School sues banks over derivatives

Biola University in La Mirada has sued Bank of America Corp. and BNP Paribas, saying the banks conspired to overcharge the Christian school for $84.2 million of derivatives.

In its suit filed Tuesday in U.S. District Court in Los Angeles, Biola said the banks misled it into believing that it paid a fair price for four derivatives it bought in 2002 and 2004. The contracts were tied to tax-exempt bonds the college sold.

Bank of America, the second-biggest U.S. bank, agreed in January to cooperate with the U.S. Justice Department in a criminal probe of the municipal bond market. The government is investigating allegedly anti-competitive practices in the selling of investments and unregulated derivatives to states, local governments and other tax-exempt borrowers.

Bank of America and BNP Paribas, France’s biggest bank, declined to comment on the lawsuit.

Biola is seeking $25 million or more in compensatory and punitive damages, said Sylvia Scott, a partner with Freeman, Freeman & Smiley in Los Angeles, which is representing Biola.

Derivatives are financial contracts whose value is determined by another security, such as a municipal bond, index or commodity. The instruments bought by Biola were “synthetic fixed-rate” swaps, which issuers of variable-rate bonds use to effectively convert their interest bill into one based on a fixed rate.

Biola bought three of the instruments from BNP, acting on the advice of Bank of America, which sold the fourth swap to the school, the suit says.

The fixed rates the school ended up paying on the swaps were excessive, the suit says. In addition, Biola alleges, Bank of America reached a secret deal with BNP to share its profit on two of the deals.