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Swap Deal Recoils, Stings Regions

Court orders Regions Bank to pay $10 million in compensation to Baldwin County Sewer Service LLC.

Court orders Regions Bank to pay $10 million in compensation to Baldwin County Sewer Service LLC.

Following a weeklong trial in January, an arbitration panel ruled that Regions Bank would have to pay a Baldwin County sewer company nearly $10 million in compensation for defrauding it in a series of complex interest rate swaps.

Research into that case, done by Cunningham Bounds LLC, representing Baldwin County Sewer, uncovered court records of four other similar cases that Regions had settled in the past four years. The Baldwin County sewer 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.

As part of financing packages sold in the early 2000s, customers issued bonds that carried a variable interest rate. These bonds were more profitable for the bank than traditional loans. Baldwin County Sewer Service LLC  issued $43 million in bonds, as well as purchasing three interest rate swaps from Regions Bank, which, the utility was told, would fix the company’s interest rate. The utility’s interest rate nearly doubled, though, when the market crashed in 2008, according to court documents.

Failures in that kind of transaction, technically known as variable rate demand notes, bloomed nationwide in the face of the 2008 financial crisis. Regions released a statement in May noting that it worked with clients to mitigate the impact of unprecedented market conditions by voluntarily restructuring such transactions whenever possible and successfully resolved “the majority” of such cases out of court. Regions declined to comment further.

The arbitration panel found there was a “pervasive failure” within Regions Bank to communicate the true risks of interest rate swaps to its customers and that these failures constituted a “material misrepresentation.”

“Executives and managers at Regions knew the risks but the people actually selling the packages didn’t,” says Billy Bonner, a Cunningham Bounds lawyer who represented the utility.

Bonner says he got several calls from companies who had been caught in interest rate swap troubles after the Baldwin County Sewer decision but isn’t currently working on any similar cases.

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