* Remember this story?…

John Tillman, the CEO of conservative think tank Illinois Policy Institute, and Warlander Asset Management’s Eric Cole, a protege of Appaloosa Management’s David Tepper, are teaming up in an effort to invalidate a whopping $14.3 billion of Illinois debt on the grounds that the state’s pension bond sale in 2003 and securities issued in 2017 to pay a backlog of unpaid bills were in fact deficit-financing transactions prohibited by the constitution.

We’ve been through the constitutional arguments of this case time and again. It’s been called a “crank lawsuit,” “absurd,” “ridiculous” and a “policy paper masquerading as a complaint.”

* There was also this little tidbit buried in some of the coverage…

Warlander owns $25 million Illinois general-obligation bonds issued in 2001, 2014, 2017 and 2018. Those bonds would be more secure if the firm succeeded in having the other securities invalidated, since there would be more money available to service the debt.

But is that all this is about for Warlander?

* AllianceBernstein and Nuveen have filed an Amicus Brief in the debt service case. In that brief is this allegation…

Warlander is not an Illinois taxpayer – its Complaint asserts a disclosed interest in the litigation that has no economic basis and admits a “separate financial interest in the litigation” that is not disclosed at all. On information and belief, that “separate financial interest” is credit default swaps Warlander purchased that will pay off if this action causes Illinois to default on any of its G.O. Bonds.

A simple question from the bench will resolve the question raised by Warlander’s own Complaint. In any event, the Petition should not be granted until the answer is provided so that the Court can determine whether the Petition is filed not to vindicate the interests of Illinois taxpayers but to allow an out-of-state hedge fund to create a default and profit from its swaps. […]

A credit default swap is a contract similar to an insurance policy on a bond. If the bond defaults, the buyer can collect from the institution that sold the swap. The swap-buyer does not have to own any bonds when it buys its swaps; it can buy the bonds later – even after a default craters the price of the bonds – and tender the bonds to the swap-seller for 100% payment on its swap contract.

Permitting activist investors to litigate against the validity of widely held municipal bonds based on their credit default swap bets could introduce a significant destabilizing force into the municipal markets and harm investors and government entities alike. […]

If public officers “for their own protection” refuse to pay principal and interest on
the challenged bonds until Petitioners’ lawsuit is finally adjudicated, the result will be catastrophic – the bonds will default, Illinois will immediately lose its credit rating and the trading price of the challenged bonds will drop sharply. If Warlander holds swaps, it can then buy G.O. Bonds at bargain basement prices and tender them to the swap-seller at 100 cents – realizing an enormous profit from the catastrophic default it has manufactured. […]

As of the date of that report, credit default swaps on Illinois G.O. Bonds exceeded $300 million. […]

On information and belief, Warlander has bought credit default swaps well in excess of its nominal $25 million in G.O. Bonds. If swaps are Warlander’s undisclosed “separate financial interest in the litigation,” then Warlander stands to reap an extraordinary profit from the mere pendency of this litigation. [Emphasis added.]

* I asked Warlander and the Illinois Policy Institute for a response. A spokesperson said he would not be providing comment beyond a new motion to block the Amicus Brief…

The proposed brief speculates at length about the nature of Warlander’s “financial interest.” There is nothing improper about an investment firm having a financial interest in litigation—this is simply what investors do. Importantly, the existence of Warlander’s financial interest has been disclosed from the outset. Further inquiry into that interest is not relevant, has no bearing on any issues relevant to Mr. Tillman’s Petition, and stands entirely separate from the constitutional violations alleged.

The next hearing is Thursday.