Keller Rohrback and co-counsel have filed a lawsuit on behalf of the City of Richmond, California against JP Morgan Chase, Royal Bank of Canada, and former financial advisors Public Resources Advisory Group and The Majors Group, over alleged illegal derivative contracts. The lawsuit seeks to recover tens of millions of dollars in payments made by the City on purported derivative contracts with defendants. The case was filed in California Superior Court, Contra Costa County.

Derivatives are complex and often risky securities whose value is dependent on underlying assets. Because of their inherent risks, California law strictly limits the conditions under which cities may enter into derivatives contracts as a form of municipal financing, only allowing them for specific purposes and requiring that they are connected to highly rated bonds. The derivatives at issue in this case, which were interest rate swaps and a swaption, did not meet those requirements. Keller Rohrback partner, Gary Gotto, attorney for the City, said, “California law is clear: a city’s contract is void if it did not comply with statutory requirements. The recipient of money paid under a void contract is obligated to return the payments.” 

The City asserts that the transactions were both costly and illegal. Richmond has met its payment obligations on the swaps, but Vice Mayor and City Councilperson Claudia Jimenez observed, “For the banks, the tens of millions of dollars that Richmond paid on these derivatives amounted to money for nothing. Meanwhile, our residents have had to endure higher taxes and reduced public services.” The City also maintains that the payments made on the derivatives worsened its already challenged financial condition and led credit rating agencies to downgrade Richmond’s credit, making additional funding even more difficult and expensive. 

In its suit, the City notes that the legal requirements surrounding derivatives exist to protect public funds, not the parties to government contracts. R. Bradley Miller, another of the City’s attorneys, said “The laws are there to protect the public interest. The legal requirements are designed to prevent waste and the improper use of public funds, and to ensure transparency and accountability.” 

The attorneys for the City of Richmond are Keller Rohrback partners Gary Gotto and Matt Melamed, along with R. Bradley Miller of R. Bradley Miller Law. The City is also represented by the City Attorney Dave Aleshire and Senior Assistant City Attorney Floy Andrews of Aleshire & Wynder, L.L.P.

Read the official press release on Business Wire here.