC

Deutsche Bank

AG

[ 1 1 / 8 / 2 0 0 7 ]

New

ork

Branch)

Morgan S t a n l e y

U

$ 5 0 , 0 0 0 , 0 0 0

1 0 / 2 4 / 2 0 0 7

1 1 / 8 / 2 0 0 7

C a p i t a l S e r v i c e s

I n c .

W e l l s Fargo

Bank,

B

 100,000,000   1 / 3 0 / 2 0 1 0

1 / 1 / 2 0 1 4

N.A.

W e l l s Fargo Bank,

N.A.

B

 100,000,000 1 2 / 2 / 2 0 1 0

1 / 1 / 2 0 1 4

 

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 12/29

  332,230,000

Second

Lien

Wastewater

V a r i a b l e

Rate

Revenue

Refunding

Bonds, e r i e s

2004A

r e f u n d e d

by

Lehm an

B r o t h e r s

  332,230,000

Second

Lien

Wastewater

S p e c i a l

F i n a n c i n g I n c .

Lehm an

B r o t h e r s ,

V a r i a b l e

Rate

Revenue Refunding

( C o u n t e r p a r t y s

n o w

I n c .

U

 232,560,000

7/22/2004

7/29/2004

Bonds,

e r i e s

2008C on 1 0 / 1 6 / 2 0 0 8 ; Deutsche

Bank AG,

.1PMorgan w a s

o l e u n d e r w r i t e r ;

s w ap s

New

ork

Branch

remained

i n

p l a c e )

[7/29/2004]

JPMo r g a n Chase

Bank

U

 49,835,000

7/22/2004 7/29/2004

Bank

of

America,

N.A.

U

 49,835,000

7/22/2004

7/29/2004

  500,000,000

Second

Lien

Water

Revenue

P r o j e c t and

Refunding Bonds,

UBS AG,

M o rgan

S t a n l e y

U   300,000,000

7/29/2004 8/5/2004

S e r i e s

2 0 04 Stamford

Branch Co. n c o r p o r a t e d

[8/24/2004]

Royal

Ba nk

of

Canada

U

 200,000,000

7/29/2004 8/5/2004

  100,000,000

Second

L i e n

Water

Revenue

P r o j e c t Bonds, e r i e s

2 0 0 0

UBSAG,

Mo r g a n S t a n l e y

U

 100,000,000

4/10/2008 4/16/2008

[

2 / 2 2 /

1999]

Stamford

Branch

Co.

n c o r p o r a t e d

  16,595,000

S a l e s Tax

Revenue

Refunding Bonds, a r i a b l e

Rate

S e r i e s

S i e b e r t

Brandford

2 0 0 2

JPMo r g a n

Chase

Bank

Shank

o.,

LC

U  I

6 , 5 9 5 , 0 0 0

6/21/2002

6/27/2002

[6/27/2002]

  152,150,000

Chicago

M i d w a y A i r p o r t

J . P .

Mo r g a n Chase

Second

Lien Revenue

Refunding Bonds,

The

Goldman

Sachs

S e c u r i t i e s , I n c .

U

 91,290,000

1 2 / 9 / 2 0 0 4

12/14/2004

S e r i e s 2 0 0 4C D Auction

Rate

S e c u r i t i e s y

Group,

n c .

[ 2 J

14/2004]

JPMorgan

Chase

Bank,

N.A.

( C o u n t e r p a r t y

s n o w

U

  60,860,000

1 2 / 9 / 2 0 0 4

12/14/2004

Wells

Fargo

Bank,

N.A.)

 44,900,000

S e n i o r Lien

T a ~ c

Increment

A l l o c a t i o n Bond s

Near

North

Bank

of America N.A.

M e s i ro w F i n a n c i a l ,

U

 44,900,000

8/5/1999

9/1/1999

Redevelopment r o j e c t ) , S e r i e s

1 9 9 9 A

I n c .

[ 8 / 5 /

999]

The

c h a r t

demonstrates t h a t of h e

C i t y s

2 5

e x i s t i n g s w a p

agreements, t

e n t e r e d

i n t o

2 1

of hem a f t e r

t

p u b l i c l y acknowledged

t s

u n d e r s t a n d i n g

of h e

r i s k s

p r e s e n t e d by s w a p

t r a n s a c t i o n s

i n

t h e

C i t y s

CAFR

o r

f i s c a l

y e a r

2 0 0 3

p u b l i s h e d

on

June

18,

004).

F u r t h e r ,

a s

mentioned

above,

l t h o u g h t h e C i t y f i r s t

p u b l i c i z e d

t s

u n d e r s t a n d i n g of

h e r i s k s

i n

2004,

h e

C i t y

o f f i c i a l s

who ere

involved i n

n e g o t i a t i n g and

e x e c u t i n g

t h e s e

s w a p

agreements t o l d us t h a t

they

we re

w e l l

aware

of

h e

r i s k s

p r e s e n t e d

by s w a p

t r a n s a c t i o n s

long

b e f o r e

t h e C i t y s p u b l i c

acknowledgement

and,

more

s p e c i f i c a l l y , a t

t h e

time they

e n t e r e d i n t o

agreements on

t h e C i t y s

behalf n

1999,

002, and 2 0 0 3 t wo

s w a p s

n

2003).

~

On pril

16,

2008 , he City refunded a

portion o f he Series

2004 a t e r

bond s ,

t

which

time

a )

he swap

ith

UBS

AG, tamford

Branch

r e l a t i n g

to

the Series

2004

a te r

bo n d s

w a s

am e n d e d to

l o w e r the

notional

am o un t

to

 2 0 0 , 0 0 0 , 0 0 0 , as amortized;

an d (b) he City

entered i n t o a

new

swap

ith

a

notional

am o un t o f 1 0 0 , 0 0 0 , 0 0 0

r e l a t e d to the

Series 2000

a t e r b o n d s

r e f l e c t e d i n the chart

above).

1 0

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 13/29

Our

n

t e r v i e w

s a l s o

 

c o n f

i r m e d  

t h a t t

h e s e C i t y

 

o f

f i c i a l s

e n t e

r e d i n t

o v a r i

a b l e

r a t e

deman

d

bo

nds and

r e l a t e

d

i n t e r e s t

 r a t e sw

ap a g r e e m e

n t s

i n  

an

f f o r t

t

o

s a v e

t

h e

C i t

y m

o ney v e r s u s

i s s

u i n g

compar

able 

i x e

d

r a t e

d e

b t , and

 a s a

n o

v e r a l l

d

e b t

r i s

k

m

anagem

ent

o o l .

I

n

e a

c h

c a

s e ,

t

c o

s t t h e

C i t y

l e

s s t o i s s u e

 v a r i

a b l e

r a t e de

mand bonds

t

t

h e

t

i m e of s s u

a n c e

t h a n

i t  

d i d

t o i s s

u e

f

i x e d r

a t e

d e

b t .   T

he C i t

y

t h

e n

e n t e r

e d i n t o an

n t e r

e s t r

a t e sw

ap o

e s

t a b l i s h

 a

y n t h e t i

c  f i x e d

r a t e ,

l o c k  

i n  

m a r k e t  

c o n d i t i o n s

a t  

t h e

t i m e ,

an d

hedge

a g a i n s t

i n t e r e s t  r a t e r i s k .

The

 p e r f o

r m a n c e

 

o

f

h e

C

i t y ' s  swa

ps 

s

an

d h a

s bee

n a

u n

c t i o n

of a r i o u

s  

f a c t o

r s .

T

wo

f

a c t o r s a r e

of

a r t i

c u l a r

i m p o r t

a n c e

f

o r

f u t u r e p

e r f o r m

a n c e : t

h e

C i t

y ' s c

r e d i t

r a t i

n g and  h e

s u p p o r

t

c

o s t s a s

s o c i a t e

d

w i

t h t h

e  i s s u a

n c e o

f h e u n

d e r l y i

n g

v a r i a b l

e  r a t e

d e b t .

As

e s c r i b e

d

a b o

v e , h e  C i t

y ' s

swap a

g r e e m e

n t s

g e n e r a

l l y c o n t a i n

 p

r o v i s i o

n s t h

a t

p e r

m i t ,

b u t do

n o

t r

e q u i r e ,

t

h e

swa

p 

c o u n t

e r p a r t

y  

t o

t e r

m i n a t e

 

t h e

agree

ment

f

t h e

C i t y

' s c r e d

i t

r a t i n g

 

f a l

l s  

belo

w

a

s p e c i

f i e d t h r e s h

o l d

l e v e l .

 

Under

u r r

e n t

m

arket

a t

e

c o n d i

t i o n s ,

i f h e  C i

t y ' s r

a t i n g s  

were

r e

d u c e d

below

h r

e s h o l d  l

e v e l s and

t s  c o u n

t e r p a r t

i e s  

e x e r c i

s e d

t h e i r

 

r i g

h t s t o

 

t e r m

i n a t e t

h e

s

waps,

 h e

 

C

i t y

would

 

be

i a b l

e

f

o r

t e

r m i n a t

i o n

p a y m

e n t s .

The r

o b a b i l i

t y

t h a t

t h i s

r i s k

 

c o

u l d

o c c

u r , a t

l e a

s t

a

s t o s o me

 of h e

C i t y ' s

swaps,

 a s

i n c r e a

s e d

i n

t h e

l a

s t

two

y e a

r s

due o

downgrades 

n

t h e

C i t y ' s

c r e d i t  r a t i n g ,

a s  d i s c u s s e d  

i n  

g r e a t e r  

d e t a i l

i n

t h e

C i t y ' s r e c e n t

r e o

f f e r i n g

 

c i r

c u l a r f o r t h e G

e n e r a l

 

O

b l i g a t i

o n V a r

i a b l e

R a t

e

De

mand

Bon

ds,

r o j e c

t

R

efundi

ng

S e r i

e s 2

003B,

 

s s u e

d

on

 Sep

tember

 

25,

 

01

4.

I n

p a r t i c u l

a r , i n t h e

l s t

 

18

month

s

h e

 

C i t y h a

s

e x p e r

i e n c e d  

t h

r e e c r

e d i t do

wngrad

es: 1)

n

J

u l y 1 7

, 2013

, M

oody's

 

e d u

c e d  t h e

r a t i

n g s

on

h e

C i t y ' s

 

g e

n e r a l

o b l i g a t

i o n  

b

onds

from

A

a3

o

A3 ,

2

)

n March

 

4,

014, 

Moody

's e d u c e d

 

t

h e

r

a t i n g s  of

 h e C i t y

' s g e n e r a

l o b l i g

a t i o n

bonds fr

om A

3 o

Baal

 ,

an

d

(3)

n No v

ember

  ,

2013,

 

i t

c h

r e d

u c e d t h e

r a t i

n g on

h e

C i t y ' s

 

g e n

e r a l o

b l i g a t i

o n  bon

ds

fr

om

AA- o

A- .

These

downg

rades

 d i d  n o t

 

b r i n

g

t h e

 C i t

y ' s

c r e d i

t r a t i n g

 below t h e

 

t h

r e s h o l d

s

i n

t

h e  a g r e

e m e n t s ,

and

 

d i

d  n o t

t

r i g g e r

c o u n t e r

p a r t i e s

' o p t i o

n s  t o

t

e r m i n a t

e .

Th

e

r e d i t

downg

rades,

 

h

owever

, 

have

c a

u s e d t h e

s

u p p o r t

 

c o s t s ,

 

. e .

 

t h e

 l e t t e

r of r

e d i t f e e s ,

 a s s o c i

a t e d

w

i t h t

h e

u n d

e r l y i n

g v a r

i a b l e

r a t e

d e b

t  

t o

i n

c r e a s e .

F. T

he 

Uni

on 

L e t

t e r s ,

the

R o o s e v

e l t

I

n s t i t u t

e

Bl o

g

P o

s t ,

an

d t h e

Grais

 

E l l

s w o r t h

 Legal

 

Mem

oran

dum

On epte

mber 1

5 ,  20

14, h e

C i t y  r e c e i

v e d

a e t t e r

from t h r e

e

u n i o

n

l e a d e

r s

u r g i n

g t h e

C i t y

t o

i m

m e d i a t

e l y

f i l e

f o

r a r

b i t r a t i o

n

t o

s e e k

a

e f u n

d of

ums e

xpende

d 

on

r a u

d u l e n t

i n

t e r e s t

r a t e swaps

  h a t

 

a r e

c o s t

i n g

t

h e C i

t y of

hi c

ago and  h e

Ch

icago

u b

l i c

Scho

ol Sys te

m o v e r

a

hundre

d

m i l l i o n

 

d o l

l a r s

e

v e r y y

e a r , an

d

o d a t e ,  

have

e s u

l t e d

i

n

a o s s  

of

v e r $80

0

i l l i o

n

d o l l a r

s .

(Septe

mber e

t t e r . The

 Sep

tembe

r 

L e t t e r

d i d

n o t  

i d e

n t i f y  a

 

p e c i f i c

 

f

r a u d u l

e n t

swa

p

a g

r e e m e n

t , i d  n o t

 

e x p

l a i n

how

h e

swap

 

a g r

e e m e n t

s

wer

e 

f r a u d u

l e n t ,

d i d n o t

i d e n t

i f y

a

m

a t e r i a l

 m i s r e

p r e s e n t

a t i o n

o

r

o m i s s i

o n of 

a c t r e l a

t e d t o  a

ny

a

r t i c u l a

r s wa

p a g r e e

m e n t ,

and

d

i d

n

o t

p r o v i d

e a

ny b a

s i s ,

o r

 u n

d e r l y i n

g f

a c t s ,

f o r

 t h e

a l l e g e d

 $800

i l

l i o n  

l o s s .  

R a

t h e r t h a

n  

p o i n t i n

g

t o

 

s p

e c i f i c  

f a

c t s

r e

l a t i n g

t o

 

t h

e

C i t y ' s

 s

wap

a g r

e e m e n t s

, h

e

Septem

ber

L e t t e

r

r e f e

r e n c e d

p u r p o

r t e d

e f f o

r t s

by t h e

r c i t i e

s t o g e

t

o u t

 

of

u c h

b o r r

o w i n g

d e a

l s

and

t o

 

r e v i e w

[

]

t h e

i r ]

o p

t i o n s

f o r

r e c o u p

i n g l o

s s e s

on

t h e i r ]

i n t e r

e s t r a t

e  s w a p s

.   Th

e

Sep

tember

 L

e t t e r a l s o r e f

e r e n c e d

 a

 

e c e

n t

Ameri

can

A r b i

t r a t i o n

 

A s s o c i

a t i o n

awar

d

e n t e

r e d

i

n

f a v o

r o

f ald

win County

 Se

wer  e r v i c

e , L

L

B C S S )

,

r i v a

t e

sewe

r 

t

i l i t y

h e

a d q u a r t

e r e d  

i n

Summer

dale,

 Alaba

ma, a

s e d

on

 

a b a n k

' s

s p e

c i f i c

m i s r

e p r e s e n

t a t i o n

 t h a t t h e

r a t e

t i e d

t o

 B

C S S ' s

v a r i a

b l e r a

t e dem

and 

n

o t e

was a

L

IBOR

a

t e

w

hen 

t

i

n

f a c t ,

w

as

o

t , and

 

h

e

b

a n k ' s

f a i

l u r e

t

o

1 1

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 14/29

d i s c l o s e b a s i s

r i s k .

The

September e t t e r r e a s o n e d t h a t b e c a u s e

t h e CSS

i l l

r e c o u p i t s

l o s s e s , t h e C i t y h a s a

chance

o r e c o u p

[ i t s u n i d e n t i f i e d ]

swap o s s e s

t o o .

The s s e r t i o n s

of

h e

September

e t t e r

c l o s e l y

r e s e m b l e d

t h o s e

of

l o g

p o s t

w r i t t e n

b y

S a q i b

B h a t t i

of

h e

R o o s e v e l t

I n s t i t u t e . I n t h e b l o g ,

Mr. h a t t i

a s s e r t s

t h a t [ a ] s

a

u l e , b a n k e r s

h i g h l i g h t e d t h e

u p s i d e and

minimized

h e p o t e n t i a l downside n

p i t c h i n g

t h e s e

d e a l s . T h i s

was

n

v i o l a t i o n

ofMSR

ule G-17. The b l o g

a r g u e s t h a t c i t i e s can

p o t e n t i a l l y

win back

h u n d r e d s

of

i l l i o n s

of

o l l a r s from Wall

S t r e e t ,

and s u g g e s t s t h a t t h e y

p u r s u e

l e g a l

c l a i m s by

i l i n g

f o r

a r b i t r a t i o n w i t h FINRA. O t h e r t h a n

t h e

a s s e r t i o n t h a t banks a c t e d as a

u l e ,

t h e

b l o g p r o v i d e d

n o

a c t s s p e c i f i c

t o

t h e C i t y ' s

swap g r e e m e n t s o r swap

o u n t e r p a r t i e s ,

d i d

n o t

i d e n t i f y

any

p a r t i c u l a r m i s r e p r e s e n t a t i o n o r o m i s s i o n , and

d i d

n o t a d d r e s s

t h e f a c t

t h a t

t h e C i t y had

acknowledged p u b l i c l y

i t s

u n d e r s t a n d i n g

of

h e r i s k s

f o r

more

h a n

1 0 y e a r s .

On

eptember 1 8 , 2014, h e C i t y r e q u e s t e d

from

h e

u n i o n l e a d e r s

f a c t s

s u p p o r t i n g

t h e i r

a l l e g a t i o n s

of r a u d

and

o s s e s r e l a t e d

t o t h e C i t y ' s swap

a g r e e m e n t s . The C i t y h a s

n o t r e c e i v e d

a

e s p o n s e

t o

t h i s

r e q u e s t .

I n s t e a d ,

on

O c t o b e r

9,

014,

h e

u n i o n l e a d e r s s e n t t h e C i t y a

second

l e t t e r

(October e t t e r ) a g a i n u r g i n g t h e C i t y t o f i l e

an r b i t r a t i o n c l a i m

under

MS RB's Rule

G - 1 7

t o c h a l l e n g e t h e f i n a n c i a l i nd u s t r y ' s q u e s t i o n a b l e p r a c t i c e s t h a t

were p e r v a s i v e

w i t h m u n i c i p a l

swap e a l s — i n c l u d i n g

t h e

w i d e s p r e a d f a i l u r e

t o

a d e q u a t e l y

d i s c l o s e

r i s k s —an d h a t have

r e s u l t e d

i n

s t a t e s , i t i e s and s c h o o l d i s t r i c t s a c r o s s

t h e

c o u n t r y g e t t i n g

s t u c k

i n

t h e s e

g r o s s l y

u n f a i r

a r r a n g e m e n t s .

The

O c t o b e r L e t t e r , l i k e

t h e

September

e t t e r , p r o v i d e s

n o

a c t s s p e c i f i c

t o t h e C i t y ' s swap

a g r e e m e n t s ,

h e

C i t y ' s swap

o u n t e r p a r t i e s ,

o r t h e a l l e g e d

f a i l u r e t o

a d e q u a t e l y

d i s c l o s e

r i s k s a s s o c i a t e d

w i t h

t h e C i t y ' s

swap

a g r e e m e n t s . The

O c t o b e r l e t t e r

however, i s c l o s e d

t h e

u n i o n l e a d e r s ' p u r p o r t e d

l e g a l

b a s i s

f o r

f i l i n g

a

r a u d

o r u n f a i r

d e a l i n g

c l a i m

a g a i n s t t h e C i t y ' s

swap

o u n t e r p a r t i e s :

a

m e m o r a n d u m from h e

law i r m G r a i s

E l l s w o r t h LLP o S a q i b

B h a t t i

t i t l e d

P o t e n t i a l Claims by u b l i c

I s s u e r s

of y n t h e t i c

Fixed

- R a t e

Debt,

a t e d

O c t o b e r

9,

014. As

i s c u s s e d

i n

f u r t h e r d e t a i l

below,

h e

G r a i s

&Ellsworth

LLP

m e m o r a n d u m i k e w i s e p r o v i d e s n o a c t s

o r a l l e g a t i o n s s p e c i f i c t o

t h e

C i t y , t h e C i t y ' s

swap

a g r e e m e n t s , o r

t h e C i t y ' s

c o u n t e r p a r t i e s .

To

a t e , t h e C i t y

h a s

r e c e i v e d

n o

a d d i t i o n a l

i n f o r m a t i o n from

h e

u n i o n s r e l a t i n g

t o

t h e i r a l l e g a t i o n s

of r a u d

o r l o s s e s r e l a t e d t o

t h e C i t y ' s

i n t e r e s t

r a t e

swaps.

1 2

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 15/29

I I I .

THE

NVESTIG TION

A.

Scope

of

Review

The i t y r e t a i n e d

D r i n k e r

B i d d l e

and

Kopecky

Schumacher

o

c o n d u c t

an n d e p e n d e n t

a n a l y s i s

of

o t e n t i a l

c h a l l e n g e s

t o

t h e

C i t y s

e x i s t i n g

i n t e r e s t r a t e

swap

g r e e m e n t s

b a s e d

on

f r a u d ,

m i s r e p r e s e n t a t i o n s ,

o m i s s i o n s , o r u n f a i r

d e a l i n g t h r o u g h

a r b i t r a t i o n

o r t h e

c o u r t s . The

r e v i e w a l s o a n a l y z e d t h e a l l e g a ti o n s s e t

f o r t h

i n t h e

September

1 5 ,

2014 and

O c t o b e r 9, 014

l t t r s and

h e G r a i s

Ellsworth Memorandum , o d e t e r m i n e

w h e t h e r t h e

C i t y

h a s

any v i a b l e

c l a i m

t h a t

t h e

swap

c o u n t e r p a r t i e s

d e f r a u d e d

o r

f a i l e d

t o

d e a l

f a i r l y w i t h t h e C i t y .

B. Documents

Reviewed

We e q u e s t e d , r e c e i v e d , and

e v i e w e d

a p p r o x i m a t e l y

50

boxes

of

a r d - c o p y

documents

and

t h o u s a n d s of

a g e s

of

l e c t r o n i c

documents e l a t i n g t o

t h e C i t y s swap

r a n s a c t i o n s .

We

r e q u e s t e d

i n f o r m a t i o n

from

m u l t i p l e

s o u r c e s ,

i n c l u d i n g t h e

C i t y ,

and

t h e c u r r e n t

and

former

employees

d e n t i f i e d

b e l o w .

I n

a d d i t i o n

t o

t h e

m a t e r i a l s

w e

p e c i f i c a l l y

r e q u e s t e d ,

w e

e n c o u r a g e d t h e

C i t y

and

w i t n e s s e s t o

f u r n i s h any

t h e r documents r

i n f o r m a t i o n t h a t might be

r e l e v a n t t o t h i s r e v i e w .

A l l

of

u r r e q u e s t s

f o r i n f o r m a t i o n

were

m e t . We

l s o

r e v i e w e d

t h e

h u n d r e d s

of

ocuments e l a t i n g

t o t h e C i t y s bond

o f f e r i n g s

and swap

g r e e m e n t s a v a i l a b l e

t h r o u g h

t h e C i t y

of

h i c a g o s

w e b s i t e

and

h e

M u n i c i p a l S e c u r i t i e s

Rulemaking

B o a r d s

w e b s i t e .

Our

e v i e w i n c l ud e d t h e

documents

e l a t i n g

t o t h e

C i t y s

e x i s t i n g swap

r a n s a c t i o n s :

t h e

I n t e r e s t R a t e S w a p

o n f i r m a t i o n s ,

Amendments o I n t e r e s t R a t e

S w a p

o n f i r m a t i o n s ,

ISDA

Master

Agreements,

c h e d u l e s

t o t h e

M a s t e r

Agreements,

nd

C r e d i t

S u p p o r t

Annexes.We l s o

r e v i e w e d , t o t h e

e x t e n t t h e s e m a t e r i a l s

e x i s t e d ,

communications

between h e C i t y

and t s

swap

c o u n t e r p a r t i e s .

C.

Witness n t e r v i e w s

I n a d d i t i o n

t o t h e

a n a l y s i s of e c o r d s

d e s c r i b e d

above, w e

n t e r v i e w e d

n i n e

i n d i v i d u a l s .

These n t e r v i e w s a r e

summarized

b r i e f l y b e l o w . The

p u r p o s e of

h e s e

i n t e r v i e w s

i n c l u d e d

i d e n t i f y i n g

t h e

key

n d i v i d u a l s i n v o l v e d

i n t h e

n e g o t i a t i o n , e x e c u t i o n , and

management

of h e

C i t y s

i n t e r e s t r a t e

swap

g r e e m e n t s ,

u n d e r s t a n d i n g

t h e

C i t y s

p o l i c i e s

and p r o c e d u r e s

f o r u s i n g

i n t e r e s t r a t e swaps,

n d e r s t a n d i n g

t h e

r e p r e s e n t a t i o n s

m ade o t h e C i t y

b y t s

c o u n t e r p a r t i e s (and

p o t e n t i a l c o u n t e r p a r t i e s )

p r i o r t o and

o l l o w i n g t h e e x e c u t i o n

of

h e

swap

g r e e m e n t s ,

d e t e r m i n i n g

t h e C i t y s

u n d e r s t a n d i n g of

t s

swap

g r e e m e n t s and

h e

v a r i o u s r i s k s

and

b e n e f i t s

a s s o c i a t e d

w i t h

t h e s e

a g r e e m e n t s ,

u n d e r s t a n d i n g t h e C i t y s

e x p e r i e n c e and

x p e r t i s e

i n

e n t e r i n g

i n t o

complex

i n a n c i a l

a r r a n g e m e n t s , d e t e r m i n i n g t h e

C i t y s

d e b t

m a n a g e m e n t

o a l s

and

o b j e c t i v e s , and

i d e n t i f y i n g

any

m i s r e p r e s e n t a t i o n s o r

o m i s s i o n s of a c t

r e l a t e d t o

t h e

C i t y s swap

a g r e e m e n t s .

I f t h e C i t y

were

o

f i l

a

l a i m

a g a i n s t one

o r more

of

t s swap

c o u n t e r p a r t i e s ,

anum ber

of

h e s e

i n d i v i d u a l s

l i k e l y

would be

a l l e d

a s

w i t n e s s e s .

Each

n d i v i d u a l

d i s p l a y e d a

i g h l e v e l

of nowledge

and

u n d e r s t a n d i n g

of

h e swap

r a n s a c t i o n s .

None

e l i e v e t h a t

t h e C i t y was

d e f r a u d e d .

I n a d d i t i o n , t h e swap

r a n s a c t i o n

documents h e m s e l v e s

acknowledge h e l i m i t e d ,

13

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 16/29

non- f i d u c i a r y

r o l e of h e

banks t h e c o u n t e r p a r t i e s ) , and

make a f f i r m a t i v e

r e p r e s e n t a t i o n s

r e g a r d i n g t h e

C i t y s

u n d e r s t a n d i n g of h e t r a n s a c t i o n s .

As we i s c u s s

i n

g r e a t e r

d e t a i l

below

i n

t h e

A n a l y s i s

S e c t i o n ,

t h e

knowledge,

x p e r i e n c e ,

s o p h i s t i c a t i o n

and

a n t i c i p a t e d

t e s t i m o n y of

c u r r e n t and

former

members

of

h e C i t y s

d e b t

management

team,

l o n g

w i t h t h e

w r i t t e n

r e p r e s e n t a t i o n s made

n

t h e

swap

agreements and t h e

r i s k d i s c l o s u r e s

i n

t h e CAFRs

nd

2006

Swap

o l i c y ,

would

make

r o v i n g or

even

a l l e g Y n g

i n

good

a i t h )

a

r a u d u l e n t

m i s r e p r e s e n t a t i o n

o r omission

c l a i m e x t r e m e l y

c h a l l e n g i n g .

L o i s

S c o t t

Chief

i n a n c i a l O f f i c e r )

Lois

S c o t t

i s t h e

Chief i n a n c i a l O f f i c e r f o r t h e C i t y .

I n t h a t

r o l e , she

s

r e s p o n s i b l e

f o r

t h e l o n g - t e r m

f i n a n c i a l s t r a t e g y

f o r

t h e C i t y ,

i n c l u d i n g d e b t

management,

n v e s t o r o u t r e a c h and

d i s c l o s u r e ,

i n t e r e s t

r a t e

r i s k management, nd

a n a l y s i s of e n s i o n l i b i l i t y

and

funding s s u e s .

Before o i n i n g t h e C i t y

i n

2011,

Ms.

c o t t

w a s

o - f o u n d e r

and

P r e s i d e n t

of

h e

f i r m

S c o t t

B a l i c e

S t r a t e g i e s ,

LLC

h ic h

became

one

of h e

l a r g e s t

p u b l i c

f i n a n c e

a d v i s o r y

f i r m s

i n t h e c o u n t r y

and

s p e c i a l i z e d

i n

p u b l i c

f i n a n c e . Ms. c o t t

e a r n e d

h e r b a c h e l o r s

d e g r e e

and

M.B.A. t

C o r n e l l

U n i v e r s i t y .

Ms. c o t t

c u r r e n t l y o v e r s e e s t h e i s s u a n c e

of

h e

C i t y s

bonds

and

n o t e s

and

o v e r s e e s

t h e

C i t y s d e b t management

team.

Ms.

c o t t

e x p l a i n e d t h a t one

of e r

primary

r e s p o n s i b i l i t i e s

i s t o

r e g u l a r l y and

p r o a c t i v e l y

monitor t h e

C i t y s

o u t s t a n d i n g

bonds and swap

d e a l s

f o r any

o p p o r t u n i t y t o

produce s a v i n g s and r e d u c e

r i s k s . To

h a t

end, Ms.

c o t t

and

h e r

s t a f f

c o n s u l t

r e g u l a r l y

w i t h f i n a n c i a l

a d v i s o r s

t o

manage

h e

C i t y s

d e b t

p o r t f o l i o . That

ongoing r eview

has

r e s u l t e d

i n t h e C i t y e n t e r i n g

i n t o f i v e

b a s i s-swap

d e a l s i n

which

t h e

C i t y

r e n e g o t i a t e d

t h e

terms

of t s

p r e - e x i s t i n g

s w ap a g r e e m e n t s .

The

C i t y

a l s o

has

1) e r m i n a t e d

two

swaps;

2)

r e n e g o t i a t e d t h e terms

of

e r t a i n

of

t s

s w ap

agreements

t o

lower

h e c r e d i t

r a t i n g

l e v e l s

t h a t

c o u l d

t r i g g e r t e r m i n a t i o n payments

o

c o u n t e r a c t t h e C i t y s

r e c e n t

c r e d i t

downgrades, and

3)

r e n e g o t i a t e d

t h e

m a t u r i t y of

e r t a i n of h e

C i t y s

s w ap

agreements

o

r e d u c e i t s

c o u n t e r p a r t y

e x p o s u r e .

According

t o

Ms.

c o t t ,

t h e C i t y

remains committed t o

m i t i g a t i n g t h e r i s k s

a s s o c i a t e d

w i t h i t s

sw aps

and

g e n e r a t i n g

c o s t s

s a v i n g s where

p o s s i b l e ) on h o s e

swaps.

Ms. c o t t

b e l i e v e s t h a t t h e C i t y had

i n

t h e p a s t ,

and

c u r r e n t l y has

n p l a c e ,

a

o p h i s t i c a t e d

and

e x p e r i e n c e d

f i n a n c i a l

and d e b t management

team t h a t

u n d e r s t a n d s

t h e

r i s k s a s s o c i a t e d

w i t h

swaps,

n c l u d i n g t h e

c r e d i t

r a t i n g ,

i n t e r e s t ,

t e r m i n a t i o n ,

and

c o u n t e r p a r t y

r i s k s . Ms.

c o t t wa s

n o t

aware

of any m i s r e p r e s e n t a t i o n s

o r

o m i s s i o n s

of

a t e r i a l

f a c t

r e l a t e d

t o

t h e

C i t y s s w a p

a g r e e m e n t s . She b e l i e v e d

t h a t

t h e C i t y w a s

w e l l informed about

h e r i s k

f a c t o r s a s s o c i a t e d

w i t h

t h e

swaps

r e f e r e n c i n g

t h e

C i t y s 2006 Swap

o l i c y and

t h e

r i s k

d i s c l o s u r e s i n i t s

CAFRs).

2 .

Jeremy

F i n e

De~ut~ptroller)

Jeremy

F i n e j o i n e d t h e

C i t y i n

2003

s

an a s s i s t a n t

c o m p t r o l l e r

i n

t h e

d e b t management

group

and

became

Deputy

C o m p t r o l l e r i n

2007.

Mr.

i n e

c u r r e n t l y

r e p o r t s

d i r e c t l y t o

Lois S c o t t ,

t h e C i t y s

CFO

nd

C o m p t r o l l e r Dan

Widawsky.

P r i o r

t o

j o i n i n g t h e

C i t y , Mr. i n e

worked n

p u b l i c f i n a n c e ,

and

c o n c e n t r a t e d on

m u n i c i p a l

u n d e r w r i t i n g a t

L a S a l l e

Bank.

Mr. Fine e a r n e d

an

u n d e r g r a d u a t e d e g r e e

from

t h e

U n i t e d

S t a t e s

M i l i t a r y

Academy West

o i n t )

and

a

Masters n

B u s i n e s s

A d m i n i s t r a t i o n Finance)

rom

t h e

U n i v e r s i t y

of

otre

Dame.

14

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 17/29

A c c o r d i n g t o Mr.

i n e , h e C i t y

e n t e r e d i n t o swap a g r e e m e n t s

t h r o u g h

two methods:

1)

c o m p e t i t i v e

b i d a g r e e m e n t s

i n

which

h e C i t y

s o l i c i t e d s i m u l t a n e o u s

b i d s from

s e v e r a l f i n a n c i a l

i n s t i t u t i o n s a t one

i m e ) ,

and

2) e g o t i a t e d

a g r e e m e n t s . T h e m a j o r i t y

of

h e

C i t y ' s swaps were

p r o c u r e d t h r o u g h

a o m p e t i t i v e b i d p r o c e s s .

I f h e

C i t y e l e c t e d t o

u s e a

n e g o t i a t e d

p r o c u r e m e n t p r o c e s s ,

h e C i t y o b t a i n e d a t h i r d - p a r t y

o p i n i o n r e g a rd i n g t h e v a l u e

of h e swap

p r i c e d

on a

n e g o t i a t e d

b a s i s .

Mr.

i n e e x p l a i n e d

t h a t

u n d e r w r i t e r s

on

h e u n d e r l y i n g

bond

d e a l s

t y p i c a l l y would c o n t a c t t h e C i t y a b o u t

e n t e r i n g i n t o swap a g r e e m e n t s . T h e C i t y

g e n e r a l l y

r e t a i n e d

a

i n a n c i a l a d v i s o r t o

a d v i s e

on h e

u n d e r l y i n g bond o f f e r i n g and o

a s s e s s

t h e

swap

i d s

o r

n e g o t i a t e

t h e t e r m s

of

h e swap agreement

on

e h a l f

of h e

C i t y , and

i s s u e an

o p i n i o n on

h e

f a i r n e s s

of

h e p r o p o s e d swap

a g r e e m e n t .

Mr.

i n e

b e l i e v e s t h e

C i t y ' s

d e b t

management

team

was

e l l

i n f o r m e d a b o u t

t h e

r i s k

f a c t o r s a s s o c i a t e d

w i t h

swap a g r e e m e n t s .

B e f o r e

e n t e r i n g

i n t o

a

swap

a g r e e m e n t , h e C i t y

a n a l y z e d

t h e

t e r m s of

h e p r o p o s e d

a g r e e m e n t , h e

h i s t o r i c a l p e r f o r m a n c e

ofLIBOR

nd

SIFM

and

o t h e r i n t e r e s t r a t e

i n d e x e s ) , h e impact

of h e swap a g r e e m e n t s

on

h e

a v a i l a b i l i t y and c o s t

of

i q u i d i t y s u p p o r t

f o r o t h e r

C i t y

v a r i a b l e

r a t e p r o g r a m s , h e

c a l l

o p t i on v a l u e , h e

c o u n t e r p a r t y

r i s k ,

t h e

C i t y ' s

e x p o s u r e

t o

v a r i a b l e r a t e s

of

n t e r e s t ,

and

o t h e r

f a c t o r s

r e l a t i n g

t o

t h e

C i t y ' s

d e b t

p o r t f o l i o .

Mr.

i n e e x p l a i n e d t h a t

t h e

C i t y

h a s d i s cl o s e d p u b l i c l y

i n

i t s

C FR s i n c e

2004) nd

i n

i t s

2006 Swap o l i c y t h e

r i s k f a c t o r s t h a t t c o n s i d e r e d and h e

m eans

u s e d

t o m i t i g a t e t h o s e

r i s k s b e f o r e e n t e r i n g i n t o a swap

r a n s a c t i o n .

Mr.

i n e c o u l d

n o t

r e c a l l any i n s t a n c e i n which

a

swap

c o u n t e r p a r t y

o r

t h e C i t y ' s swap

a d v i s o r

f a i l e d

t o

d i s c l o s e

a

m a t e r i a l

f a c t ,

m i s r e p r e s e n t e d a

m a t e r i a l f a c t ,

a i l e d

t o

e x p l a i n

t h e

p r o d u c t o r

t h e

t e r m s

of h e

swap,

r w i t h h e l d any

n f o r m a t i o n re q u e s t e d by h e C i t y

o r

t h e

C i t y ' s f i n a n c i a l a d v i s o r s ) . While Mr. i n e

b e l i e v e s

t h a t

c o u n t e r p a r t y

d i s c l o s u r e s

r e l a t i n g

t o

t h e

swap a g r e e m e n t s have i n c r e a s e d

o v e r

t h e y e a r s , h e does n o t

b e l i e v e o r have

r e a s o n t o

b e l i e v e

t h a t

any

i n f o r m a t i o n

o r

r i s k

f a c t o r s were

m i s s t a t e d o r w i t h h e l d

from h e C i t y b e f o r e

i t

e n t e r e d

i n t o

t h e

swap

a g r e e m e n t s . Nor was Mr. i n e aware

of ny r a u d u l e n t

o r r e c k l e s s c o n d u c t

by

h e

swap c o u n t e r p a r t i e s .

Mr.

i n e

b e l i e v e s

t h a t

t h e

C i t y ' s

swaps

e n e f i t t e d

t a x p a y e r s and

t h a t

t h e

C i t y

o b t a i n e d

t h e

b e s t d e a l s

t

c o u l d b a s e d on

h e

m a r k e t

c o n d i t i o n s

e x i s t i n g a t t h e t i m e

t

e n t e r e d

i n t o

t h e

swap a g r e e m e n t s .

Michele

C u r r a n A s s i s t a n t

C o m p t r o l l e r )

Michele

C u r r a n became an A s s i s t a n t

C o m p t r o l l e r i n 2007.

P r i o r t o

t h a t , s h e

was

employed by h e C i t y

a s

a

e s e a r c h

a n a l y s t

s t a r t i n g

i n 2000.

Ms.

u r r a n

e a r n e d an u n d e r g r a d u a t e

d e g r e e

B.S.

i n a n c e )

from

t h e

U n i v e r s i t y

of

l l i n o i s a t

Chicago

and

a

M a s t e r s

i n

B u s i n e s s

A d m i n i s t r a t i o n

from DePaul n i v e r s i t y

( F i n a n c e ) . Ms.

u r r a n c u r r e n t l y

r e p o r t s

d i r e c t l y t o

Deputy

C o m p t r o l l e r Jeremy F i n e and

CFO

o i s

S c o t t .

Ms. u r r a n h a s

been i n v o l v e d i n t h e C i t y ' s

swap a g r e e m e n t s s i n c e

2003,

nd

h a s p l a y e d

an a c t i v e r o l e

i n t h e

p r o c u r e m e n t and

a d m i n i s t r a t i o n

of

h e

a g r e e m e n t s

s i n c e 2007. Ms.

u r r a n

e x p l a i n e d t h a t t h e C i t y

was e l l i n f o r m e d a b o u t

t h e

r i s k s a s s o c i a t e d

w i t h swap

a g r e e m e n t s .

Th e

C i t y worked

w i t h

s o p h i s t i c a t e d

f i n a n c i a l a d v i s o r s w h o

p e c i a l i z e d

i n

swap

d e a l s .

These

a d v i s o r s

would

a n a l y z e swap e r m s

s h e e t s , a t t e n d

m e e t i n g s w i t h

f i n a n c i a l s e r v i c e

companies h a t

p r o p o s e d

f i n a n c i n g

s t r u c t u r e s

i n c l u d i n g

s w a p s ) , n e g o t i a t e t h e

t e r m s

of h e swap

a g r e e m e n t s ,

i d e n t i f y and communicate

r i s k

f a c t o r s

t o

t h e

C i t y , and i s s u e

o p i n i o n s

r e g a r d i ng t h e

f a i r n e s s

of

h e

15

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 18/29

p r o p o

s e d t r a n

s a c t i o n s .  

The i t y

a l s o

u n d e

r s t o o d

t h e imp

act 

h a t

v a r i

o u s

r i s

k f a c t o

r s

c o u l

d

have

on h e

 

p e r f

o r m a n c e

of h e

swa p a g r e e m

e n t s .

T h i s i

n c l u d e d t h e

 r i s k

 

t

h a t t h e i

n t e r e s t

d

ue u

n d e r a

v a r i a b l

e

-

r a t e agreeme

nt o u l d

f l

l

be

low

h

e

s y n t h e t i

c  f

i x e d

r a t e p aym

ent a i d

t o

t h

e  b

ank

c o u n t

e r p a r t i e s

.

Ms.

u r r a n

b e l i e v e s

t h a t

t h e  C i t y  

g o t

t h e

b e s t

d e a l

t h a t

t  

c o u l d b a s e d

on 

market

c o n d

i t i o n s

a t

t h e

t i m e

 

t

e n t e r e d  

i n t o

t h e

 sw

a p

a g r

e e m e n t s .

Ms.

u

r r a n

wa s

n o t

awa

re

of

ny

f

r a u d u l e n t

 c o n d u c t

, m a t e r i

a l m i s

r e p r e s e n t

a t i o n s of

a c t ,

o r  

m a t e r

i a l o m i s s

i o n s  

o

f

a c t

r e l a t e d

 

t

o

t h e

 

C i

t y s  

swa

ps.

4 . B r i a n  

Ki

ng f o r

m e r

De

puty

C o m p t r

o l l e r )

B r i

a n

King s e

r v e d a s  Deput

y

C

o m p t r o l l e

r  from

 

1999

o

2006.

C

u r r e n t l y ,

 Mr. King

s

a

Managi

ng

D i r e c t o

r

of

  u b l i c

F i n a n c e

 a t

Mesi r o

w

i n

a n c i a l .

Mr. 

K

ing ha s 

o v e

r

2

0

e a r s

of

p u b l

i c  

f i n a

n c e

e x p e r i

e n c e .

Mr.

Ki

ng

e a r

n e d h i s

 

b a c h

e l o r s d e g

r e e

from Knox

 

C o l

l e g e

and a

M a s t e r

s

o

f

Managem e

nt

fro

m N o r t

h w e s t e r n

 U n i v e r s i

t y .

 s

Dep uty C o m p t r

o l l e r ,

Mr.

 

King

 work

ed on

l l

of

h e C i t y

s

swa p a g r e e

m e n t s

from

1

999

h r o

u g h 20

06.

Mr .

K

ing

e x p

l a i n e d

t h a t

t

h e m a j o r i

t y

o

f

h e

C i t y   s swaps

were

p r o c u r

e d

t h r o u g

h

c o m p

e t i t i v e b i d

p r o c e s

s e s . For

h o s e  swaps r o

c u r e d

t

h r o u g h n

e g o t i a t i o n

, Mr

.

Ki

ng

b e l i

e v e d t h a t t h e c o

u n t e r p a r t i

e s d

e a l t

w i t h

t h e C i

t y

i n

g

ood

a i t h .

Mr. King

 

e

x p l a i n e d

 t h a t swa p

c o u n t e r p

a r t i e s

ha d

 

an

 

n c e

n t i v e  t o d e a l

w i t h t h e

C i t y

i n

good

a

i t h

b

e c a u s e t h e

banks

wanted o

conduc

t 

u t u r e

 b u s i n e s

s

w i t h  

t h e C

i t y .

A c c o r d i

n g

t o

 

Mr. Ki

ng, h e  C i

t y would n o

t do b u s i n e s s

w i t h a 

o u n t e r p a r

t y

i t b e l

i e v e d t o be

 

i

s h o n e s t .

Mr.

 King b e l i e v e d

 

t h a t

t h e

C i t y

 

was

w e l l  i n f o r m

e d

a

b o u t t h

e

r i

s k s a s s o c i a

t e d

w i t h

 

swap

a g

r e e m e n t s .

  m

ong t s e

mployees

 and

i n a n c

i a l

a d v i s

o r s ,

t

h e

C i t y

f r e q u e

n t l y

d i

s c u s s e d

c o u n t e r p

a r t y

r i s k s ,

c r e d

i t r i

s k s , b a s i s

 r i s k s ,

t a x

r

i s k s ,

and

t e r m

i n a t i o n

r

i s k s .

Mr .

 

Ki

ng b e l i e

v e d

t h a t t h e C i t y

 

g o t

t h e

b e s t

d

e a l t c o u

l d b a s

e d on

marke

t o

n d i t i o n s

a t

t

h e

t i m e  

t

e n t e r e d

 i n t o

t h

e

swa p a g r e e m

e n t s .

Mr.

Ki

ng

wa s  o t

awar e

 

of n

y

r

a u d u l e n t

c o n d u c t ,

m a t e r i a

l

m i s r

e p r e s e n t a

t i o n s of 

a c t ,

o r

m a t e r i

a l o m i s s i o

n s

of

 

a c t r e l a t e d

 t o

t h e C i t

y s

s

waps.

5 .

D a n a

 

Leve

nson fo

rmer CFO 

D a n

a L

ev enson

 

s e

r v e d

a s

 

Chie

f

i n a n c

i a l O f f i c e r

 

fr

om

a

p p r o x i m a

t e l y S

eptember

 

2 0

0 4  o

Ma r ch

2007. 

Mr.

L

evenson

g r a d u

a t e d from

Brown

 

n i v e r s i

t y i

n

1979 

and o b t a i n e d

 

a

M a s t e r

s

i

n

B u s

i n e s s

A d m

i n i s t r a t i

o n fr om

 

Ne

w

or k

  n i v e r s

i t y .

P r i o r

t o

j o i

n i n g t

h e C i t

y ,

Mr.

ev

enson

wo

rked

i n i n v

e s t m e n t

b a n k

i n g f o r more

 

h a

n  

2 5

y e

a r s ,

p e r f o r

m i n g  n

umerous

 

o r p o r a

t e

an

d

m u n i

c i p a l d e b

t

f i n

a n c i n g s

and

n t

e r e s t

r

a t e

swaps.

Mr .

 

ev e

nson

b e l i e

v e d t h a t

t h e

d e b t

 m a nagem

ent

team

a

t  

t h e C

i t y

d u r i n

g h i s

t

e n u r e

wa s

b o t h

 

e

x p e r i e n c e

d

and k n o w l

e d g e a b l e

.

F u r t h e r

,

b e c a u s e

of

i s

own x p

e r i e n c e ,

 he wa s

 

n v o l v e d

i n

t h e

C

i t y   s

bon

d

i s

s u a n c e s ,  

i

n c l u d i n g

v a r i a b l e

 r

a t e

de m a nd o b l i g a t

i o n s

and n t e

r e s t

r a t e s

wa ps.

He

nd t h e d e b t

 m a n a ge

m ent team

 

u

n d e r s t o o d

 t h e

r i

s k s

o

f

uch

r a n s a

c t i o n s . I n d e e d ,

 he

p

a r t i c i p a t e

d i n i d e n t i f y

i n g

and r a f t

i n g t h e r i s k s

a s s

o c i a t e d w i t h

t h e

swap

 

r a n s a c t i o n

s

f o r

 

t h e

C i t y s

 C FR

s nd h e C i t y

  s 2 0 0 6

n

t e r e s t

R

a t e S wa p

o l i c y .

 

Mr .

Leven

son n o t e d

t h a t

 a t t h e

t

i m e

of

h e s

e t r a n s a

c t i o n s ,

t

h e C i t y

  s c r e

d i t

r

a t i n g w

a s t

a

 2 0

- y e a r

h i g h , b u t

f u r t h e

r  

n

o t e d

t h a t he

16

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 19/29

f u l

l y  

u n

d e r s

t o o d

t h a t down

grad

es

n  t h e

 

C i

t y   s

c

r e d i

t r a t

i n g s

c

o u l d

imp

act  h e

 

c o s t of

a p i

t a l .

Wh

ile he d

i d  

n

o t e

x p e c

t

t h a t

r i s k t o

 

be 

e a l i z

e d ,  

he

u n

d e r s

t o o d

 

t h i s

r i s k

 

a t  

t h e  

t i

m e  

t h

e  C i

t y

e n t

e r e d

 

i n t

o

t h

e  

sw a

p

a g r e e

m e n t

s .

Mr

. Lev

enso

n

d

i d n

o t  b e

l i e v

e t

h a t any

 

a c

t u a l o r

p

o t e n t

i a l

c o u

n t e r p

a r t i e

s  

m

i s r e

p r e s e

n t e d

 t h

a t

r i s k

t

o  t h e

 C i t y ,

 a

nd h

e

b e

l i e v

e d

t h a

t t h e  

r e s t  

of

 

h e C

i t y

s d e b

t

m a

n age

m ent

 tea

m 

l i

k e w i

s e u n d

e r s t

o o d

t h

a t r i s k .

Du

ring

 M

r.

e v e

n s o n

  s

t e

n u r e ,

 

t h

e  C i

t y  u

s e d  

f i n a

n c i a l

 

a d v

i s o r s

 

and

 

s

wap  a d v

i s o r s

 

t o

c o n s

u l t on

 

t h

e  

t r a n

s a c t i

o n s .   e

 i d

 n o t

b e l i e

v e  

t h a

t  

a

ny of

h

e s e a d

v i s o r

s , bo

nd u n d e

r w r i t

e r s

o r

s

w ap

 

o u n t

e r p a

r t i e s

 down

play

ed o r  

t

r i e d  

t o

min

imiz

e t h e

r i s

k s of

h e

t r a n

s a c t i

o n s .  

M

r. L

even

son

wa s

 

n o t  awa

re

o

f a

ny 

m i s

r e p r e

s e n t

a t i o n

 

o r

o m

i s s i o

n m

a d e  

n

c

o n n e

c t i o n

 w i t h

 an

y of

h e

C i t y

s

s w

a p

r a n s a

c t i o n

s .

6 .  

T

a r i q

Malh

anc

e

f o r

m e r Com

ptro

ller

T a r

i q  

M

alha

nce t a r t

e d a t

 

t h e

C i t

y i n

 

1

981

a s

a

n

A

c c o u n

t a n t

 f o r t h

e C i t

y C o m

p t r o l

l e r

s

O f f i c

e .   I n

200

2 

he

be

c am e

 t h e

C o m p t

r o l l

e r

an

d

r

emai

ned

i n

t h i s

 

p o s

i t i o n

 u n t i

l D e c

e m b

e r  

2005

.

Mr.

Malhance 

h o l d s

a 

B a c h e l o r

of

c i e n c e

and

a

M a s t e r s  

i n  

B u s i n e s s  

A d m i n i s t r a t i o n  

from

R

o o s e

v e l t

 

U n

i v e r

s i t y ,

 

an

 M.A

. 

n

Ec

onom

ics

 

fr

om

t h e U n i

v e r s

i t y

o f l l

i n o i s

a t  

C h i

c a g o

, and

f

i n i s h

e d

t

h e

co

urse

work

 

f

o r

a 

Ph.D

.

n  

P u b l i

c P o l i

c y  A n a l

y s i s  a t

t

h e U n

i v e r

s i t y

of

 

l

l i n o i

s a t

C h

i c a g

o .

C u r r

e n t l y

,

Mr.

 

M

alha

nce

s e r v e

s  

i n

t h

e

P u

b l i c

 F

i n a n

c e

Grou

p  

a t

H i

l l i a r

d

Lyon

s.

I n

 

h i s

 

r o l e s

 

a

t

t h e  

C i t

y ,

Mr.

 

M

alha

nce

ove

rsaw

 

t

h e i

s s u a n

c e

o

f e b t ,

 i n c l

u d i n

g  d e b t

t r a n

s a c t

i o n s

w i

t h i n t e r

e s t

r a t e

swap

s. 

Mr

.

Ma

lhan

ce

c u

r r e n

t l y

h a s

  i t t l

r e c

o l l e c

t i o n  of

h e

d e t

a i l s

of

any

s p

e c i f i

c sw

ap

r a n s a

c t i o

n .

e

i d

r e

m em

be r

h e

t e r

m i n a t

i o n

of

an

 i n t e r

e s t

r a t e

 

s

w a p

 

w i

t h

Bea

r

S t e a r

n s

t h

a t r e

s u l t

e d i n a

r o

f i t

t o t h

e  

C i

t y .  

A c

c o r d

i n g

t o

Mr. 

Malh

ance

 

Bea

r

S

t e a r n

s p a

i d

t h e

C i t

y

a

 

s u b s t

a n t i a

l t e r m i

n a t i

o n

f e e

.

e

 

x p l a

i n e d

 h i

s  

kno

wled

ge

and

u n d e

r s t a

n d i n g

 o f 

wap

t r a n

s a c t

i o n s ,

 and

 

u

s e d t

h e  exa

mple

 of

 h e

B e a

r s S t e a r

n s

s wa

p

a

s  a

i t u a t

i o n

t h a

t

t

u r n e d

 a 

r o

f i t

f o r

t h e

C i t y .  

Mr. 

Malhance

s t a t e d t h a t  

t h e C i t

y c

o n s i s

t e n t

l y t r i e

d

t

o  k

eep 

t s c o s t

 

o

f

a

p i t a l

 

l

ow

an

d

u s e

d a 

c o m b

i n a t

i o n  o f

 

i x e d  

and

 v a r i a

b l e

r a t e d e b t

 i n a

n

f f o r

t t o d o

s o .

Th

e C i t y

 u s e d

 f i n

a n c i

a l

a

d v i s o

r s

and

 s wa

p

a d v i s

o r s

t o  

a s

s i s t i t

M

r.

Mal

hanc

e 

doe

s 

n o t

b e

l i e v e

 

t

h a t

a

 ban

k c o u

n t e r

p a r t y

 o r u

n d e r

w r i t e

r  

m i

s l e d

t h e

C i

t y ,

o r

 

t h a t

 

t h e

 C i

t y d i d

n o t

u n d e r

s t a n

d t h e

r i s k s

 

i

n v o l

v e d

i

n  

t h

e  

t r a n s

a c t i o

n s . e

 

s

n o

t  a

waxe

 

of

any

 m i

s r e p

r e s e n

t a t i

o n o r

o m i s

s i o n

 

m a

d e

n

c o

n n e c

t i o n

w i t h  

any

 of

h e

 C i t y

  s s

w a p

  r a n s a

c t i o n

s .

7 .

 

S t

e v e

L u

x

f

o r m e

r  

C

ompt

rol

ler

S t

e v e

L u x  

s e r v e

d t h e

C i t y

 i n  

v a

r i o u s

 p o s

i t i o

n s  

fr

om 1

996 

o  

2

011.

 

e

 

r a d u

a t e d  

fro

m 

t h

e

U n i v e

r s i t

y  

o f

 

l l i n

o i s

w i t h

 

a

B a c

h e l o

r of

c i e n c

e  

i n A

c c o u

n t i n

g i n 1

9 86 an

d i

s

a

 C e

r t i f i

e d

P u b

l i c

A c

c o u n

t a n t

. e

 

o i n e d

Tou che

Ross  where he

s p e n t

e a r s a s

an 

a u d i t o r ,  

w i t h  

t h e  C i t y

a s

a

c l i e n

t .

I

n

1996

  h

e

o i

n e d

t h e

 C i

t y  a

s

a

 d e

p u t y

 

c

o m p t

r o l l e

r f o

r

g

e n e r a

l

a

c c o u n

t i n g

.

e

b

e c a

m e

t

h e

C i t y

  s  C o m

p t r o

l l e r

 

i n  

2 00

6 and

  f t

 

t

h e  

C

i t y  

i n

 

J u l

y

20

11. e

 

a t e

r be c a

m e t h

e  

Ch

ief

F i

n a n c

i a l O

f f i c

e r

a t t h

e  Ch

ica

go

Park

 

D

i s t r i

c t ,

a

o s i t i

o n  

t h a t

 he

c o n t

i n u e

s t o  h o

l d .

I n h i s r

o l e a t  t

h e C

i t y ,

 Mr.

 L u

x

w

a s n v o

l v e d

 

w i

t h

r u n

n i n g

 

h i

s t o r i

c a l d a t a

 a

nd

c a l

c u l a t

i n g

f

i n a n c

i a l

p r o

j e c t i

o n s

t o b

e i n c

l u d e d

 i n  

t h

e  

o f f e

r i n g

 d

ocum

ents

 

o r

t h

e

C i

t y s b

ond 

i s s u a

n c e s

,

i n c

l u d i n

g  

v

a r i a b

l e

r a t e

 

d e

m a n d

 

o b l i

g a t i

o n s w i

t h

i

n t e r e

s t

r a t e

 

sw

aps.

  e

 

e

l i e v

e d

t h a t

 

t h e

 C i

t y

1 7

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 20/29

f u l l y

u n d e r s t o o d

t h e

r i s k s

i n v o l v e d

i n

t h e s e

t r a n s a c t i o n s ,

and

he

was

n v o l v e d

i n

p r e p a r i n g

d i s c l o s u r e s of h o s e r i s k s .

Mr.

Lux

c o n f i r m e d t h a t

a t t h e t i m e

of n t e r i n g i n t o

t h e

swap

a g r e e m e n t s ,

he

u n d e r s t o o d

t h e

r i s k t h a t

t h e

C i t y s

c r e d i t

r a t i n g s

c o u l d

be

downgraded l t h o u g h

he d i d

n o t

b e l i e v e t h a t

t h e

downgrades would

happen

t o

t h e

e x t e n t

t h a t

t h e y h a v e . He

b e l i e v e d

t h a t

t h e

u s e of

n t e r e s t

r a t e

swaps s a v e d t h e

C i t y

s u b s t a n t i a l c a p i t a l c o s t s a s

compared

t o

i s s u i n g

c o n v e n t i o n a l ,

i x e d - r a t e

d e b t

a t

t h e t i m e ,

t h a t

t h e

swaps

r e

s t i l l working

i n

t h e

C i t y s

f a v o r

t o d a y , and t h a t

t h e swaps m ay

l t i m a t e l y s a v e

a d d i t i o n a l t a x p a y e r f u n d s .

F i n a l l y ,

Mr. Lux s t a t e d

t h a t

t h e C i t y

r e t a i n e d s o p h i s t i c a t e d

c o u n s e l

and

a d v i s o r s

on

t h e

t r a n s a c t i o n s ,

and

he d i d

n o t

b e l i e v e t h e

swap

c o u n t e r p a r t i e s

o r b r o k e r- d e a l e r s and

a d v i s o r s m i s l e d t h e

C i t y .

Mr. Lux s

n o t

aware

of

any m i s r e p r e s e n t a t i o n s

o r o m i s s i o n s m a d e n

c o n n e c t i o n w i t h

any

of h e C i t y s

swap

t r a n s a c t i o n s .

8 .

P a u l Volpeformer CFO)

P a u l

Volpe

g r a d u a t e d

from N o r t h e a s t e r n

U n i v e r s i t y

w i t h

a

L i b e r a l A r t s

d e g r e e i n

1 9 9 1 .

A f t e r g r a d u a t i o n ,

he worked i n r e t a i l

b a n k i n g u n t i l

j o i n i n g t h e

F i n a n c e

D i v i s i o n of h e C i t y s

A v i a t i o n

Department

n

1 9 9 5 .

He

orked

on

m a ny

d e b t

- r e l a t e d

t r a n s a c t i o n s

w h i l e w i t h t h e

A v i a t i o n

D e p a r t m e n t , and mov e d

t o t h e C i t y s

budget

o f f i c e

i n June 2005

where he b e c a m e

t h e

C i t y s

b u d g e t

d i r e c t o r . I n

June 2007

Mr. Volpe

b e c a m e t h e

C i t y s

Chief

i n a n c i a l O f f i c e r,

and

s e r v e d a s CFO

n t i l

he

was

n a m e d

former Mayor D a l e y s

Chief of t a f f

n

D e c e m b er

2008. He

i s

n o w

t h e V i l l a g e Manager of h e V i l l a g e

of

Elmwoo d

P a r k ,

l l i n o i s

Mr.

Volpe

d i d

n o t have

any s p e c i f i c

r e c o l l e c t i o n of any

p a r t i c u l a r

bond

o r

swap

t r a n s a c t i o n . He t a t e d ,

however

h a t t h e C i t y

u s e d i n t e r e s t r a t e swaps

n

a n

e f f o r t

t o

s a v e

on

h e

c o s t

of

a p i t a l

and m i t i g a t e t h e r i s k s

of

a r i a b l e

r a t e bond s s u e s .

Mr. Volpe

r e p o r t e d t h a t

t h e

C i t y

g e n e r a l l y

r e t a i n e d l a w y e r s and

o u t s i d e a d v i s o r s and

had an

e x p e r i e n c e d , k n o w l e d g e a b l e

t eam

w i t h i n t h e

C i t y t o r e v i e w and n e g o t i a t e

t r a n s a c t i o n s .

I f

anyone

d e t e c t e d

a

m i s r e p r e s e n t a t i o n

o r o m i s s i o n ,

he

b e l i e v e d

i t

would

have been

v o i c e d . He

u r t h e r

b e l i e v e d

t h a t

g i v e n

t h e

number

of

banks

n v o l v e d

and t h e

number

of r e s e n t a t i o n s t h e

C i t y a t t e n d e d ,

i f any

one

bank

a t t e m p t e d t o m i s r e p r e s e n t a

m a t e r i a l f a c t ,

t h e

C i t y

would

have

r e c o g n i z e d i t o r

i d e n t i f i e d

i t a s a r e d f l a g , o r a competing

bank

would

have

d i s c o v e r e d

i t

and

b r o u g h t

t

t o

t h e

C i t y s

a t t e n t i o n .

Mr.

Volpe b e l i e v e d

t h a t t h e

C i t y u n d e r s t o o d t h e

r i s k s i n v o l v e d

i n swap

t r a n s a c t i o n s .

W hi l e he d i d

n o t p e r s o n a l l y

b e l i e v e

t h a t

t h e C i t y s

c r e d i t

r a t i n g

would

be

downgraded h e

u n d e r s t o o d and was d v i s e d

of

h e

r i s k

of

such a downgrade and

t h e

impact

t would

have u n d e r

t h e

swap

a g r e e m e n t s a t t h e t i m e t h e C i t y

e n t e r e d

i n t o

t h e s e

t r a n s a c t i o n s . I n t h a t

r e g a r d , h e

s t a t e d

t h a t he

k n e w

more a b o u t

t h e C i t y s c r e d i t

w o r t h i n e s s

t h a n

t h e

swap c o u n t e r p a r t i e s

and

b r o k e r

-

d e a l e r s .

Mr.

Volpe

was

n o t

aware

of any

m i s r e p r e s e n t a t i o n s

o r

o m i s s i o n s m a d e

n c o n n e c t i o n

w i t h

any

of

h e

C i t y s

swap

t r a n s a c t i o n s .

9 .

W a l t e r

Knorr

f o r m e r

CFO)

W a l t e r

Knorr

g r a d u a t e d

from

W i t t e n b e r g

U n i v e r s i t y i n

1971 and

b e c a m e a C e r t i f i e d

P u b l i c A c c o u n t a n t a t

A r t h u r

Youn g

Company n t h e

a u d i t

d e p a r t m e n t .

He

o i n e d

t h e C i t y

i n

1 9 8 2

s A s s i s t a n t

Deputy

C o n t r o l l e r , and remained

w i t h t h e C i t y ,

r i s i n g t o

Comptroller/CFO

18

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 21/29

b e f o

r e  he

e f t t h e

C i t y

 

i n

2002.

 Mr

. Knorr

 

went

 

o n

t o

w

ork

f o r  C i t i

b a n k

and

s

c u r r e n

t l y

t

h e  Vic

e

P r e s i d e

n t , Chie

f i n

a n c i a l  

O f f i

c e r , and 

C o m p t r

o l l e r

f

o r

t

h e U n i v e r s

i t y

of

l l i n

o i s

M

r. Kno

rr s t a t e

d

t h

a t t h e C i t y

 

t

o o k  

a c o n

s e r v a t i

v e

a

p p r o a c

h

t o

i

n t e r e s t  

r a t e

 

sw

ap

t r a n s

a c t i o n s

.

I n

t

h e

m

i d- 1 9 9 0

s ,  ban

ks be

gan t o

 p r e s e n

t swaps

 

a s

r i

s k  

ma

n ageme

nt 

o o l s

.

Mr

.

Knorr

d i d

n o t

want 

h e C i t y

t o

be

one

of

h e

f i r s t

m u n i c i p a l i t i e s t o  e n t e r  

i n t o  

su ch

t r a n s a c t i o n s

a n d ,

h e r e f o r

e ,

t

h e

C i t y m

o n i t o r

e d

t h e

sw

a p

ma r

ket p r i o r  t o

e n t e r i

n g i n t

o

swap

s

o n

 

t s

own

b e h a

l f .

Mr.

Knorr

 

a l s o

 

rem

embe r

e d

s i t

t i n g t h

r o u g h a

 n umbe

r of r

e s e n t a t

i o n s

t h a

t

d i s c u s

s e d t h e

r i s k s a

s s o c i a t

e d

w

i t h

s

wa p t r a n

s a c t i o n

s ,

i n c l u

d i n g

i n

t e r e s t

r a t e

r i s k

 

c r

e d i t  

r

i s k

t h

e  

r i s k

 

o

f  a

c o u

n t e r p a

r t y ' s c r e d

i t

r a t i

n g

s u f f e r i

n g a down

grade ,

 

a

nd

b a s i s

r i s k .  

e

oes

n o

t  

b e l i

e v e any

c o u n

t e r p a r t

y  

downpl

a yed

r i s k

s

o r

t r i

e d t o m i s l e a

d t h e

 C i t y

 

b y

 

m i s r e p r

e s e n t i n

g  o r o

m i t t i n g

 a

m

a t e r i a l

 

f a c

t . Nor 

s

h

e a

ware

o

f an

y a c t

s t h

a t

s u p p o r

t a

r a u d

o r

o t h e

r

c l a i

m

b y

t h e C i

t y

a g

a i n s t

i t s  

c o

u n t e r p a

r t i e s

r e l

a t i n g t o

t h e

swa p

 

r a n

s a c t i o n

s  e

n t e r e d  

i n t o

d u r

i n g

h i s  

t i m e a t  t h e

C i t y .

IV .

N

LYSIS

We

ave 

c o n c l u d e d

t h a t

t h e C i t y

does n o t  

have

a

go od

a i t h

l e

g a l b a s i s

upon

 w

hich  

t o

a

l l e g e u

n f a i r o r  f r a u d u

l e n t

c o

n d u c t

b y

t h

e ba

nk

c

o u n t e r p

a r t i e s

t o t h e

C i t y ' s

swap t r

a n s a c t i

o n s .

We

 

n a l y z e

d  

t h e C i t y '

s

e x i s t

i n g

swa

p

t

r a n s a c t

i o n s

u

n d e r  

t h e

f e d e r a

l s

e c u r i t i

e s  

l a w s

, h e

I l l i

n o i s

s e

c u r i t i e

s

l a w s ,

 and

FINR

 

r b i

t r a t i o n

r u l e s .

A

.

Fr

a u d

Bas

e d

C la i

ms

-

n 

xami na

ti on o

f h e

 

C i t y

' s Sw

ap 

Deals

 

Unc

ov ere d

No v i

de nc e

 

of

a

Ma t

erial

M i s r e

p r e s e n

t a t i o n or

O

missi

on 

of

Fa

ct

1 .

Feder

al e c u r

i t i e s  Law

s  laim

s

We

ound

no e v i d e n c

e  

t h a

t

would

 

s

u p p o r t

 

a  goo

d f

a i t h

c

l a i m

a g a i n

s t

t h

e  

C i t y '

s

c o u

n t e r p a r

t i e s

f o r

a

v i

o l a t i o n

 

of

h e f e d e

r a l

s e c u

r i t i e s

l a

w s .

S e

c t i o n

1 0 b )

 

o f

 

h e

S e c u r i t

i e s

E

xch an

ge Ac

t

ma

kes

t

u

n l a w f u

l  f o r

 any p e r s

o n

t o use o r

employ

, n

c o n n e c t

i o n w i t

h t h e

p u

r c h a s e

 o r

s a l e of a

ny s

e c u r i t y

 

an

y m

a n i p u l a

t i v e  o r d e

c e p t i v e

 d e v

i c e

o r  c o n t r

i v a n c e

i n

c o n t r a v

e n t i o n o

f

such

 

r u l e s

and

r

e g u l a t i

o n s  a s t h

e  

C o

mmiss

ion

ma y

 

p

r e s c r i b

e a s  

n e c e

s s a r y o r

a p p r o p r

i a t e i n

t h e p u

b l i c

i

n t e r e s t  

o r

 f

o r

t

h e

p r o t

e c t i o n

o

f  

n v e s t

o r s . 15

U.S

.C. §

8 j ( b

) . SEC

Rule

 l O b - 5

 

i

mpleme

nts

h i s p r o

v i s i o n b y

ma ki n

g t

u n l a

w f u l ,  

a m o n g

 o t h e r t h i n

g s , t

o ma k

e

any

u n t r

u e

s t a t

e m e n t

of

a  

m a t e

r i a l  

f a c t

o

r

t o omi

t o s t a t

e

a

m a t e r i

a l

f a c t

n e

c e s s a r y

 i n o r d e

r t o  

m ake

t h e

s t a t e

m e n t s ma

de ,

n

l i g h t

of

  h e c i r c

u m s t a n c

e s

u n d e r

whic

h 

t h e y

 w

ere ma de ,

 

o t m i s l e a

d i n g .

1 7

CF

R

4 0 . 1 O b -

5 ( b ) .

T h e

U n i

t e d  

S t a t e

s  

S upre

me  

C o u r t

 

h a

s

r e c o g

n i z e d

an

i m p l

i e d

p r i v a

t e

c a u s

e

o

f c t

i o n fr

om t h e

t e

x t

and p u r

p o s e

of

§ 1 0 ( b ) .

See

 T e l l a b

s ,

I n

c .  

v

M

akor  s s u

e s  

&Right

s,

L t d

. ,

5 5 1 U.S. 308,

 

3

1 8 2 0 0

7 ) .

For

t h e C i t y  

t o

p r e v a i l

o n a 

l a i m  

t h a t

a  

o u n t e r p a r t y

ma d e

a

m a t e r i a l m i s r e p r e s e n t a t i o n

o r

o m i s

s i o n  i

n v i o l a

t i o n

o

f §

 

1 0   b )

 an

d 

Ru

le l O b - 5

,

t mu

st l l

e g e and

p r o v e

(1)

a

 

m a t e r i

a l

m i s

r e p r e s

e n t a t i o

n

o

r

o m i s s

i o n

b y

 

t h

e  d e

f e n d a n t

;

(

2 )  c i e

n t e r ;

( 3 )

c

o n n e c t i

o n b

etween

 t h e

m

i s r e p r e

s e n t a t i

o n

o r

o m

i s s i o n

and

t h e p

u r c h a s

e  

o r s a l e

o

f

a s e c u r i

t y ;

( 4)

 e l i a n c

e

upon

t h e

m i s r e p r

e s e n t a t

i o n

o r

 o m i s

s i o n ;

5 ) c

onomic

 

l o s s ;

and ( 6)

 o s s  

c a

u s a t i o n

.

S t o n

e r i d g e

I

n v e s t m

e n t P a r

t n e r s ,

LLC

 

S c i e n t i

f i c - A t l a

n t a ,

I

n c . ,  

5 5 2

U

.S.

148,

 

1 5 7

2 0 0 8 )

.

1 9

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 22/29

 

i s r e p r e s e n t a t i o n o r o m i s s i o n i s

m a t e r i a l

when

h e r e

i s a

u b s t a n t i a l l i k e l i h o o d

t h a t

t h e

d i s c l o s u r e

of

h e o m i t t e d f a c t

would

have been

viewed b y h e

r e a s o n a b l e

i n v e s t o r a s

h a v i n g

s i g n i f i c a n t l y

a l t e r e d

t h e

` t o t a l

mix'

of

n f o r m a t i o n made

v a i l a b l e . Basic

n c . v

L e v i n s o n ,

485

U.S.

224, 31-32 1 9 8 8 ) . The

i t y

a l s o must

s t a b l i s h

t h a t

t h e swap

o u n t e r p a r t y

a c t e d w i t h a

m e n t a l

s t a t e

embracing

n t e n t

t o d e c e i v e ,

m a n i p u l a t e ,

o r

d e f r a u d .

T e l l a b s ,

551 U.S. t 319,

.

3 .

 

o m p l a i n t a d e q u a t e l y p l e a d s f r a u d u l e n t

i n t e n t

only

f

a

e a s o n a b l e p e r s o n

would

deem

h e

i n f e r e n c e

of

c i e n t e r c o g e n t and a t

l e a s t

a s

c o m p e l l i n g a s

any

p p o s i n g i n f e r e n c e

one

o u l d

draw

from

t h e

f a c t s

a l l e g e d . I d . a t 324.

A c c o r d i n g l y ,

h e

c r i t i c a l e l e m e n t

of any

a u s e

of

c t i o n f o r

s e c u r i t i e s f r a u d ,

o r

any

r a u d

c l a i m f o r

t h a t

m a t t e r ,

s a a t e r i a l

m i s r e p r e s e n t a t i o n o r o m i s s i o n . H e r e ,

we

found no

v i d e n c e

of

a

i s r e p r e s e n t a t i o n o r

o m i s s i o n

b y h e C i t y ' s

c o u n t e r p a r t i e s

on

any of

h e swap

g r e e m e n t s .

Nor was

any

n d i v i d u a l i n v o l v e d

i n

t h e

t r a n s a c t i o n s

on e h a l f

of

h e C i t y

aware

of

a

m i s r e p r e s e n t a t i o n o r o m i s s i o n .

A l l of

h e

i n d i v i d u a l s

we

n t e r v i e w e d ,

i n c l u d i n g t h e

i n d i v i d u a l s

r e s p o n s i b l e f o r n e g o t i a t i n g

and

e x e c u t i n g

t h e

C i t y ' s

swap g r e e m e n t s ,

were w e l l i n f o r m e d

and

aware

of

h e

v a r i o u s r i s k s a s s o c i a t e d

w i t h

swaps.

No

ne

was aware

of

any

r a u d u l e n t

o r

r e c k l e s s

c o n d u c t

b y a swap

o u n t e r p a r t y ,

and

e v e r a l i n d i v i d u a l s

v o l u n t e e r e d

t h e i r

b e l i e f t h a t

t h e

swaps have e n e f i t t e d t h e C i t y .

I n d e e d ,

l l

a g r e e d

t h a t t h e C i t y

o b t a i n e d t h e

b e s t

p o s s i b l e d e a l

t h a t

i t

c o u l d

have

made a s e d on

market o n d i t i o n s a t

t h e

t i m e i t e n t e r e d

i n t o

t h e swap

a g r e e m e n t s .

F u r t h e r , we

found

no

documents

r

communications o

t h e

C i t y

a u t h o r e d

b y

c o u n t e r p a r t i e s

o r u n d e r w r i t e r s

t h a t a t t e m p t e d t o

m i s s t a t e t h e

r i s k s a s s o c i a t e d

w i t h

t h e

swap

a g r e e m e n t s . Moreover,

h e

C i t y

would

be a r d

p r e s s e d

t o

c l a i m t h a t

i t

d i d

n o t

u n d e r s t a n d t h o s e

r i s k s . The

i t y employed

a a l e n t e d ,

e x p e r i e n c e d , and

k n o w l e d g e a b l e

d e b t

management

team

a s

w e l l

a s o u t s i d e

a d v i s o r s

and

o u t s i d e

c o u n s e l t o

a d v i s e

on h e

t r a n s a c t i o n s .

I n

so me

n s t a n c e s ,

t h e

C i t y r e v i e w e d m u l t i p l e

p r e s e n t a t i o n s

from m u l t i p l e i n v e s t m e n t

banks

r i o r t o

e n t e r i n g i n t o swap

t r a n s a c t i o n s .

The

C i t y

and t s

a d v i s o r s n e g o t i a t e d and

documented h e

swap

r a n s a c t i o n s .

I n

t h e

swap

r a n s a c t i o n a g r e e m e n t s ,

h e C i t y

made

a

number

of

e p r e s e n t a t i o n s r e g a r d i n g

i t s

knowledge

and

s o p h i s t i c a t i o n and

acknowledged

h e

l i m i t e d ,

non- f i d u c i a r y

r o l e p l a y e d b y h e

swap

c o u n t e r p a r t y .

The n t e r v i e w s and

r e v i e w

of

ocuments

make

l e a r

t h a t

t h e C i t y

knowingl y and

s t r a t e g i c a l l y

u s e d t h e

swap

r a n s a c t i o n s

a s a i s k

management

o o l , and

swaps

o n s t i t u t e d

o n l y

a

p o r t i o n

of h e

C i t y ' s d e b t p o r t f o l i o .

F i n a l l y ,

t h e

C i t y

p u b l i s h e d t h e

r i s k s a s s o c i a t e d

w i t h swap

a g r e e m e n t s i n i t s C FRs nd

t s 2006 Swap o l i c y .

I t would be

v i r t u a l l y i m p o s s i b l e

f o r t h e C i t y t o

a r g u e

now

h a t

a o u n t e r p a r t y

made

a

m a t e r i a l m i s r e p r e s e n t a t i o n

o r o m i s s i o n g i v e n t h e

C i t y ' s

r e p r e s e n t a t i o n s

t o

t h e

c o u n t e r p a r t i e s , t s

u n d e r s t a n d i n g of h e r i s k s i n

t h e s e swap

r a n s a c t i o n s ,

and

t s

u s e of d v i s o r s

and

o u t s i d e

c o u n s e l

t o

a s s i s t

These

same a c t s

would

undermine

any

l a i m

b y

h e C i t y

t h a t i t r e l i e d

on a

m i s r e p r e s e n t a t i o n

made

b y

one of

h e C i t y ' s swap

o u n t e r p a r t i e s .

R e l i a n c e i s

an

s s e n t i a l

element

e q u i r e d t o e s t a b l i s h a

§

0 ( b )

and

Rule l O b - 5

v i o l a t i o n . S t o n e r i d g e

I n v e s t m e n t

P a r t n e r s ,

LLC

S c i e n t i f i c - A t l a n t a ,

I n c . ,

552

U.S.

4 8 , 157

2 0 0 8 ) .

I n a d d i t i o n

t o

t h e

d i s c l o s u r e s

i n t h e C i t y ' s

C FRs

nd

h e C i t y ' s

2006

Swap

o l i c y ,

and

h e

C i t y ' s

e x p e r i e n c e d

d e b t

management

team—each

of

which a l o n e

would r e a t e

an

b s t a c l e

i n

e s t a b l i s h i n g

r e l i a n c e — t h e

ISD

a s t e r Agreements h a t

g o v e r n e d

a l l

of

h e

C i t y ' s swap

g r e e m e n t s

c o n t a i n e d

a

non-

2 0

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 23/29

r e l i a n c e c l a u s e , i n

which

h e C i t y s t a t e d t h a t

t had made

t s

own e c i s i o n t o

e n t e r i n t o

e a c h

t r a n s a c t i o n

u s i n g

i t s own udgment and t h e

a d v i c e of

t s

a d v i s o r s .

The

C i t y

a f f i r m a t i v e l y

acknowledged

t h a t

t

was

n o t

r e l y i n g

on

any

r e p r e s e n t a t i o n s by

a

swap

c o u n t e r p a r t y ,

and t h a t

t h e

c o u n t e r p a r t y

was o t

a c t i n g a s

t h e

C i t y ' s

f i d u c i a r y o r

a s

t h e C i t y ' s

a d v i s o r w i t h r e s p e c t

t o

t h e

t r a n s a c t i o n . The ISDA M a s t e r

Agreements u r t h e r

p r o v i d e d t h a t

[ t h e

C i t y ] h a s

d e t e r m i n e d

t h e

economic

r i s k s and

m e r i t s ,

a s

w e l l

a s

l e g a l , t a x , and

a c c o u n t i n g

c h a r a c t e r i z a t i o n s and

c o n s e q u e n c e s

..

.

and

i s

c a p a b l e

of

assuming

s u c h

r i s k s , w i t h o u t

r e l y i n g on

t h e

a d v i c e

of

c o u n t e r p a r t y

b a n k ] .

Given

t h e non- r e l i a n c e c l a u s e i n t h e

M a s t e r

Agreement and t h e

o t h e r

f a c t o r s

i d e n t i f i e d a b o v e ,

w e have c o n c l u d e d

t h a t

t h e C i t y

does

n o t have

a

b a s i s t o e s t a b l i s h r e l i a n c e .

As o t h e b a s i s swap r a n s a c t i o n s t h e

C i t y e n t e r e d

i n t o ,

t h e s e t r a n s a c t i o n s

were

o r

t h e

p u r p o s e

of e c e i v i n g

a

u b s t a n t i a l

up

- f r o n t payment,

r

t o

s h o r t e n

o r

l e n g t h e n

t h e

d u r a t i o n

of h e

swap.

The

b a s i s

swap

t r a n s a c t i o n s

s e r v e d

t h e

C i t y ' s

s t a t e d

p u r p o s e .

We i k e w i s e

found

no

e v i d e n c e

t h a t t h e

C i t y ' s swap

c o u n t e r p a r t i e s

m i s r e p r e s e n t e d t h e

r i s k s

of

h e s e

t r a n s a c t i o n s .

R a t h e r ,

t h e

C i t y

s t r a t e g i c a l l y n e g o t i a t e d

t h e

t e r m s

of h e s e

swap

r a n s a c t i o n s t o

manage

t s

d e b t

p o r t f o l i o and r e c e i v e up- f r o n t

c a s h

p a y m e n t s .

The

C i t y

does n o t have

a

r e d i b l e

c l a i m f o r f r a u d

o r

m i s r e p r e s e n t a t i o n

u n d e r

t h e f e d e r a l

s e c u r i t i e s

law

r e l a t i n g

t o t h e s e

b a s i s swap

r a n s a c t i o n s .

One

d d i t i o n a l f a c t

t h a t

would make t

e x t r e m e l y d i f f i c u l t

f o r

t h e

C i t y

t o

a s s e r t a

good

f a i t h

c l a i m

a g a i n s t t s swap

c o u n t e r p a r t i e s

f o r a

v i o l a t i o n of

h e

f e d e r a l

s e c u r i t i e s

laws s t h a t t h e

C i t y ' s c u r r e n t and former employees

n v o l v e d i n

n e g o t i a t i n g

and

e x e c u t i n g t h e swap

a g r e e m e n t s

a r e n o t aware

of

any

m i s r e p r e s e n t a t i o n o r

o m i s s i o n

made

n

c o n n e c t i o n w i t h any of

h e swaps. I f

t h e C i t y

were

o

f i l e

a c l a i m a g a i n s t one

o r more of

t s c o u n t e r p a r t i e s , a

number of h e s e

i n d i v i d u a l s

l i k e l y

would

be c a l l e d

a s w i t n e s s e s

t o

a d d r e s s

t h a t

c l a i m . But none

w i l l

t e s t i f y

t h a t

t h e

c o u n t e r p a r t i e s d e f r a u d e d t h e

C i t y ,

and

none

w i l l

t e s t i f y

t h a t

t h e

c o u n t e r p a r t i e s

f a i l e d

t o

d e a l

f a i r l y w i t h

t h e

C i t y .

Based

on our r e v i e w of

h e

a v a i l a b l e e v i d e n c e ,

w e

recommend

t h a t

t h e C i t y n o t p u r s u e a

c a u s e

of c t i o n

a g a i n s t any

of

t s

c o u n t e r p a r t i e s f o r

a

v i o l a t i o n

of

h e

f e d e r a l s e c u r i t i e s

l a w s .

2 .

I l l i n o i s

S e c u r i t i e s

Law f 953

I l l i n o i s

S e c u r i t i e s Act )

We

l s o

found

no

e v i d e n c e t h a t would

s u p p o r t

a good

a i t h

c l a i m

a g a i n s t t h e

C i t y ' s

c o u n t e r p a r t i e s f o r a

v i o l a t i o n

of h e

l l i n o i s S e c u r i t i e s

A c t .

The l l i n o i s

S e c u r i t i e s Act r o v i d e s

r e s c i s s i o n

a s

a

remedy

o r u n l a w f u l

conduct

n

c o n n e c t i o n w i t h t h e

s a l e of

a

e c u r i t y .

S p e c i f i c a l l y ,

t h e

I l l i n o i s

S e c u r i t i e s

Act

r o v i d e s

t h a t

[ e ] v e r y

s a l e

of

e c u r i t y

made

n

v i o l a t i o n

of h e p r o v i s i o n s

of

h i s Act

h a l l

be v o i d a b l e

a t

t h e

e l e c t i o n

of h e

p u r c h a s e r . 815 ILCS

5 / 1 3 ( A ) . To

n v o k e t h i s

p r o v i s i o n ,

t h e p u r c h a s e r

must

i v e

n o t i c e

of

ny

l e c t i o n

t o

v o i d

w i t h i n

  onths

f t e r t h e

p u r c h a s e r

s h a l l have

knowledge

h a t

t h e

s a l e

of h e

s e c u r i t i e s

t o him

o r h e r

i s

v o i d a b l e . See 815 ILCS

5 / 1 3 ( B ) .

21

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 24/29

S e c t i o n

12

of

h e I l l i n o i s S e c u r i t i e s

Act

r o v i d e s :

I t

s h a l l

be

a

i o l a t i o n

of

h e

p r o v i s i o n s

of

h i s Act o r

any

p e r s o n :

F . To engage n any r a n s a c t i o n , p r a c t i c e

o r c o u r s e

of

u s i n e s s

i n

c o n n e c t i o n

w i t h

t h e

s a l e

o r

p u r c h a s e

of e c u r i t i e s which works

o r

t e n d s

t o

work

a

r a u d

o r

d e c e i t

upon

h e

p u r c h a s e r o r s e l l e r

t h e r e o f .

G.

To

b t a i n

money

o r p r o p e r t y t h r o u g h t h e s a l e

of

e c u r i t i e s b y

means of ny

u n t r u e s t a t e m e n t

of

a

m a t e r i a l

f a c t

I

To employ

any

d e v i c e , scheme

o r

a r t i f i c e

t o d e f r a u d

i n c o n n e c t i o n w i t h t h e

s a l e

o r

p u r c h a s e of

ny

e c u r i t y ,

d i r e c t l y

o r

i n d i r e c t l y .

815

ILCS 5 / 1 2

(West

1 9 9 8 ) .

Because e c t i o n s

1 2 ( F ) ,

1 2 ( G ) , and

1 2 ( I )

of

h e

I l l i n o i s

S e c u r i t i e s

Act

r e

modeled

f t e r

s e c t i o n s 1 7 ( a ) ( 1 ) t h r o u g h

a ) ( 3 )

of

h e

f e d e r a l S e c u r i t i e s Act of

1933

S e c u r i t i e s

Act)

15 U . S . C .

§

7 7 q ( a ) ( 1 )

h r o u g h

a ) ( 3 )

2 0 0 0 ) ) ,

l l i n o i s c o u r t s

l o o k

t o

f e d e r a l

s e c u r i t i e s

f r a u d

c a s e

law i n

i n t e r p r e t i n g

t h o s e

s e c t i o n s . People W h i t l o w , 89 1 1 2 d

322,

33-34

1 9 8 2 ) ;

F o s t e r v

A l e x ,

213

I l l

App.

3d

1001,

1005 5 t h

D i s t .

1 9 9 1 ) .

S e c t i o n s

1 7 ( a ) ( 1 )

h r o u g h

a ) ( 3 )

of h e

S e c u r i t i e s Act

r e q u i r e n e a r l y

t h e

same l e m e n t s a s s e c t i o n

1 0 ( b )

of h e S e c u r i t i e s

Exchange Act

15

U.S.C.

§

8 j ( b ) 2 0 0 0 ) ) ,

and

Rule

l O b - 5

(17

. F . R . § 2 4 0 . 1 O b - 5

2 0 0 0 ) ) .

Moreover, r e a s o n a b l e

r e l i a n c e

i s

an

e l e m e n t of

e c t i o n s

1 2 ( F ) ,

1 2 ( G ) ,

and

1 2 ( I )

of

h e

I l l i n o i s

S e c u r i t i e s

Law.

T i r a p e l l i v Advanced q u i t i e s , I n c .

351

l l

App. 3d

4 5 0 1 s t D i s t .

2 0 0 4 ) .

I f

h e C i t y were

o

a t t e m p t

t o

p u r s u e c l a i m s

u n d e r

t h e

I l l i n o i s

S e c u r i t i e s A c t ,

t would

f a c e s i m i l a r h u r d l e s

t o

t h o s e r e l a t i n g

t o

t h e

f e d e r a l

s e c u r i t i e s

l a w s .

F i r s t , a s

d i s c u s s e d

a b o v e , w e

have

found no e v i d e n c e of a

m i s r e p r e s e n t a t i o n

o r

o m i s s i o n r e l a t e d

t o

t h e C i t y ' s swap

a g r e e m e n t s . Second,

h e C i t y

w a s

a

o p h i s t i c a t e d and

k n o w l e d g e a b l e

market a r t i c i p a n t

t h a t

was

d v i s e d

b y

p r o f e s s i o n a l a d v i s o r s . Moreover, w h e n h e C i t y e n t e r e d

i n t o

e a c h

of

h e

swap

a g r e e m e n t s

i n

q u e s t i o n ,

t

e x p r e s s l y

acknowledged

t h a t i t had n o t r e l i e d

on

any

e p r e s e n t a t i o n s

made

b y h e c o u n t e r p a r t y

b a n k s . R a t h e r , t h e

C i t y

e n t e r e d

i n t o

each

agreement

f t e r

i t s

o w n

r e v i e w and a s s e s s m e n t of h e p r o p o s e d

t r a n s a c t i o n

and

w i t h t h e

p r o f e s s i o n a l i n p u t

and a d v i c e

of

o u t s i d e

f i n a n c i a l

a d v i s o r s ,

t a x

a d v i s o r s , and

c o u n s e l . Und e r h e s e

c i r c u m s t a n c e s ,

t

would

be

e x t r e m e l y d i f f i c u l t f o r t h e

C i t y

t o

e s t a b l i s h

t h e ke y

element

of

e l i a n c e .

A c c o r d i n g l y ,

b a s e d

on

o u r r e v i e w of

h e

e v i d e n c e and t h e f a c t s

and

c i r c u m s t a n c e s w e

recommend

t h a t

t h e

C i t y

n o t

p u r s u e a a u s e of

c t i o n a g a i n s t any

of

t s

c o u n t e r p a r t i e s

f o r

a

v i o l a t i o n

of h e

I l l i n o i s S e c u r i t i e s

A c t .

22

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 25/29

3.

Cla

ims

Under

t h

e I l l i n o

i s

Cons

umer

Fra

ud and

eceptive 

P r a c t i c e s

 

Ac t

Th

e

G r a i s

&Ellsw

orth

memora

ndum a l s o

s u

g g e s t s

t h a t

i t i

e s  m

ay

h

ave

c l

a i m s u n d e r

s t a t e

u n f a i r

t r a d e

p r a c t i c e s a c t s .

However, h e  C i t y

l a c k s s t a n d i n g  t o

a s s e r t

a l a i m

u n d e r  

t h e

I l l i n

o i s

Con

sum er

F r a u

d

a

nd D e c e

p t i v e

P r a c t i c e s

 

Act

CFA). To

t a t e a 

c l a i m

u n d e r  t h e

CFA

,

person

a s

 s p e c

i f i c a l l y d e f i n e d by t h

e CF

A

us

t

s

how: a

n 

u n f a i r

 

o r  d e c e

p t i v e a c t

o r

p r

a c t i c e

by t h

e

d e f

e n d a n t ;

t h e

d

e f e n d a n t '

s

i n t e n

t t h a t

p l a i n

t i f f r e l y  on t

h e

d e c e p t i

o n ; t h e  o c c u r

r e n c e of

  h e

d

e c e p t i o n

 

d u r i n

g

a c o u

r s e of

o n d u

c t i n v o l v i

n g

t r

a d e

o r  comme

rc e;

and

a c t

u a l

d

amage  o

t h e

p l a i n t

i f f

p r

o x i m a t e l y

 

c a u s

e d by h e

d e

c e p t i o n .

See 815 IL

CS

5 0 5

/ 1

e t s e q .

;

s e e a l s o

M a n t i s

 

v .

P

e k i n Mem'l

 Hosp. 

n c . ,

395

l l

App. 3d

 943,

949

I l l . Ap p .

t .

3d 

D i s t . 2 0 0 9 ) .

U

nder

h e

CFA,

a m u n

i c i p a l i t y

 

i s

n o

t

a

perso

n a p a b l e of

 

r i n g i n g

 s u i t .

See 815 l l

Comp .

 t a t .

§ 

0 5 / 1 ( c ) ;

Board

 

of

d u c

a t i o n of i r y

of 

hic

ago . A,

n

d

,

I n c

. ,

1

3 1 I l

l

2d 428,

6

9

19

89)

[ T ] h

e

l e g i s l a t u

r e i s aware of how

  o

i n c l u d e

a

body p o l i t i

c

w i t h

i n  

t h

e

d e f i n i t i

o n

of

p e r s o

n ' o r

` c o r p o

r a t i o n , '

and we e l

i e v e t h a t

 

i t s

f a i l u

r e

t o

do

 

so i

n  

t h

e

C

onsumer

 Fr

aud

Act s

how s an

 i n t e n t

n o t  

t o

i n c l u d e  them w i t h i n

t h e

d e f i n i t i o n

of

e r s o n s  

w ho may 

s u e b a s e d

on  

t h e

A c t . ) .

H e r e , b e c a u s

e t h e  C i t y

i s n o t

a

per

son 

l i g i b

l e

t o

f i l

e

a

  l a i

m

u n d e r  t h e

s t a t u t e ,

 

t l a c

k s

s t a n d i n g

 

t

o a s s e r t

 a c l a i m

u n d e r

t h

e

CFA. Mo

re

m p o r t a n t l

y ,

a

goo

d f a i t h

 

c l a i m

u n d e

r

t h e

CFA

s u f f

e r s from 

t h e

sam

e

d i s p o s i t i

v e

d e f

e c t s a s

 

t

h e o t h e r c

l a i m s d i s

c u s s e d

a b o v e : t h e r e

 i s

no

e v i

d e n c e

o

f

a

d e c e p t i

v e a c t  

o r

p r a c t i c

e

by

one 

o

f 

h

e swap

c o u n t e r

p a r t i e s .

Th

ere

s

, t h

e r e f o r e ,

no

go

od

f a i t h

b

a s i s  u

pon

w

hich t h e C i t

y may

  u r s

u e

a

l a i m

u n d e r

t h e

 

CFA.

4

.

Claim

s

or

V i o l a t i o

n s

o f

MS

RB nd

FINR

A 

ul

es

The

C i t

y

h a s

n

o 

p r i v a t e r i g

h t

of

c t i o n

 a g a i n s

t

any of

t s  

swap

o u n t e r p a r

t i e s  

u n

d e r

r u l e s

p r o m u l g a t e d

by t h e  

M u n i c i p a l  

S e c u r i t i e s  

Rule

Making

Board 

MSRB), 

r

t h e F i n a n c i a l I n d u s t r y

R e g u l a

t o r y

A u t h o r i t

y

(FINR

A).

C

ongress

r e a t e d t h

e

MS

RB

n 1975,

 

a

nd expand

ed t s  

m i s s i o n

w i t h

 

p a s

s a g e

of

 h e D od

d- F r a

n k Ac t

 

n

2010.

The

MS

RB

r e a t

e s  r u l e s

t h a t

s e c u r i t i

e s

f i r m s

,

b a n k s ,

 and

m u n i c i

p a l

a d v i

s o r s  mu

st

o l

l o w wh

en

e n g a g

i n g

i

n m u n i c

i p a l

s e c u r i t i e s

 t r a n s a c t i

o n s

and

 a d v i s i n g

 

i

n v e s t o r s

and 

s t a t

e and l

o c a l g o v e r n m

e n t s .

The

U n i t e d  S t a t e

s

S e c u r i

t i e s and

E

xchange Comm

ission

(SE

C),

F

INRA,

nd

 

f e

d e r a l b a n k i n

g

r

e g u l a t o r s

e n f o r

c e

MSRB

 

u l

e s ,

d

e p e n d i n g

 

on t h e

s t a t u s

of h e  

e n t i t y a g a i

n s t

w

hom

h

e

r u l e s

a r e

b

e i n g e n f o r c

e d . There

s no

e x p r e s s

 

p r i v a t e r i g

h t

o

f c t

i o n

u n d e r

t h e

MSR

B u

l e s ,

and

c o u r t s

t

h u s

f a r have 

r e j e c t e d

a t t e m p

t s

t o imply

 

a

r

i v a t e r i g h t

o

f

c t i o n .

 

See

.

g . ,

Prager

.

F

MS

o

nds,

n c . , 20 1

0

WL 9

50065

(

S.D.

F l a .

2 0 1 0 )

;

C h a r t e r

Hou

se

. F

i r s t T e n n e s s

e e Bank

,693

F . S

upp. 593

, 

59

8 M . D .

 

Tenn

 

1 9 8 8

) .

I n

a d d i t i o n

t o  

t h e  

e n f o r c e m e n t

of MSRB u l e s ,  

F

INR

r o m u l g a t e s  

i t s own

u l e s f o r

memb

er i r m s , i n

c l u d i n g

Rule 

2010,

whic

h

r

e q u i r e s

me

mbers o o

b s e r v e

h i g

h

s t

a n d a r d s of

comme

rcial 

hon

or an

d e q u i t a

b l e p r i n c i

p l e s

of

r a d

e . C o u r t s

a l s o

have 

r e j e c t e d a 

r i v a t e c a u s e

of

a c

t i o n f o

r

a

v i o l a

t i o n

of F

INR

u

l e s

o r

r e g u

l a t i o n s . Se

e

S a

l d e r v .  

R e t a i l P r o p e

r t i e s

o

fAm., n c . ,

N

o. 1 2

- 5 8 8 2 , 20

14

WL

5988

04, *2

4

N

. D. l l

Ju

ne 

1 0

,

2 0 1 4 ) ;  

Richman

.  

Goldman

 S

achs

Gro

up, n c . ,

 

8

68

F .

S

upp.

2d

 

26

1,

275

n .

5

S.D.N.Y

. 0 1 2 ) .  

A c c o r d

i n g l y ,

t h e

M

SRB

nd

FINRA

 

u l e s

do n o t

 c r e a t e

 

a 

a u s e

of c t i o n

t h e C i t y

c

o u l d  p u r

s u e

i n

c o u r t .

23

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 26/29

B.

FINRA

r b i t r a t i o n

Even f

t h e

C i t y

c o u l d

a s s e r t

a g o o d - f a i t h c l a i m

grounded

n

f r a u d

a g a i n s t a

swap

c o u n t e r p a r t y , an r b i t r a t i o n

b e f o r e

FINRA, hich h e

September

1 5 ,

2014

and

O c t o b e r

1 0 , 2014

l e t t e r s u r g e t h e

C i t y

t o

i m m e d i a t e l y f i l e , i s

a l m o s t

c e r t a i n l y u n a v a i l a b l e t o t h e

C i t y .

FINRA s

a s e l f - r e g u l a t o r y

o r g a n i z a t i o n r e g u l a t e d

by

h e

SEC

h a t p r o v i d e s

an

l t e r n a t i v e

d i s p u t e

r e s o l u t i o n

fo r u m

o

i t s

m e m b e r i r m s and

c u s t o m e r s

o f t s

m e m b e r i r m s .

Under

FINRA

r u l e s , m e m b e r i r m s a r e r e q u i r e d t o a r b i t r a t e

c u s t o m e r d i s p u t e s

b e f o r e

a

FINRA p p o i n t e d

a r b i t r a t i o n

p a n e l .

FINRA

e m b e r i r m s a l s o a r e

r e q u i r e d t o

i n c l u d e

i n t h e i r a g r e e m e n t s

w i t h

c u s t o m e r s a

r o v i s i o n

t h a t a l l o w s

d i s p u t e s t o be

r b i t r a t e d . None

o f

h e

C i t y ' s swap

c o u n t e r p a r t i e s

a r e

FINRA

e m b e r i r m s .

Nor

does t

a p p e a r t h a t

i n

most

n s t a n c e s

t h e swap

c o u n t e r p a r t i e s

c o u l d

be c o n s i d e r e d

b r o k e r - d e a l e r s

e n g a g i n g i n

m u n i c i p a l s e c u r i t i e s

a c t i v i t i e s o r

u n d e r w r i t e r s s u b j e c t t o

an

a r b i t r a t i o n

r e q u i r e m e n t

u n d e r

Rule G-35

o f h e

MSRB

a t h e r ,

t h e

c o u n t e r p a r t i e s

a r e

banks

h a t s u b m i t t e d

b i d s

t o ,

o r

n e g o t i a t e d

w i t h , t h e C i t y

o n h e swap

t r a n s a c t i o n s and

n t e r e d

i n t o

ISDA Master Agreements

o r each swap

r a n s a c t i o n . I t i s u n l i k e l y

t h a t

t h e C i t y c o u l d

compel

h e s e

non-FINRA

m e m b e r

i r m s

t o

a r b i t r a t e

b e f o r e

FINRA.

I f

a i a b l e

c a u s e

o f c t i o n

e x i s t e d , t h e

C i t y might

be

a b l e

t o ,

i n so me

n s t a n c e s , b r i n g

FINRA

r b i t r a t i o n c l a i m s a g a i n s t t h e

b r o k e r

- d e a l e r

bond

managers and

u n d e r w r i t e r s . I f t h e

swap

c o u n t e r p a r t y and

e n i o r bond manager,

r

u n d e r w r i t e r ,

a r e

a f f i l i a t e s

o f

h e

same n v e s t m e n t

bank,

h e C i t y

c o u l d a r g u e t h a t t h e

FINRA

e m b e r o l d

t h e

i n t e r e s t r a t e

swaps

w i t h

t h e

u n d e r l y i n g v a x i a b l e

r a t e

bonds

s

a package

and h a t ,

i n d o i n g s o ,

t h e

bond

manager r

u n d e r w r i t e r

m i s l e d

t h e C i t y .

I n

many

n s t a n c e s ,

however,

h e

C i t y

i s s u e d t h e

v a r i a b l e

r a t e bonds

and

c o m p e t i t i v e l y

b i d t h e a s s o c i a t e d

i n t e r e s t

r a t e swap.

C o n s e q u e n t l y ,

t h e swap

o u n t e r p a r t y

and

t h e

bond

manager

r

u n d e r w r i t e r

were

n o t

a f f i l i a t e s

o f h e

same

n v e s t m e n t

b a n k .

These

f a c t s

p r e s e n t s i g n i f i c a n t

c h a l l e n g e s

t o

c o m p e l l i n g

FINRA

r b i t r a t i o n , even

u n d e r t h i s a l t e r n a t i v e

t h e o r y .

Moreover, h e ISDA M a s t e r Agreements

h a t

t h e

C i t y

e n t e r e d

i n t o

w i t h t h e swap

c o u n t e r p a r t i e s

c o n t a i n

e x c l u s i v e

fo r u m

e l e c t i o n c l a u s e s . These c l a u s e s

r e q u i r e t h e

p a r t i e s

t o

submit

any i s p u t e t o

t h e

e x c l u s i v e

j u r i s d i c t i o n

o f

h e c o u r t s

o f

h e

S t a t e

o f l l i n o i s

and

h e

U n i t e d

S t a t e s D i s t r i c t Court

n

t h e

N o r t h e r n D i s t r i c t

o f l l i n o i s .

R e c e n t l y , t h e Second

C i r c u i t

h e l d

t h a t

a fo r u m

s e l e c t i o n

c l a u s e

s u p e r s e d e s

FINRA

u l e s

r e q u i r i n g

a r b i t r a t i o n .

Goldman,

Sachs

o.

.

Golden

Empire

c h .

F i n . A u t h . ,

No.

13

-797-CV,

014

WL

099289,

t *6

2d

C i r .

Aug.

1,

0 1 4 ) ;

C i t g r o u p

Global

a r k e t s , I n c . ,

v . N.

C

s t .

Muni.

Power Agency,No. 3 -

2247

-CV, 014

WL 099289,

t

*6

2d

C i r .

Aug.

21, 0 1 4 ) .

The

September

1 5 ,

2014

e t t e r ' s

r e f e r e n c e

t h a t

t h e C i t y

had

u n t i l o n l y e a r l y

O c t o b e r

t o

i n i t i a t e

a

FINRA

r b i t r a t i o n

i s

l i k e l y

a

e f e r e n c e

t o

FINRA's

i x

- y e a r

a r b i t r a t i o n

e l i g i b i l i t y r u l e s .

See

FINRA

o d e

o f

r b i t r a t i o n ,

Rule

12206. Under

FINRA's

i s p u t e

r e s o l u t i o n r u l e s ,

t h e

o c c u r r e n c e o r e v e n t g i v i n g r i s e t o

t h e

d i s p u t e

must have

c c u r r e d

w i t h i n s i x

y e a r s

f o r

t h e

c l a i m

t o be l i g i b l e

f o r

s u b m i s s i o n t o

a r b i t r a t i o n . Here,

h e

C i t y e n t e r e d

i n t o

a l l o f h e

u n d e r l y i n g

v a r i a b l e r a t e bond

o f f e r i n g s

w i t h c o n n e c t e d

i n t e r e s t r a t e swap

r a n s a c t i o n s m o r e

h a n

s i x

y e a r s

a g o .

T he v e n t o r o c c u r r e n c e

g i v i n g

r i s e t o

t h e

d i s p u t e would be h e

m i s r e p r e s e n t a t i o n ,

o m i s s i o n ,

o r

l a c k o f

a i r d e a l i n g a t

t h e

t i m e

o f

n t e r i n g

i n t o

t h e

u n d e r l y i n g

v a r i a b l e

r a t e

bond

o f f e r i n g

and

c o n n e c t e d

swap. T h e r e f o r e ,

even f

FINRA

r b i t r a t i o n were

an

a v a i l a b l e forum

o r

24

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 27/29

t h

e C i

t y t

o

f i l e

a

l a i m

 r e

l a t i n

g t o

 i

t s

s

wap

 

a

g r e e

m e n t

s ,  

d i

s p u t

e s

r e l a t

i n g t o f r

a u d  

o r u n f a i

r  

d e a l

i n g

i n

t h e

indu

ceme

nt of

h o s e

 

swap

 

r a n s a

c t i o n

s  

l i k e l

y

wou

ld n o

t b

e l i

g i b l e

 

f o r

s u b m

i s s i

o n  

t o

F

INR

r b i t

r a t i o

n .

C.

  T

he Ba

ldw

i n

C

ou n t

y S

e we r

 

S e r v

i c e

A r

b i t r a

t i o n

,

The

 R o

o s e v

e l t

I n s t i

t u t e

 

Blog

P o s

t ,  

an d  

t h e  

Grais 

&Ellsworth 

LLP 

Memorandum

I

t i s o

u r

u n

d e r s t

a n d i

n g

t

h a t t h

e a l l

e g a t i

o n s

s e t

f

o r t h

 

i n t

h e  S

epte

mber

 an

d

O c t o

b e r  

L e t

t e r s

t h e C

i t y

r

e c e i v

e d

fr

om

u n i o

n

l e

a d e r s

 we

re b a s

e d  on

o u

r

s

o u r c

e s :

(

1) 

n Opi n

ion

a

nd

Awa

rd

i s s u

e d by

  h e

Ame

rica

n 

A r b i

t r a t

i o n

A

s s o c

i a t i

o n  o

n Ma

rch

 

20

,

01

4,

n t h e

m a t t

e r  c a

p t i o

n e d

I n

t h e M

a t t e

r

o f

r b i t

r a t i

o n b e

t w e e

n Ba

ldwi

n Co

unty

 S

ewe

r

e r v i

c e L

. L . C

.

an d

 

Regi

ons

Bank

;

2)

p o s

t

b

y S

a q i b

B h a

t t i on

 

t h e

R o o s

e v e l

t I n s

t i t u t

e b l o g

 

N

e xt  

Ne

w 

e a l

  ,

i t l

e d

W a l l

 

S t

r e e t

Sw

indl

ed

L

ocal

 Go

vern

ment

s, T o o .

H

e r e '

s  

o

w 

The

y

C

an

Ge t

 

T

h e i r

 Mon e

y Ba

ck,

a t

e d

S

ept e

mber

 

1

7 , 20

14;

3

) m

e m or

an d

u m fro

m

t h e

 la

w

f

i r m

G r

a i s  

&E

llsw

orth

 L L P

,  

a

t e d

Au

gust

25,

 

0

14,

o

S

a q i b

 

B h

a t t i ;

 

and (4

)

m e m

ora

n d u m

 

f

rom t h

e  la

w 

f

i r m  

G

r a i s

 

l l

w s o r

t h L

L P,

d a t

e d

O c t o

b e r 9,

01

4.

Be

caus

e t h e

O c

t o b e r

 

9, 

014 

and

 

Au

gust

 2

5,

014

 

G r

a i s

&El

lswo

rth

m e m oran d a

r e  

i d e n t i c a l ,

w i t h

t h e

e x c e p t i o n

of

ne 

p a r a g r a p h

t h a t

acknowledges 

h a t  

an

s s u e r s

d

i s c l o

s u r e

s m

a y

v a r y

 

b

a s e d

upon

  h e

i r

know

ledg

e 

and e x

p e r i e

n c e ,

 

we 

e

f e r  

t o

b o t h

 

m

e m or

an d

a

c o l l

e c t i v

e l y  a s t

h e

Me

m ora

n d u

m .

T

he s s

e r t i o

n s a

nd

a l l

e g a t i

o n s r

a i s e d

 

by

h e s e

 m a

t e r i a

l s

w

ere n o t

 

s u b s

t a n t i

a t e d

b y 

ou

r 

n

a l y s

i s  of

h e

 C i t y

  s s

wap

 

a g r

e e m e

n t s .

T

he R o o

s e v e

l t  

I

n s t i t

u t e

b l o

g  

p o s t

 

a p p

e a r s

 t

o be

 a l m o

s t

e

n t i r e

l y

b

a s e d

 on   h

e

Me

m or

a n d u

m .

O u r

 

e v i

e w of

M

r.

h a t

t i s q u

a l i f i

c a t i o

n s r e v e

a l e d

t

h a t h

e

h o l

d s

an

u

n d e r

g r a d

u a t e  

d e

g r e e

 i n  

P o l i t

i c a l  S c

i e n c

e .  He

 o l d s

 n o

p o

s t

-

g r a d u

a t e

d e g

r e e s

, a

nd h a s

 n o

s p e

c i a l i

z e d

t r a

i n i n g

 i n

f i n a

n c e ,

  e t

a l o n

e m

u n i c

i p a l

 

f i n a n

c e .  

e

 d

oes n o t

 

h

o l d a

 

i n a n

c e ,

econ

omic

s,  

c

c o u n

t i n g ,

 

o

r  

l

aw d e g

r e e .

 He

 

o m p l e

t e d

aone

-ye a

r 

e

l l o w s

h i p w i

t h a n o t -

f o r -

p r o f i

t

gro u

p wo

rk in

g w i t h

 l a

b o r

u

n i o n

s  t o

r e v

i e w  t h e

 

r o l e

m

u n i c

i p a l

 f i n a

n c e

d e

a l s

p

l a y e

d

i n

t h e

p u

b l i c

b u d g e t

r i s i s

N e i t h e r

h i s  

b l o g

p o s t

n o r

t h e

Me m ora n d u m  

p r o v i d e  

any 

e t a i l

o r

any 

p e c i f i c

m i s

r e p r

e s e n t

a t i o

n s

o r  

o m

i s s i

o n s

r e l e

v a n t t o

 t h e

C i t y

s  

swa

p

a g r

e e m e n

t s . I

n a

d d i t i

o n ,

Mr.

  h a t t

i

a p p

e a r e d

 a t t h

e  

Sept

embe

r 24,

  0 14

 m e e

t i n g

 

of

 h e

Chi

cago

 

B

oard

 of

d u c

a t i o

n

t

o

u r g

e

t h a

t

t h

e

Boa

rd

p

u r s u

e  c l a

i m s

a g a

i n s t

 i t s ban

k 

o u n

t e r p a

r t i e s

.

T

he

Bo

ard

o

f 

d u c a

t i o n

 a s k e

d Mr

. h a t

t i

f o r  

s

p e c i f

i c s ,

 

b u

t  he

 

was

n a b

l e

t o

i d e

n t i f y

 any

a l l

e g e d

m

i s r e

p r e s e

n t a t

i o n s  

o

r

o m

i s s i o

n s .

The

 Me m o

ran

d u m

 p u

r p o r

t s

t o a n a l

y z e  

p o t

e n t i

a l c l a i m

s by

 p u b l

i c

i s s

u e r s

o

f

y n

t h e t i

c

f i x e d

- r a t e

 

d e

b t

a g

a i n s t

 

t h e i

r  

swa

p o

u n t e r

p a r t

i e s .

Howe

v er,

 n

t h e

v e

r y

f i r

s t

p a r

a g r a

p h o

f

h e

M

e m o

ran d

u m ,

 

r a i s

 &E

llsw

ort h

 a

ckno

wled

ge h e

l i m i

t a t i

o n

o

f

h e i

r

l e g a l

 

a n

a l y s

i s  a

nd

re c

omme

ndat

ions

:

We a n n o t

a d v i s e  

on  

any 

p e c i f i c  

f i n a n c i n g

w i t h o u t  

c l o s e l y  

r e v i e w i n g  

t h e

f i

n a n c i

n g

and

l l  

r e

l a t e

d t r

a n s a

c t i o n

s , a s  w e

l l  a

s

t

h e

r e p

r e s e

n t a t i

o n s

m ad

e

by

u n d e

r w r i t

i n g b

anks

 a

nd o t h

e r s  t

o

i s s u

e r

p

e r s o

n n e l

. . . .  

IJf

 

n

u n d e

r w r i

t e r

d i d v i o l

a t e  

t h e

f a i r

 

d

e a l i

n g

r u

l e ,

t h

e  

i s s u

e r m ay

 hav

e

a

 re m e

dy

i n a r b i t

r a t i o

n

b e

f o r e

 

FI

N R A

.

(emp

hasi

s

a d

d e d )

.

T

he  M

e m or

an d

u m t h

e n

c o

n c e d

e s t h a

t G r a i

s

l l w o

r t h  

d i

d n o t

r e v i

e w any

s p

e c i f i

c

f i

n a n c

i n g o r

 

swap

  r a

n s a c t

i o n d

ocum

ents

 and 

t h a t   t

was

 awar

e

of

o

p e

c i f i c

u n d e

r w r i

t e r

t h a

t a c t

u a l l y

 v i o l

a t e d

 

t h e

 

f a i r

 

d e

a l i n

g

r u l

e .

I

n s t e

a d ,  

t h e

Me m

ora

n d u

m o f

f e r s  

t h e

25

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 28/29

c o n c l u s o

r y

s t a t e

m e n t t

h a t

[ i ] n g e n e r a

l , howeve

r,

u r

[

G r a i s

l l s w o r t h

' s ]

r e s e a r c h s t

r o n g l y

t h a t  u n d e r w r

i t e r s

f r e q u e n

t l y

f a i l e d

t o p r o v i d e

 

t h e

d i s c l o s u r

e s  t

o

p u b l i c

i s s u

e r s by t h e f a i

r

d e

a l i n g

r u l e , and

m i s r e

p r e s e n t e d

 

m

a t e r i a l r i s k s .

(Emp

hasis a d d e d )

. No

u c h

r e

s e a r c h

h a s

b

een

p r e s e n t

e d t o

t h e C i t y by

G r a i s

 

Ell

sworth o r anyone

e l

s e .

G r a i s l l w o r t h ' s

Me m o r a n d um  

p r e s u p p o s e s

t h e

most

r i t i c l

and

n e c e s s a r y

r e q u i r e m

e n t f o r a

  r a u d

 c l a i m :

t h a t

t

h e

u n d e r w r i

t e r s

m

i s r e p r e s e

n t e d

m a t e r

i a l

f a c t s t o

t

h e  

i s s u e r .

Th e e n

t i r e

a n a

l y s i s

t h a t

f o l

l o w s

i n t h e

Me m o r

a n d u m , nd

 which w

a s

s u b s e q u e n

t l y

a d o p t e

d

by

t

h e

R o o s e

v e l t I n s

t i t u t e  b l o g

 p o s t

and

t h e

 

Septe

mber

and O c t o b

e r

L e t t e r s ,

assumes

  h a t t h e r e w

ere

m i s

r e p r e s e n t

a t i o n s

o

f a t e

r i a l  f

a c t s

r e l a t

e d

t o

t

h e  C i t y

' s

i

n t e r e s t

r a t e  

swap

s.

Based

o n

h i s

a s s u m

p t i o n ,

h

e Me m

o r a n d um

 d i s c u s

s e s h

ow 

r b i t r a t i o n

 

c o u

l d be

 

i n i

t i a t e d

and

 

c l a i m

s c o

u l d be

m

ad e  a g a

i n s t t h e

s w a p 

c o u n t e r p

a r t i e s . T

h e

a s s

u m p t i o n

t h a t t h e r e

were

m a t e r i a

l

r e p r e s e n

t a t i o n s i s

a

i g n i f i

c a n t

one

a n d ,

 

b a s

e d

o n

our n v e s t i g

a t i o n ,

unfo

un ded

i n

 

t h e

 

c o n t e x

t

of

h e C i

t y an

d t s

s

w a p

a g

r e e m e n t s .

F

u r t h e r ,

t h e

Me m o r a n

d um  

c i t e s a

 

2

012

n t e r p r e t a

t i v e

N o t i c

e

r e l a t i n g t o

M

SR

ul e

G-

1 7 ,

which

r e q u i r e s  

t h e

d i s c l o s u r e

of

e r t a i n r i s k s  

t o  

i s s u e r s  

of complex

m u n i c i p a l

s e c u r i t i e s .

Th e

C i t

y ,

how

ever,

a s

p u

b l i c l y a

cknowle

dged t s u n

d e r s t a n d i

n g

of

h e r

i s k s

i d e n t i f i e

d

i n  t h e

I n t e r p r e t

a t i v e Guidance

 

o r

m

o r e

t h a n

t e n y e a r s ,

and 

our i n t e r v

i e w s

r

e v e a l e d

t h a t

 

t h e

C i t y

o f f i c i a

l s r e s p

o n s i b l e  

f o r e x e c u t i n

g

t h e

 sw

aps

u n

d e r s t o o d

t h o s e

r i s k s  

l o n g

 

b e

f o r e  

t h e n . Becau

se

o

u r i n v e s

t i g a t i o n u

n c o v e r e d

 

no

e v

i d e n c e

of

i s r e

p r e s e n t a t

i o n s

o r  

o m i s

s i o n s

o n

t h e

 

p a

r t

of

h e

C

i t y ' s sw

ap c o u n t e r p

a r t i e s

o r

u n

d e r w r i t e r

s  

a n d ,

n

f

a c t ,

f

ound 

t h

a t

t h e

C i t y

p u b l i

c l y

ack

nowledge

d t s

u n d e r s t

a n d i n g of

h

e  

r i s k s ,

t h

e  

Me m o r a

n d um

and t h e R o o

s e v e l t

I n s t

i t u t e  b l o g

p o s t

were n o t

h e l p f u l

t o o u r  a n

a l y s i s .

R e l i a n c e

o n

t

h e b l o g

p o s t , t h e

Septemb

er and

 O c t o b e r

 

L

e t t e r s ,

a

nd

t h e M

e m o r a n

d um  t o

a s s e r t a

c l a

i m

a l s

o woul

d be m i s p l a c e

d  

f o r

a n o

t h e r  r e a s o n

:

m a n y

of

h e

c l a i m

s and

recommendations

i n  

t h e s e

documents

a r e

grounded

a l m o s t ,

f

n o t  

e n t i r e l y ,

o n  a

i n g l e

a r b i t r a t i o n

d e c i s i o n

 

i n v

o l v i n g Bald

win

C

oun ty S e w e r 

S e r v i c

e

LL

C B C

S S) ,

r i v a t

e

sew

er

t i l i t y

h e a d q u a r

t e r e d

i n Summerda

le, 

Ala

bama.

I n

t h i s d e c i

s i o n , a  - 1

p a n e l fou

nd t h a t  A m

S out h Ba

nk,

w h

i l e a

c t i n g b o t h

a s a

r e d i t o r

and

an

a d

v i s o r ,  m i s r e

p r e s e n t e d

 

t

h e  

r a t e

s o n

v a r i a b l e r a

t e

d e m

an d

n o t e

s s o

l d t o B

CSS. S p e c i f i

c a l l y , bank

emplo

yees r e p e

a t e d l y t o l

d

i n d i

v i d u a l s

a t BCSS

 h a t

t

h e

v a r i a

b l e

r

a t e s

were

L

IBOR

a t e s   w h en,

 n

f a c t ,

t

h e y

were

 

n o

t .

F

u r t h e r ,  

t h

e

p a n e l  d e t e r m

i n e d

t h a t

w h e n

t h e bank

 l a t e r s o l

d s

w a p a g r e e

m e n t s t o

BCSS

t

f a i l e

d

t o

d i s c l o s e

t

h e b a s

i s

r i s k

a s s o c

i a t e d w i t h

t h e

swap

. 

Th e

p a n e l  r e j e c t e d

 

t h e b

a n k s  

c

l a i m

t h a

t

t

had

d i s c l o

s e d t h i s

 r i s k ,

n o t i n

g

t h a t

t

h e  o n l y

p r e s e n t a t

i o n a l l e g e

d l y m a d

e w

a s   o

a

2

3- y e

a r- o l d

l o w  

l e v e l t e m p o r

a r y

e

mployee

a t  

BCSS

h ose

r

e s p o n s i b i l

i t i e s

i n c

l u d e d

s u p e r v i s i

n g

t

h e

s e

c r e t a r i e s

,

b u t n o t

f i n a n c e

.

F u

r t h e r ,  t h e p a n e

l  

n o t e d

t h a t

t h i s

p

r e s e n t a t i

o n w

as h r e e  

y e a r s b e f o r e

t h e ba

nk e

ven

s

o l d a

swap

agreement

o

BCSS.

Beca

use t h e f

a c t s and c i r c u m s

t a n c e s

i n

t h e BCS

S

r b i t r a t i o

n

d

e c i s i o n

a r e so

 

d i f f e r e n t

t h a n

t h o s

e

r e

l a t i n g

t o t h e C i t y

 an

d

t s

e x i s t i n

g s w a p a g r e e m e n

t s ,

h a t

d e c i s i

o n

o

f f e r s no

s u p p o r t

f o r

 

t

h e i d e a t

h a t

t h e

 C i t y s h o u

l d f i l e a

r a u d

o r u n f

a i r d e a l i n g

 c l a i m

a g a i

n s t

i t s

c o u n t

e r p a r t i e s

.

F i r s t ,

wh

ereas

t h e

 

B

CSS

r b i t r

a t i o n

i n v o

l v e d a

  p

e c i f i c

m i s r e p r e

s e n t a t i o n

 —sayi

ng

t h e

r a t e  

a t

i s s u e

w a s

 

a

LI

BOR

a t e  

w h e n

t

w a

s

n o t

—

o ur r e v i e w  foun

d

n

o 

e v i d e n c

e t o s

u g g e s t

t h a t any

of

t h e

C i t y ' s

 

bank

 

c o u n

t e r p a r t i e

s

m

i s r e p r e s

e n t e d t h e

t e r m

s

of

h e s w

ap

a g r e

e m e n t s .

Secon

d, n l i k e

8/20/2019 Chicago Interest Rate Swap Legal Analysis

http://slidepdf.com/reader/full/chicago-interest-rate-swap-legal-analysis 29/29

BCSS

 

h

e C i

t y has

 

d

ecade

s

of

 

x p

e r i e n

c e

i n e n

t e r i n g

 

s wa p

 

r a

n s a c t

i o n s .

Th

e

C i t y

 d i d not

e l

y

up

on

t s

ow

n o u n t e r

p a r t y

 

a

s  

an

 a d

v i s o r .

  I n s

t e a d , our

 

re

view

o

f h e

d

ocume

n t s an d

 i n t e r v

i e w s

of

i n d i v

i d u a l s

 

i

nvolv

ed

i n e x e

c u t i n g

 

t

h e C i

t y ' s swap

 agr

eeme

nts r

e v e a l

e d t h a t

 

each t r

a n s a c

t i o n  

wa s

thor

oughl

y exami

ne d,

e t t e

d , a

n d

n e

g o t i a t

e d

b

y t s

ow

n i g h l

y s o p h i

s t i c a t

e d

p r o f

e s s i o n

a l s ,

f

i n a n c i

a l  

a d v

i s o r s

,  

t a x

a

d v i s o

r s , an d

 

c o

u n s e l .

 

In

man

y 

a s e

s ,

t h e  

C i t y

 c o m

p e t i t

i v e l y

b i d  t h

e

swaps 

an d

r e c e i v e d

m u l t i p l e p r e s e n t a t i o n s

from

d i f f e r e n t  

banks 

p r i o r t o

a g r e e i n g

on

t h e

lowest

i n

t e r e s t

 r a t e

b i d .

T h i r

d ,

w

e 

ou

nd 

n o ev

idenc

e

t

o  s u g g

e s t

t h

a t  

bank

 

c

o u n t e

r p a r t i

e s m

i s s t a

t e d t h e

r i

s k s

a s s

o c i a t

e d

w i t

h  

t h e sw

aps ,

n

c l u d i

n g

t h

e b

a s i s r i s

k .

To h e

c o n t

r a r y ,

  o r mor

e

tha

n

t e n

y

e a r s ,

t h e C i t

y

h

as 

d i s

c l o s e

d  

p u b l i c

l y t s

u n d e r

s t a n d

i n g of

 

h

e

r i

s k s

a s

s o c i a t

e d

with

 

s

wa p

agre

ements

.

F i

n a l l y ,

 

we a ve

not

 unc

ov er

ed a

n y supp

ort o

r t h e

 

a l l e g

a t i o n

i n

t h e  

uni

on l

e a d e r s

'

Sep

temb

er

a n d O

ctobe

r L e t t e r

s t h a t

t h e  

C i t y ' s

 

i

n t e r e s

t r a t e

 swap

s a

r e

c o s

t i n g t h e  

C i t y  an

d

t h e

C

hicag

o

P u b

l i c S

chool

s

ov er

 

100

m i

l l i o n every

 

y e a r

,  

a n

d hav

e caus

ed

l o s s e s

 

of o

ver 80

0

m

i l l i o

n  t o d a t e .

 

T

h e

Octo

ber L e

t t e r  a

s s e r t s

 t h a t

t h e C

i t y ha

s made

  e t

 

i n t e

r e s t

s wa p

pa y m

en t s 

of

approx

imate

l y

70

 

i l l i o

n .

T

hat 

h e C

i t y

has m

ade 

e t  

s w

a p paym

ents,

 

howe v

er, do

es not

 m e a

n

t h a t  t h e  

C i t y

has 

s u f f e r e d

d amag e s

as 

a

e s u l t  

of

r a u d

o r

u n f a i r d e a l i n g .

Th e  

n o t i o n  

t h a t

n e t

i n t e r e

s t s

wap pa

ymen

ts eq

uate 

t o d a m

a g e s

 pres

uppos

es

t h

a t

s

uch pa

y men

t s a

r e t h e r e

s u l t  

of r a u

d

o r

u n

f a i r

d e a l i

n g

an

d i g

n o r e s

 

t

h e f a c

t t h a t

t h e  C i t y

 rem

ains

o b l i

g a t e d

 

t o

 s e r v i

c e

t

s

debt

( r e

g a r d l e

s s of wh e

ther t

i s s u e

d

a

 

v a

r i a b l

e r a t

e

or

 

a  i

x e d  

r

a t e b

ond).

V.

 

ON

LUS

ION

O

ur n v e s

t i g a t i

o n  f

ound 

n o ev

idenc

e t h a t

wo

ul d

s

u p p o r t

 

a  

go

od a i t

h cl

aim t h a t

 t h e

C i t y '

s

s

wap

agr

eemen

ts

w

ere 

p

rocur

ed by

 

r a u d

 

o r

t h a

t

a n y

of

 h e

C i t y '

s

s w

a p

c o u n t e

r p a r t

i e s ma

de a

n y

m a t e r

i a l

m i s r e

p r e s e n

t a t i o

n s  

or

om

issio

ns of a c t .

 

Nor

d i d

t h e  

i n v e s

t i g a t i

o n d i

s c o v e

r an

y

evi

dence

 

t o

sup

port 

a

clai

m

t h

a t  

t h e

C i

t y ' s s

wap c o

u n t e r

p a r t i e

s

f a i

l e d

t o

 

d e a

l

f a

i r l y

wi

th t h e

C i t y

when 

e g o t i a t i n g

and

e x e c u t i n g t h e  

s wa p 

agreements.

Indeed, 

h e

f a c t s t h a t  a f f i r m a t i v e l y r e f u t e

a n y

s

uch

cl

aim h

e r e

a r e

c l

e a r

an d 

c o m p

e l l i n

g .   F

i l i n g

suc h

 a

cla

im

not

on l

y 

wo u

l d be

a 

wa s

te 

of

t h e  

C i t y ' s

 

m

on e y

, but

 

cou

ld

d a ma

g e t h e

 C i t

y ' s c r e d i b i

l i t y ,

an

d

we a k

e n t s

p o

s i t i o

n i

n c u r r e

n t an d

f u

t u r e bon

d an

d

o

t h e r

f

i n a n c i

a l  d e

a l i n ~ s

a t ~ i d t

r a n s a c

t i o n s .

s

 

L

.

Kop

e c k y

D

aniel

  . o

i n s