An arbitration panel has ordered Regions Bank to pay nearly $10 million to the Baldwin County Sewer Service. The award was for Regions defrauding the company with an interest rate swap scheme. After a week-long trial in January, the arbitration panel found the Birmingham, Ala.,-based bank misrepresented the borrower’s obligations and failed to disclose risks related to a series of complex interest rate swaps.
The sewer company was advised by Regions Bank employees in 2005 and 2007 about purchasing interest rate swaps. Regions backed around $43 million in bonds sold by Baldwin County Sewer in 2002 and 2007, “swapping” variable rate loans for fixed rate loans. The arbitration panel determined that Regions misled the sewer company representatives into believing the interest rates on the bonds it bought were tied to LIBOR – the London Interbank Offered Rate – used to set a benchmark for variable rate loans. However, the loans were in fact tied to Regions’ guarantee of the bonds.
If the variable rate the sewer company paid bondholders and the variable rate it received based on LIBOR were equal, this would essentially give Baldwin County Sewer a fixed interest rate. But because the interest rates were instead tied directly to Regions’ guarantee, when the financial bubble burst in 2008 and Regions’ credit rating suffered, the interest rates “skewed far apart.” This left Baldwin County Sewer liable for the difference between what they paid and what they owed. In fact, the sewer company’s interest rate nearly doubled as a result of the financial collapse.
The arbitration panel ordered Regions to refund $7.4 million paid by Baldwin County Sewer Service as a result of the fraudulent agreement, and to terminate the agreements, which are worth about another $2.5 million. This brings the total of the decision to close to $10 million. The case is believed to be one of the first cases in the country where a bank has been held liable for fraud in connection with the sale of an interest rate swap.
Baldwin County Sewer Service was represented in the arbitration by Billy Bonner and Skip Finkbohner, lawyers with the Mobile-based law firm of Cunningham Bounds. These lawyers did an excellent job for their client in this matter, getting a tremendous result.
Sources: al.com, MarketWatch