We have had a lot of clients ask us what’s going on with MDL 3162, in which plaintiffs allege banks and settlement administrators illegally profited in their management of class action Qualified Settlement Funds (“QSFs”). There are two tracks to the case: the Bank Interest Track and the Digital Disbursement Track. We’ll discuss the Bank Interest Track in this commentary and cover the Digital Disbursement Track in a future paper.
Understanding the allegations in the Bank Interest Track begins with a review of the standard bank business model and why large, low-cost deposits are like Unicorns.
Bank Business Model:
The bank business model is essentially to borrow at low interest rates (deposits) and invest at higher rates (loans/securities). The Bank:
- Borrows short through deposits, which are required to have same day liquidity.
- Lends long through mortgages, auto loans, commercial loans, credit cards, etc. The Bank also holds interest-bearing securities on its balance sheet.
The result is the Net Interest Margin (“NIM”), which is an important driver of the Bank’s profit and stock price.
| Net Interest Margin Example | Rate |
| Earnings on Loan/Securities Portfolio | 5.50% |
| Average Deposit Rate | 2.00% |
| Net Interest Margin (NIM) | 3.50% |
The business model utilizes leverage, meaning the asset portfolio is significantly larger than the Bank’s equity (total value of bank). This ratio is typically around 10%, meaning that the if the Bank is worth $1 billion it is lending $10 billion.
Importance of Deposits:
Deposits are often referred to as the lifeblood of the Bank. Without deposits, the Bank can’t make loans and generate NIM. The Bank must hold sufficient liquidity to meet deposit demands from its customers, which the Bank must return the same day. Large deposit demands can be problematic during times of distress such as The Silicon Valley Bank Crisis.
The rate the Bank must pay to attract deposits is critical to its profitability. While smaller clients are less sensitive to deposit rates, large fiduciaries typically demand to be paid more. It is extremely rare to find low-cost deposits in institutional size, which is why the fiduciary duty of the Banks and Settlement Administrators to claimants is at issue here.
The Alleged Collusion Between the Banks and the Settlement Administrators:
Settlement Administrators responsible for managing QSFs are institutional fiduciaries. They control settlement funds ranging in size from the multi-millions into the billions of dollars, and it is their duty to act in the best interest of clients. Passing through the majority of interest earned on the claimants’ principal is central to this fiduciary duty.
Plaintiffs allege that the Settlement Administrators colluded with the Banks to cheat settlement victims out of QSF interest earnings. The scheme involved Settlement Administrators awarding large QSF deposits to the Banks at well below-market interest rates. In turn, the Banks paid kickbacks to the Settlement Administrators, either directly or through special purpose entities (“SPEs”) created to secretly receive the payments. The case alleges that the Banks benefited from artificially low cost deposit funding in institutional size and the Settlement Administrators profited through undisclosed kickbacks from the Banks, all at the expense of the settlement victims.
The table below illustrates the economics of the alleged scheme at various settlement sizes. This example details how the scheme may have worked in mid-2023 when the Federal Reserve’s benchmark interest rate was set in the 5.25-5.50% range.
| Annual Cost of Interest Rate Scheme | Rate | $10 million | $100 million | $1 billion |
| Effective Fed Funds (Market Rate) | 5.375% | $53,750 | $5,375,000 | $53,750,000 |
| Bank QSF Deposit Rate | 0.500% | $5,000 | $500,000 | $5,000,000 |
| Bank Savings on Deposit | 2.438% | $24,375 | $2,437,500 | $24,375,000 |
| Kickback to Administrators | 2.438% | $24,375 | $2,437,500 | $24,375,000 |
| Opportunity Cost to Claimants | 4.875% | $48,750 | $4,875,000 | $48,750,000 |
If you are interested in learning about what sets Orion Settlement Solutions apart from other QSF administrators, please reach out to me at dbrown@orionmasstort.com.
Orion Settlement Solutions is privately owned and has never participated in a revenue sharing agreement with a bank, hedge fund, or FinTech organization.
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