BEFORE THE FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.

Case Number ___________

CITY OF RENO, NEVADA CLAIMANT, -VSGOLDMAN, SACHS & CO. RESPONDENT. _____________________________________________________

I. STATEMENT OF CLAIM Claimant City of Reno, Nevada, respectfully submits this Statement of Claim against Respondent Goldman Sachs & Co. (Goldman). SUMMARY 1. In 2005, the City of Reno issued $73.45 million of floating-rate bonds to fund

projects and refinance prior debt. At the recommendation of Goldman, these bonds were issued in the form of auction rate securities (ARS). In making this recommendation, however, Goldman did not disclose to Reno that Goldmans support bids were propping up the auction rate securities market and were necessary to achieve the represented low short-term interest rates. Goldman further did not disclose that alternate ARS structures, such as a maximum default rate based on an index, were viable market options at the time of issuance and would have protected Reno had Goldman ultimately decided to stop supporting the market. Goldman failed to disclose

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these facts because they would have prevented Reno from issuing ARS and ARS were more profitable to Goldman than alternate products. 2. In 2006, Reno issued $137,425,000 of floating-rate bonds to finance the

completion of a railroad grade separation project through central Reno and to refinance prior debt. Again, at the recommendation of Goldman, Reno issued its 2006 bonds in the form of auction rate securities (ARS). And as before, Goldman did not disclose to Reno that its support bids were propping up the auction rate securities market and were necessary to achieve the represented interest payments, nor did it disclose the availability of alternate ARS structures, such as maximum default rates based on formulas. Further, Goldman did not disclose that, based on its experience as sole broker-dealer for Renos 2005 bonds, many if not the majority of the auctions for those bonds would have failed but for its intervention. 3. In February 2008, Goldman decided without warning to stop supporting the ARS

market. The ARS market promptly collapsed, and the rates on Renos ARS skyrocketed. As a result, Reno paid much higher interest payments and sustained other damages, such as costs of refinancing and swap termination fees, as outlined within. Reno has brought this arbitration against Goldman to recover the damages it sustained due to Goldmans misrepresentations and omissions during the structuring process, all of which were clear violations of the duties Goldman owed to Reno. BACKGROUND A. Auction Rate Securities 4. ARS are long-term variable-rate instruments with interest rates that reset at

frequent periodic auctions. In each auction, existing holders and prospective bidders state the interest rate they require to purchase or continue to hold the security in each auction. In a typical 2 of 24
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ARS auction, bid orders are accepted starting with the lowest interest rate bid until all securities available for sale are matched with purchase orders. The rate at which the final sell order is filled is known as the clearing rate. The clearing rate applies to the entire issue of ARS, including all other buy orders, and to the securities of existing holders who chose to hold rather than sell their securities in the auction. This type of auction process is referred to as a Dutch auction. 5. ARS auctions are generally held every 7, 28, or 35 days. Orders to purchase or

sell ARS at auctions can be placed only through designated broker-dealers that manage the auctions of the ARS. These broker-dealers (in this case, Goldman) collect buy and sell orders and then forward them to the designated auction agent that administers the Dutch auction. 6. If the bids received by the auction agent are insufficient to purchase all the ARS

offered for sale at a particular auction, the auction fails. As a result, until the next successful auction, the ARS holders are unable to sell the securities that they hold (unless they can do so in a secondary market) and the interest rate on all ARS in the issuance jumps to a contractual maximum rate. 7. Based on the reports of several financial media outlets and state and federal

regulators, by February 2008, the ARS market had grown to approximately $330 billion in outstanding securities. Approximately half of this market (~$160 billion) was issued by

municipal issuers like Reno. 8. Goldman promoted the ARS structure to municipal issuers like Reno as a means

to borrow money long-term for capital projects at short-term interest rates. Goldman also promoted ARS to investors interested in short-term investments (for example, to manage cash balances) as a money-market substitute that generally offered a slightly higher interest rate than a 3 of 24
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money-market fund. Underwriters preferred ARS to other variable-rate instruments because ARS generated larger fees for broker-dealers (e.g., ARS remarketing fees were typically 25 basis points, compared to ~7 basis points for variable-rate demand obligations (VRDO)) and because ARS did not require a liquidity facility or letter of credit and therefore did not use up bank capital. B. Unbeknownst to Most Market Participants, Broker-Dealers like Goldman Propped Up Auctions for ARS 9. Unbeknownst to Reno, the ARS market had historically functioned as promoted

because broker-dealers like Goldman always placed support bids in every ARS auction for which they were the lead broker-dealer. That is, prior to February 2008, Goldman always placed a bid in every auction to prevent auction failure. The other major broker-dealers commonly followed the same practice. At all times, Goldman was aware that if it stopped placing bids to prevent auction failures, many auctions would fail and the ARS product as a whole would fail. 10. Upon information and belief, based on the findings of a study conducted by

members of the Federal Reserve, press reports, and the bid data obtained from Renos ARS auctions, a majority of Goldman-led auctions would have failed in the absence of these support bids. The broker-dealers support bidding thereby created the artificial appearance of a liquid and efficient market, enabling Goldman to market their ARS capital-raising structure to issuers like Reno and to market the securities themselves to institutional and retail investors as sound financial investments. For underwriters and broker-dealers, the apparent zero percent failure rate in ARS auctions was a critical means by which to create and foster trust in the ARS market, because ARS were marketed to investors as a money-market substitute. If traditional ARS investors were aware that there was a chance investors would be unable to quickly liquidate their

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ARS positions and would be stuck holding long-term variable-rate bonds, these traditional ARS investors would quickly abandon the product. C. Interest Rates for ARS Spiked When Broker-Dealers Ceased Blanket Bidding 11. On February 12, 2008, Goldman decided to stop submitting support bids for all of

its lead broker-dealer auctions in the municipal ARS market. Over the next two days, other broker-dealers also ceased support for the market, and over 50% of all auctions failed. 12. Once ARS auctions started to fail en masse, traditional ARS investors predictably

abandoned the product, and ARS no longer generated the low short-term interest rates expected of a money-market like investment. Even for issuers whose ARS did not experience failures, the flight of the traditional ARS investor meant that ARS began to clear at interest rates at or above long-term fixed interest rates, much higher than the rates expected by issuers or generated by the substitute short-term products issuers could have issued instead of ARS. D. ARS Issuers with High-Fixed Maximum Rates Were Particularly Affected 13. As discussed above, ARS structures contained a maximum or penalty rate to

which the interest rate on the bonds would default in the event that there were not sufficient bids to clear an auction. Traditionally, and nearly universally prior to 2004, ARS had deployed a contractual maximum rate based on a formula: a short-term index (such as LIBOR, BMA, or commercial paper) multiplied by a percentage often based on an issuers credit rating. So in a typical formula, an AAA-rated issuer might have a maximum rate of 125% of LIBOR, meaning that if there were insufficient bids to account for all the bonds in the auction, all holders of the bonds would be paid 125% of LIBOR until the next successful auction. Generally these ARS formulas would also have a statutory or contractual cap of a fixed rate percentage, meaning that the maximum rate would be set to the lesser of 125% of LIBOR or, say, 15%. 5 of 24
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14.

Beginning in 2004 and 2005 for municipal issuers, however, underwriters began

suggesting that municipal issuers issue ARS with a contractual maximum rate equal to a highfixed rate, such as 15%, and often stopped disclosing the availability of formulaic maximum rates to issuers. With a high-fixed maximum rate, in the event that there were insufficient bids, the ARS would default to a maximum rate of 15%. Although ARS issues with high fixed maximum rates were issued by municipal issuers after 2004, many municipal issuers continued to issue ARS with formulaic maximum rates through 2007, and outstanding municipal ARS with formulaic maximum rates continued to clear normally (and at essentially the same interest rates as ARS with high-fixed maximum rates) until early 2008. Many municipal ARS with formulaic maximum rates remain outstanding today. Moreover, most non-municipal issuers of ARS, such as corporations, student loan issuers, and closed-end funds, did not issue ARS with high-fixed maximum rates and suffered no notable market access issues. 15. The effect of a high-fixed maximum rate was to inflict very substantial interest

costs upon an issuer with a failed auction. That issuer would be forced to quickly refinance under the strain of the much higher interest rate, thus clearing the failing ARS from the market and removing the bonds from broker-dealers inventories. It also ensured that broker-dealers, who maintained substantial inventories of ARS due to their blanket bidding, would receive much higher interest payments for holding failing ARS in their inventories through refinancing. 16. Following the collapse of the ARS market in February 2008, most ARS with Yet because they had

formulaic maximum rates experienced continual auction failures.

formulaic maximum rates, the resulting interest rates were often effectively capped at rates around 4-5%. By comparison, many ARS with high-fixed maximum rates never experienced an auction failure. Yet once the market collapsed and traditional ARS investors abandoned the 6 of 24
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products, ARS with high-fixed maximum rates would regularly clear at much higher rates. Because of the ARS structure chosen, when the ARS market collapsed in February 2008, ARS issuers with high-fixed maximum rates were much more exposed to high interest rates than issuers with formulaic maximum rates. E. ARS Issuers Troubles Were Compounded by Derivatives like Interest-Rate Swaps 17. Many municipal ARS issuers structured their ARS with a related derivative

transaction, such as an interest-rate swap. In a typical floating-to-fixed swap, an ARS issuer agrees to make fixed-rate payments to a counterparty (often an affiliate of the underwriter) in exchange for a floating-rate payment from the counterparty. The floating-rate payment is

typically based on an index, such as BMA or a percentage of LIBOR, which would be expected to track ARS interest rates such that the floating-rate payment and the payment on the ARS would cancel each other out. When the ARS and the interest-rate swap are combined, the ARS issuers ultimate interest rate-related obligations would be expected to be the fixed-rate payments on the swap and the administrative costs of the ARS. This structure is referred to as a synthetic fixed-rate. The benefit of this synthetic fixed-rate structure is that it produces fixed-rate

payment obligations, allowing for easier budgeting and predictability of an issuers future interest obligations. 18. One significant feature of interest-rate swaps is that, upon early termination, one

party to the swap will owe the other a termination payment. The termination payment obligation is generally fixed based upon the present value of the parties expected future payments under the swap (along with some additional considerations outlined in the particular swap contract). For a floating-to-fixed swap, the present value of the expected future interest payments fluctuates

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constantly based upon interest rate projections, meaning that the nominal termination value can be quite high even when a synthetic fixed-rate structure is working appropriately. 19. When the ARS market collapsed, however, ARS issuers with interest rate swaps

(like Reno) found that their derivative structures no longer functioned as promised by their underwriters. Because broker-dealers had stopped supporting the ARS market and traditional ARS investors had abandoned the product once the risk of auction failure materialized, ARS no longer generated short-term interest rates that matched the variable payments made by swap counterparties, meaning that the ARS issuers had to pay more to their ARS investors than they received from the swap counterparty. Accordingly, the interest obligations of an ARS issuer with a synthetic fixed-rate issuance stopped generating predictably low fixed-interest rates and began to increase as well as fluctuate wildly, particularly for ARS issuers with high-fixed maximum rates. In fact, in early-to-mid 2008, while ARS were clearing at extremely high rates, most short-term indexes actually declined, meaning that ARS issuers with interest rate swaps were making substantially higher payments on their ARS at the same time that they were receiving substantially lower payments from their swap counterparties. And ultimately, ARS issuers who wanted to quickly refinance discovered that they were often locked into their interest rate swaps for many years and that their termination payments (which were no longer related to the rates being generated by their ARS) were often astronomical. THE PARTIES 20. 21. Claimant, City of Reno, is located in Washoe County, Nevada. Respondent, Goldman, Sachs & Co. (CRD # 361), is a registered brokerage firm

with a principal place of business in New York, New York.

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FINRAS JURISDICTION 22. Goldman is a FINRA member. Reno is a customer of Goldman, having procured

and paid for the Goldmans services as underwriter and broker-dealer, and this dispute arises from the business activities of Goldman, including but not limited to underwriting and brokerdealing. The Claimant demands arbitration pursuant to FINRA Rule 12200. FACTUAL ALLEGATIONS THE 2005 ISSUANCE A. In 2005, Reno sought to raise funds, and engaged Goldman as lead underwriter. 23. 24. In 2005, Reno sought to raise funds to finance projects. Reno engaged Goldman to assist with the financing. The parties agreed that the

transaction would be negotiated, meaning that Goldman worked closely with Reno to structure the 2005 bond issuance. 25. Goldman and its representatives actively participated in structuring and

implementing Renos 2005 financing. Goldman ultimately advised Reno on what it regarded as the appropriate capital-generation structure for Renos bonds; acted as Renos agent in dealing with the rating agencies; assisted with ARS-related discussions with bond insurers on Renos behalf; bought the instant ARS bonds from Reno and resold them; sold a related interest rate swap to Reno that supposedly supported the ARS structure; provided monitoring and advisory services regarding the bonds and the swap after the issuance; functioned as the main brokerdealer for Renos ARS auctions; and performed various other tasks as Renos advisor, agent, and fiduciary. 26. In the course of structuring the 2005 bonds, Goldmans representatives had

regular telephone conferences and in-person meetings with Renos representatives. During this 9 of 24
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structuring period, Goldmans representatives continually advised and made recommendations to Reno and its representatives. B. At Goldmans recommendation, Reno issued $73.45 million of ARS 27. In structuring Renos 2005 bonds, Goldman recommended that Reno structure its

bonds as auction rate securities. Goldman represented that ARS would generate considerable interest savings as compared to the fixed rate bonds Reno had outstanding. 28. Relying on representations and recommendations by Goldmans representatives

about the benefits of ARS, Reno decided to issue its 2005 bonds as ARS. C. Goldman omits material information about support bidding and maximum rates. 29. During these debt-structuring negotiations, Goldman did not disclose that at the

time it had a practice of placing bids to prevent failures in every auction for which it was lead broker-dealer, or that without these support bids auctions would fail, the ARS market would collapse, and lower interest costs would surely not be realized. 30. Had Reno known that if it issued ARS it would be wholly-dependent on

Goldmans continued support bidding practice for the ARS market to function and for Renos ARS to generate the predicted short-term rates in its auctions, Reno would never have taken the risk that Goldman might decide, at any point in the 27-year expected life of the bonds, to stop supporting the market causing Renos debt obligations to balloon. Instead, Reno could have chosen an alternate structure for the financing. 31. Goldmans failure to inform Reno about its material auction practices in 2005 and

the risk that those auction practices posed to Renos ARS issuances is a violation of Goldmans obligations under federal and state securities laws, MSRB and NASD rules, as well as its duties as Renos underwriter and fiduciary under state law. 10 of 24
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32. 33.

In structuring the 2005 issuance, Reno utilized a high fixed maximum rate: 15%. Goldman did not disclose to Reno that Goldman and other broker-dealers

continued to underwrite municipal ARS with formulaic rates during this period or that Goldman continued to manage auctions for ARS with formulaic rates that cleared at the same rates as high-fixed maximum rate auctions. A formulaic maximum rate would have provided protection to an issuer like Reno, allowing an issuer to weather an ARS market collapse, like the collapse in February 2008, by preventing interest rates from spiraling out of control. 34. Goldman preferred a high fixed maximum rate, however, in order to protect it

from carrying low interest rate failed ARS bonds in its inventory if the market were to experience problems. It was thus in Goldmans interest to withhold from Reno the availability of formulaic maximum rates in 2005: a high-fixed maximum rate for the ARS made the bonds much more attractive to Goldman and much less desirable for Reno. 35. When the ARS market collapsed in February 2008, the rates on Renos 2005

bonds quickly increased beyond rates for ARS with formulaic maximum rates, causing Reno significant damages in the form of excess interest payments. 36. The MSRB has recognized that underwriters have an obligation to deal fairly with

issuers during the structuring of an issuance of ARS, and to provide all material information to issuers, including information about maximum rates. Goldmans failure to inform Reno about the availability of a formulaic maximum rate is a violation of Goldmans obligations under MSRB and NASD rules. 37. Reno, at Goldmans recommendation, entered into a floating-to-fixed rate swap,

which created a synthetic fixed-rate structure for its 2005 ARS issuance. In its floating-tofixed rate swap, Reno had agreed to pay a fixed rate to the swap counterparty (3.53%) in 11 of 24
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exchange for a floating rate payment from the counterparty (based on the LIBOR index) that was expected to match the payments Reno would owe on the ARS. Through this mechanism, Goldman represented that Reno could achieve a fixed debt obligation equal to the fixed rate on the swap plus the administrative costs of the bonds because the swap counterpartys floating rate payment and the bond payments would be expected to offset. 38. Goldman was well aware, however, that Renos swap would only function as

represented, and the counterpayments from the swap counterparty would only offset the payments on the ARS, if Goldman continued to place bids to support Renos ARS. Nonetheless, Goldman failed to disclose this information to Reno, and recommended that Reno enter issue its ARS with a swap transaction that locked Reno into payments to a counterparty for many years. 39. The ARS debt-financing structure was more profitable to Goldman than

alternative structures. Goldman made far more money on an ongoing basis remarketing Renos ARS than it would have on alternative products. D. Reno issues its 2005 bonds. 40. In October 2005, Reno issued its Series 2005 bonds, totaling $73,450,000, as

auction rate securities. 41. Although Renos 2005 ARS appeared to produce low short-term interest rates,

they only produced these rates because Goldman placed support bids in the auctions and then often sold its inventory at a discount between the auctions, effectively masking that there was no natural market to support Renos auctions at short-term rates. 42. In February 2008, Goldman stopped placing cover bids in auctions generally, and

the rates on Renos ARS rapidly increased. Moreover, the swap sold by Goldman to hedge Renos exposure to variable interest rate shifts utterly failed, causing Reno to pay both the 12 of 24
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inflated interest payments on the bonds and a spread on the swap. For a period, Renos total interest expense exceeded 18%, over four times the interest rate it expected to pay on its 2005 bonds. And when Reno finally refinanced, the administrative cost of a letter of credit for the refinanced bonds was much higher than during earlier periods prior to the collapse of the ARS market. 43. As described below, Reno seeks to recover those increased interest payments, Reno

refinancing costs, and excess administrative costs going forward in this arbitration. reserves the right to supplement these damages as discovery progresses. THE 2006 ISSUANCE A.

In 2006, Reno sought financing to fund a railroad project, and engaged Goldman as an underwriter. 44. In 2006, Reno sought advice regarding the completion of a railroad grade

separation project in the center of the city. Based on the relationship Reno had with Goldman from the 2005 issuance, Reno hired Goldman to underwrite this 2006 issuance. 45. As in 2005, Goldmans representatives participated actively in planning the

structure of and implementing Renos financing plans in 2006. Goldman ultimately advised Reno on the appropriate structure; acted as Renos agents in dealing with the rating agencies; assisted with discussions with bond insurers; bought the bonds from Reno and resold them; provided monitoring and advisory services regarding the 2006 bonds after the issuance; functioned as the main broker-dealer for the auctions; and performed various other tasks as Renos advisor, agent, and fiduciary.

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B.

Goldman provided advice and recommendations to Reno on which Reno relied. 46. Reno informed Goldman that it wanted to raise funds to fund the completion of Goldmans

the railroad project and to refinance outstanding debt relating to the project.

representatives ultimately recommended that Reno issue $137.425 million worth of ARS. 47. During these negotiations, as in 2006, Goldman did not disclose that it had a

practice of placing support bids in every auction for which it was lead broker-dealer in order to prevent auction failures, and that if it stopped placing these bids, auctions would fail and the ARS market would collapse. 48. Further, Goldman also did not disclose that the auctions for Renos 2005 ARS,

which Goldman led, were clearing only because of Goldmans cover bidding. This means, in short, that Renos 2005 issuance generated short-term interest rates only because Goldman bid at those rates. 49. As it had done in connection with the 2005 ARS, Reno, at Goldmans

recommendation, entered into a floating-to-fixed rate swap, which created a synthetic fixedrate structure for its 2006 ARS issuance. In its floating-to-fixed rate swap, Reno had agreed to pay a fixed rate to the swap counterparty (3.778%) in exchange for a floating rate payment from the counterparty (based on LIBOR) that was expected to match the payments Reno would owe on the ARS. Through this mechanism, Goldman represented that Reno could achieve a fixed debt obligation equal to the fixed rate on the swap plus the administrative costs of the bonds because the swap counterpartys floating rate payment and the bond payments would be expected to offset. 50. Goldman was well aware, however, that Renos swap would only function as

represented, and the counterpayments from the swap counterparty would only offset the 14 of 24
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payments on the ARS, if Goldman continued to place bids to support Renos ARS. Nonetheless, Goldman failed to disclose this information to Reno, and recommended that Reno issue its ARS with a swap transaction that locked Reno into payments to a counterparty for thirty-four years. 51. Goldmans failure to inform Reno that its bidding practices distorted the prices

generated by the auctions is a clear violation of Goldmans obligations under MSRB and NASD rules, including most notably MSRB rule G-17, which requires underwriters to ensure that an issuer is treated fairly: When a dealer is negotiating the underwriting of municipal securities, the dealer has an obligation to negotiate in good faith with the issuer. Also is the dealer knows the issuer is unsophisticated or otherwise depending on the dealer as its sole source of market information, the dealers duty under rule G-17 is to ensure that the issuer is treated fairly specifically in light of the relationship of reliance that exists between the issuer and the underwriter. MSRB G-17 Interpretive Letter, December 1, 2007 (emphasis added). Goldman was well aware that Reno was dependent on Goldman to provide it accurate information about the state of the ARS market and Goldmans own bidding practices, and yet Goldman did not inform Reno about the effect its auction practices were having on Renos auctions. C. In February 2008, the ARS market collapsed and Renos structure failed. 52. 53. In April 2006, Reno issued $137.425 million worth of bonds, structured as ARS. In February 2008, Goldman stopped submitting blanket bids in many auctions,

and the ARS market collapsed. Traditional ARS investors quickly fled the market, and ARS no longer generated short-term interest rates that matched the payments Reno received from its swap counter-party. Accordingly, Renos interest payments skyrocketed.

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54.

Reno was forced to rapidly refinance its 2006 ARS in early-2008, at considerable

cost in refinancing fees. Furthermore, Reno was forced to unwind its 2006 swap position, incurring a swap termination obligation of over $8,000,000. 55. Through this arbitration, as explained in the Claims section of this submission,

Reno seeks to recover the damages it has suffered as a result of Goldmans serial breaches of its duties as Renos advisor and fiduciary and under MSRB and NASD rules, as well as damages incurred as a result of Goldmans omission of material information during the underwriting of Renos bonds. Reno seeks to recover, among other costs, its excess interest payments,

refinancing costs, excess interest payments and administrative costs on the refinanced bonds, and swap termination fees. Reno reserves the right to supplement these damages as discovery progresses. GOLDMANS UNDERWRITING AND BROKER/DEALER COMPENSATION 56. Goldman earned substantial fees as a result of its relationship with Reno. Under

the terms of the Contract of Purchase between Reno and Goldman, Goldman agreed to purchase Renos bonds at a price discounted from their par value, the amount of which represented its sales commission and profit when it subsequently sold the Bonds into the market. Additionally, Goldman earned a management fee, which represented a payment from Reno to Goldman for Goldmans assistance in structuring the transaction. 57. Similarly, under the terms of the Broker-Dealer Agreement between Goldman and

Reno, following each auction period, Goldman earned a fee equal to (i) 0.25% of the principal amount of Bonds either held or purchased pursuant to orders submitted to it for a particular auction, or (ii) if no auction took place on a particular auction date, 0.25% of the principal

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amount of Bonds held by holders through Goldman. On the total $210 million of ARS issued by Reno, these fees would annually equal over $500,000. 58. Based on information and belief, Renos swap counterparty, a Goldman affiliate,

also earned a spread on the Swap Agreement. 59. In total, the fees and spreads earned by Goldman and its affiliates through a

synthetic fixed-rate ARS issuance were significantly higher than Goldman could have earned through other financing structures. STATE AND FEDERAL REGULATORS HAVE IDENTIFIED GOLDMANS WRONGFUL CONDUCT, AND GOLDMAN HAS ACCEPTED CENSURE AND PAID PENALTIES 60. Following the collapse of the auction rate market, Goldman entered into a

settlement with various states in which Goldman agreed to pay fines, to buy back billions of dollars worth of auction rate securities, and to refund refinancing fees to certain municipal issuers in order to resolve issues relating to its auction rate securities practices. An example of one of these state settlements is the Consent Order between Goldman and the New Jersey Bureau of Securities. 61. The New Jersey Bureau of Securities made the following findings, among others: (a) Since it began participating in the auction rate securities market,

Goldman Sachs submitted cover bids, purchase orders for the entirety of an auction rate security issue for which it acted as the sole or lead auction manager. (b) [S]uch cover bids were Goldman Sachs proprietary orders that would

be filled, in whole or in part, if there was otherwise insufficient demand in an auction. (c) Because many investors could not ascertain how much of an auction was

filled through Goldman Sachs cover bids, those investors could not determine if auctions were 17 of 24
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clearing because of normal marketplace demand, or because Goldman Sachs was making up for the lack of demand through cover bids. (d) Many investors were also not aware that the liquidity of auction rate

securities was dependent upon Goldman Sachs continued use of cover bids. While Goldman Sachs could track its own inventory as a measure of the supply and demand for its auction rate securities, many investors had no comparable ability to assess the operation of the auctions. There was no way for those investors to monitor supply and demand in the market or to assess when broker-dealers might decide to stop supporting the market, which could cause its collapse. (e) In February of 2008, Goldman Sachs and other firms stopped supporting

auctions. Without the benefit of cover bids, the auction rate securities market collapsed. 62. In the May 4, 2011 Consent Order with the New Jersey Bureau of Securities,

Goldman agreed, among other things, to: (i) buyback ARS from a number of investors; (ii) arbitrate investors consequential damages claims under the auspices of the Financial Industry Regulatory Authority; and (iii) refund refinancing fees to municipal auction rate issuers that issued ARS between August 1, 2007 and February 12, 2008. 63. According to published reports, Goldman has agreed to pay state securities

regulators penalties in the amount of $22.5 million and to buy back over $1.5 billion in ARS from its customers as a result of both its failure to disclose the extent of its involvement in the market for ARS and its misrepresentations about the vibrancy, efficiency, and viability of the ARS market.

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CAUSES OF ACTION Count I: Breach of Fiduciary Duty 64. In connection with the issuance of Renos 2005 and 2006 ARS, Goldman advised

Reno to issue its bonds as ARS, and Goldman acted with respect to Reno with superior knowledge of market risks and opportunities. Goldman had superior knowledge about the ARS structure and the ARS market, and Reno placed its trust and confidence in Goldman and relied on its superior knowledge about how the ARS market worked, the state of the ARS market, and what the important material risks were. Goldman actively encouraged Reno to place trust and confidence in it, was aware that Reno was placing its trust and confidence in Goldmans superior knowledge and expertise, and willingly accepted this position of trust. As a result, Goldman owed fiduciary duties to Reno. 65. Despite its fiduciary obligations, Goldman failed to disclose to Reno material

facts, including (a) the extent to which its blanket bid practice created and manipulated the market for ARS generally; (b) the extent to which its active manipulation of the ARS market disguised the lack of natural demand for ARS; and (c) the availability of an alternate ARS structure using a formulaic maximum rate that would have protected Reno from the markets collapse in the event Goldman ceased its support bidding. These omissions materially misled Reno to its great prejudice, as reflected in the collapse of Renos debt structure and the higher interest costs suffered by Reno after the ARS markets collapse. Goldmans breach of its fiduciary duty benefited Goldman and injured Reno, as outlined above. 66. Goldman breached the fiduciary duty it owed to Reno. Goldman is liable for all

damages sustained as a result of its breach of its fiduciary duty.

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Count II: Fraud 67. As noted throughout this Statement of Claim and in paragraph 65 above,

Goldman made numerous misrepresentations of, and failed to disclose, many material facts to Reno. These misrepresentations and omissions were made to obtain an unjust advantage over Reno. 68. In light of its position of superior knowledge and its role as a municipal

underwriter in negotiated transactions, Goldman unquestionably had a duty to provide accurate information about ARS market practices and conditions to Reno. This duty is further confirmed by the MSRB rules, which directly mandate such disclosure. 69. The omitted facts were unquestionably material to Renos decision to issue ARS.

Had Reno known that the ARS market was wholly dependent on Goldmans support bids and that if broker-dealers like Goldman ceased their support bidding policy the market would collapse and cease generating short-term interest rates, Reno would never have chosen to issue ARS. And had Reno been apprised that there was an alternate ARS structure that would have protected Reno in the event of market collapse, Reno would have chosen the alternate structure. 70. Goldman was well aware that Reno was relying on Goldman to provide accurate

information about the ARS market, and that Goldman was better positioned to have accurate information about its own bidding practices and the broader ARS market than Reno. Reno justifiably relied on Goldman, given that Reno was paying Goldman to provide fair and accurate debt-structuring advice as required by MSRB and NASD rules. Yet Goldman chose to remain silent about these facts because of the profits Goldman stood to gain from the transactions.

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71.

Goldmans fraudulent actions have unquestionably caused damage to Reno, as Goldman is liable for all damages sustained as a result of its fraudulent

outlined above.

misrepresentations and concealment. Count III: Negligent Misrepresentation 72. herein. 73. Goldman breached its duty to Reno by negligently misrepresenting material facts Reno specifically incorporates the allegations contained in Count II as set forth

about the ARS market, the extent of its involvement in propping up the ARS market, and the material risks in the transactions that it recommended. These misrepresentations were made by Goldman to induce Reno to issue ARS, a form of debt that was more lucrative for Goldman than alternative structures. 74. As a direct and proximate result of Goldmans breach, Reno suffered damage as

described herein. Goldman is liable for all damages sustained as a result of its negligent misrepresentations. Count IV: Violation of 10(b) of the Exchange Act and Rule 10b-5 75. In advising that Reno should issue ARS and in buying the ARS from Reno,

Goldman failed to disclose several obvious material facts: that, but for Goldmans support bids, there was not a sufficient market to sustain the auctions and to generate the short-term interest rates necessary to sustain Renos financing structure; and that Reno could have used an alternate ARS structure with a formulaic maximum rate that would have protected Reno from the markets collapse in the event Goldman ceased its support bidding.

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76.

Goldman acted recklessly and had fraudulent motives when dealing with Reno.

Although the ARS were not the most desirable structure for Reno, they were more lucrative for Goldman than other debt structures. 77. Goldman thus deliberately concealed its support bid practices in advising Reno to

issue ARS. As a result, Reno has been damaged as outlined above, and Goldman is liable pursuant to Section 10(b) of the Exchange Act, 15 U.S.C. 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5, thereunder. Count V: Violation of Nevada Securities Act 78. herein. 79. Goldmans misrepresentations and omissions to Reno are also violations of the Reno specifically incorporates the allegations contained in Count IV as set forth

Nevada Securities Act, Nev. Rev. Stat. Ann. 90.215 et seq. The information withheld by Goldman would have significantly affected the issuance decision of any reasonable issuer, and specifically affected the issuance decision of Reno. 80. As a result of Goldmans actions and omissions, Reno suffered significant

damages, for which Goldman is liable under the Nevada Securities Act, Nev. Rev. Stat. Ann. 90.660. Count VI: Breach of MSRB and NASD duties 81. The SEC and FINRA have recognized that a claimant may assert a claim in

FINRA arbitration for violations of MSRB and NASD rules which cause harm to the claimant. Goldmans actions, misrepresentations, and omissions as laid out in the statement of claim constitute violations of the following MSRB and NASD rules:

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MSRB Rule G-17, requiring that each broker, dealer, municipal securities dealer, and municipal advisor shall deal fairly with all persons [including issuers] and shall not engage in any deceptive, dishonest, or unfair practice;

NASD Rule 2310-2 and 2310-3, requiring that NASD members make every effort to make customers aware of the pertinent information regarding [new financial] products and ensure that the customer understands the risks of the product;

NASD Rule 2210(d)(1)(A), requiring that all member communications shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service. No member may omit any material fact or qualification if the omission, in the light of the context of the material presented, would cause the communications to be misleading. 82. As outlined above, Goldmans actions, misrepresentations, and omissions

demonstrate that it did not deal fairly with Reno, and as a result Reno sustained extensive damages. Goldman is liable for all damages caused by its violations of MSRB and NASD rules. 83. progresses. PRAYER FOR RELIEF WHEREFORE, Reno prays that this Statement of Claim be deemed good and sufficient, and that after due proceedings had, there be an award in its favor of: a. b. c. Actual damages; Compensatory damages; Punitive damages; 23 of 24
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Reno reserves the right to assert additional causes of action as discovery

d. e.

Consequential damages; Restitution and disgorgement of all fees and costs associated with issuing the ARS, conducting the auctions, and any and all other associated fees and costs;

f.

The costs of prosecuting this action, together with interest, including pre- and post-judgment interest,

g. h.

Reasonable attorneys fees in connection with the prosecution of this case; and All other appropriate legal or equitable relief deemed appropriate. Respectfully submitted,

February 10, 2012

/s/ Joseph C. Peiffer James R. Swanson Joseph C. Peiffer Jason W. Burge Fishman Haygood Phelps Walmsley Willis & Swanson, LLP 201 St. Charles Avenue, 46th Floor New Orleans, Louisiana 70170-4600 Telephone: (504) 586-5252 Facsimile: (504) 586-5250 Garrett W. Wotkyns Adam B. Wolf Schneider Wallace Cottrell Brayton Konecky LLP 7702 E. Doubletree Ranch Road, Suite 300 Scottsdale, Arizona 85258 Telephone: (480) 607-4368 Facsimile: (480) 607-4366 Peter Mougey Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor,P.A. 316 S. Baylen Street, Suite 600 Pensacola, FL 32502 Office: (850) 435-7072 Fax: (850) 436-6068 Counsel for City of Reno, Nevada 24 of 24
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