WASHINGTON (CN) - A trade group for banking claims in a federal complaint that the U.S. government pulled a classic bait and switch when it diverted dividend payments to a highway trust fund.
The class action filed in the U.S. Court of Federal Claims on Feb. 9, targets a Federal Reserve rule which the plaintiffs claim made the diversion possible.
Since 1913, the Federal Reserve has provided member banks with a six percent annual dividend on stock purchased in any one of the 12 Federal Reserve banks.
The purpose of the rule is to incentivize and retain membership within the Federal Reserve.
The plaintiffs, the American Bankers Association and Washington Federal -- a massive Federal Reserve-backed bank with assets of nearly $15 billion -- say the aging rule was broken when former President Barack Obama signed the Fixing America's Surface Transportation Act into law.
The act is commonly known as the FAST Act.
“The FAST Act set a troubling precedent to target specific segments of the business community to meet broad public obligations like a highway infrastructure. Every industry in this country is vulnerable if this is allowed to stand,” said Rob Nichols, CEO of the American Bankers Association. Nichols issued the statement last week.
The legislation authorized spending $305 billion over the next four years on a variety of transportation maintenance programs.
Funds go toward the upkeep of national highways, promoting highway motor vehicle safety and maintaining public transportation. Money is also allocated for the study of hazardous materials safety and rail, research and transportation technology and statistics programs.
But to keep funds rolling in, the plaintiffs claim the rule unfairly targeted financial institutions with more than $10 billion in assets and allowed for the slashing of the guaranteed six percent dividend promised to those institutions by the Federal Reserve Banks.
They claim that as a result of the what they call a bait-and-switch, $1.1 billion in anticipated dividends were transferred from stockholders to the United States Treasury.
"The FAST Act has resulted quite literally in highway robbery, albeit by another name," the complaint said.
The changes were made under Congressional direction but the plaintiffs allege that the rules were nonetheless deceptive.
"None of the contract documents exchanged between the parties includes a provision stating that the six percent dividend would be subject to change or that the contract would be subject to legislative changes to the Federal Reserve Act," the 25-page complaint states.
The plaintiffs also claim that the defendant violated its Fifth Amendment rights under the U.S. Constitution which bars the government from taking private property without just compensation.
Representatives from the American Bankers Association and Washington Federal did not return a call for comment.
“While legal action against the government is always a last resort, it’s one that we must turn to when alternatives are unavailable and matters of principle are at stake,” Nichols said.
Representatives from the Washington Federal did not return a call for comment.
The plaintiffs are represented by Brett Shumate of the K Street firm of Wiley Rein.
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