Flint residents sue bond underwriters, claim they helped create city’s water crisis

(This story has been updated with additional information.)

FLINT, MI — A federal lawsuit filed on behalf of Flint children claims three companies that helped finance Flint’s participation in the Karegnondi Water Authority are partly responsible for the city’s water crisis.

The lawsuit, filed Wednesday, Oct. 7, in U.S. District Court, says J.P. Morgan Chase & Co., Wells Fargo Bank National Association, and Stifel, Nicolaus, and Company, Inc., pushed ahead with bonding to finance construction of a new water pipeline to Lake Huron while knowing the city would use the Flint River as its short-term source of drinking water and of the resulting hazards to residents’ health.

Without the bond financing, Flint would not have been able to join the KWA and tap into its new pipeline, the lawsuit alleges, the KWA would not have been able to start construction of the project, and the city would never have switched its water source to the river.

Flint was initial partner in the KWA, agreeing to buy a set amount of raw water from the new pipeline, but unlike Genesee County, the other primary partner, the city stopped purchasing pre-treated water from the city of Detroit before the pipeline was built, switching instead to treating its own river water during parts of 2014 and 2015.

The city’s change in water source triggered the water crisis, sending highly corrosive water through the distribution system, including thousands of lead and galvanized service lines to homes, causing elevated levels of lead and bacteria in tap water.

State appointed emergency managers were charged with running the city’s affairs at the time bonding was secured for the pipeline project.

“J.P. Morgan Chase, Wells Fargo, and Stifel knew … that the Flint River would be used as an interim source of drinking water for Flint for the foreseeable future, as well as the hazards to human health presented by the Flint River’s highly corrosive water and Flint’s aging network of lead service lines,” the lawsuit filed by New York-based attorney Corey Stern says in part.

MLive-The Flint Journal could not immediately reach Wells Fargo or Stifel, Nicolaus and Company for comment, while a representative of J.P. Morgan Chase declined to comment on the case.

Stern, who has represented Flint residents in other federal lawsuits and who helped negotiate a proposed $600-million lawsuit with the state of Michigan, said the three companies bought and sold bonds that financed Flint’s participation in the KWA despite having “all the reports and all the information that the (Flint water) treatment plant wasn’t ready” to produce safe water.

Each client in the lawsuit is under the age of 18, Stern said, because “they were the ones who were the most injured” by exposure to elevated levels of lead.

Financing for the KWA pipeline has long been a source of interest for state prosecutors as they pursued criminal charges related to the water crisis, but civil cases to date have focused on alleged wrongdoing by city and state workers and by private consultants that advised the city on its water system.

Two years ago, the city’s former utilities administrator testified in Genesee District Court that Flint was only able to buy into the KWA because of the approximately $85 million it was allowed to borrow — supposedly to clean up a lime-sludge lagoon — because it had reached its borrowing limits and was in financial distress.

The state Department of Environmental Quality issued an administrative consent order that allowed the city to borrow to fix the sludge lagoon, which it claimed was an environmental emergency that must be addressed.

Stern’s lawsuit says Wells Fargo, J.P. Morgan Chase and Stifel knew of “the farce that was the administrative consent order,” but concluded “the back-end was too good for them to pass up despite the consequences.”

Although the city did buy into the KWA pipeline, using the increased debt allowed by the consent order, the Great Lakes Water Authority later bought out its partial ownership and future bond payment related to the project.

In return, Flint agreed to buy already-treated water for the next 30 years from GLWA.

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