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REGIONS TO PAY NEARLY $10 MILLION FOR BOND SWAP FRAUD, MOBILE ARBITRATION PANEL RULES

May 20, 2014

By: Stan Diel, al.com

To read at al.com article click here.

BIRMINGHAM, Alabama – Regions Bank will pay a Baldwin County sewer company nearly $10 million in compensation for defrauding it in a series of complex interest rate swaps, an arbitration panel has ruled.

A spokeswoman for Regions declined to comment. An attorney representing the privately-held sewer company said Regions indicated it would not appeal the ruling.

The arbitration panel in Mobile found that the Birmingham-based bank advised Baldwin County Sewer Service LLC in 2005 and 2007 to buy three interest rate swaps, or deals in which the terms of payment of interest on bonds is changed.

Typically, fixed rate interest is traded for variable rate interest, or vice versa, as a hedge against changing rates. But swaps, which were central to Jefferson County's financial collapse in the late 1990s, also can come with hefty fees and complex terms that make them difficult for even the financially savvy to understand.

Arbitration documents indicate that Regions backed about $43 million in bonds sold by Baldwin County Sewer in 2002 and 2007, and told sewer company officials that the interest rate on the bonds was tied to the London Interbank Offered Rate, which is commonly used as a benchmark for variable rate loans. But in fact, documents indicate, the interest rate closely followed LIBOR but was instead tied to the creditworthiness of Regions' guarantee of the bonds.

Under the terms of the swaps Baldwin County Sewer traded its variable rate interest payments for what it was told were fixed rate payments. The sewer company paid Regions a fixed rate, and Regions in turn paid BCSS' variable interest rate. The sewer company paid a variable rate to the bondholders.

Sewer company officials were told by Regions that the variable rate it paid bondholders and the variable rate it received from Regions would be equal, effectively fixing its interest rate, said Billy Bonner, an attorney representing the sewer company. Such deals were commonly marketed by Regions as fixed-rate, and Regions' salesman who dealt with the sewer company was unaware that was not the case, the arbitration ruling indicates.

In 2008, the arbitration ruling indicates, the financial bubble burst and the credit ratings of financial institutions suffered. That pushed the variable interest rates paid and received by the sewer company apart, making the company liable for the difference.

Company officials, who testimony indicates had been told they had a fixed rate, called Regions when they were billed for higher rates and were wrongly told "that there had been some mistake; the rate was still fixed," the panel found.

"What my client was told is they'd get a fixed rate, and that didn't happen," Bonner said today.

A request for punitive damages was withdrawn because Regions employees who represented the rates as fixed to customers had been misinformed by their superiors and believed that to be the case, documents indicate.

The arbitration panel found that Regions actively misrepresented the borrower's obligations and failed to disclose risks. Regions was ordered to refund $7.4 million in expenses associated with the rate swaps and forgive more than $2 million in debt.

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