BEVERLY HILLS FINANCIAL FIRM AND FOUNDER PLEAD GUILTY TO BID-RIGGING IN MUNI BOND MARKET

The following excerpt is from the Department of Justice website:

"WASHINGTON – A Beverly Hills, Calif.,-based financial products and services firm, and its founder and owner pleaded guilty today in the Southern District of New York for their participation in bid-rigging and fraud conspiracies related to contracts for the investment of municipal bond proceeds and other related municipal finance contracts, the Department of Justice announced. 

Rubin/Chambers, Dunhill Insurance Services, also known as CDR Financial Products, and David Rubin, CDR founder and owner, pleaded guilty before U.S. District Judge Victor Marrero in the Southern District of New York.  Rubin and CDR, along with Zevi Wolmark, also known as Stewart Wolmark, the former chief financial officer and managing director of CDR, and Evan Andrew Zarefsky, a vice president of CDR, were indicted on Oct. 29, 2009.  The trial for Wolmark and Zarefsky is scheduled to begin on Jan. 3, 2012, in the Southern District of New York.

Rubin and CDR each pleaded guilty to participating in separate bid-rigging and fraud conspiracies with various financial institutions and insurance companies and their representatives.  These institutions and companies, or “providers,” offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States.  The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects.  Rubin and CDR also pleaded guilty to one count of wire fraud in connection with those schemes.

“Mr. Rubin and his company engaged in fraudulent and anticompetitive conduct that harmed municipalities and other public entities,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Justice Department’s Antitrust Division.  “Today’s guilty pleas are an important development in our continued efforts to hold accountable those who violate the antitrust laws and subvert the competitive process in our financial markets.”

According to court documents, CDR was hired by public entities that issue municipal bonds to act as their broker and conduct what was supposed to be a competitive bidding process for contracts for the investment of municipal bond proceeds.  Competitive bidding for those contracts is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.

During his plea hearing, Rubin admitted that, from 1998 until 2006, he and other co-conspirators supplied information to providers to help them win bids, solicited intentionally losing bids, and signed certifications that contained false statements regarding whether the bidding process for certain investment agreements complied with relevant Treasury Regulations.  Additionally, Rubin admitted that he and other co-conspirators solicited fees from providers, which were in fact payments to CDR for rigging or manipulating bids for certain investment agreements so that a particular provider would win that agreement at an artificially determined price. 

“Mr. Rubin and his firm were trusted with public money and confidence to assist municipalities with issuing bonds,” said FBI Assistant Director in Charge Janice K. Fedarcyk.  “Contrary to his agreement and the law, Mr. Rubin shirked his responsibilities while defrauding taxpayers.  Thankfully, this bid-rigging scheme, where Mr. Rubin decided the winners and losers, is over.”

“ IRS is the federal agency responsible for compliance with tax laws applicable to the issuance of tax-exempt municipal bonds,” said Special Agent in Charge Charles R. Pine of the Internal Revenue Service-Criminal Investigation (IRS-CI) New York Field Office .  “Today’s guilty pleas by David Rubin and CDR are the result of a coordinated effort by the Department of Justice and IRS-Criminal Investigation.  Depriving municipalities of investment earnings and diverting arbitrage via illegal agreements and kickbacks will not be tolerated.  IRS-Criminal Investigation agents will continue to investigate fraud in the municipal bond market and recommend prosecution against those who have participated in the fraudulent scheme.”      

The bid–rigging conspiracy with which Rubin is charged carries a maximum penalty of 10 years in prison and a $1 million criminal fine.  The fraud conspiracy with which Rubin is charged carries a maximum penalty of five years in prison and a $250,000 criminal fine.  The wire fraud charge with which Rubin is charged carries a maximum penalty of 20 years in prison and a $250,000 criminal fine.  The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

CDR faces a maximum criminal fine on the bid-rigging charge of $100 million.  The fraud conspiracy and wire fraud offenses with which CDR is charged each carry a maximum criminal fine of $500,000.  The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Rubin is the tenth individual to plead guilty in an ongoing federal investigation into the municipal bonds industry, which is being conducted by the Antitrust Division’s New York Field Office, the FBI and IRS-CI. 

In addition, Dominick Carollo and Peter S. Grimm, formerly of GE Funding Capital Market Services, and Steven E. Goldberg, formerly of GE Funding Capital Market Services and FSA, were indicted on July 27, 2010, and are scheduled to begin trial in April 2012.  Three former UBS employees, Peter Ghavami, Gary Heinz and Michael Welty, were indicted on Dec. 9, 2010."

WACHOVIA BANK N.A. CHARGED BY SEC WITH BID RIGGING IN MUNICIPAL BOND MARKET

The following excerpt is from the SEC website: “Washington, D.C., Dec. 8, 2011 – The Securities and Exchange Commission today charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds. The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico. Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids. Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division. “Wachovia won bids by playing an elaborate game of ‘you scratch my back and I’ll scratch yours,’ rather than engaging in legitimate competition to win municipalities’ business.” said Robert Khuzami, Director of the SEC’s Division of Enforcement. Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Wachovia hid its fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct. This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.” Wachovia Bank is now Wells Fargo Bank following a merger in March 2010. When municipal securities are sold to investors, portions of the proceeds often are not spent immediately by municipalities but rather temporarily invested in municipal reinvestment products until the money is used for the intended purposes. These products are typically financial instruments tailored to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts (GICs), repurchase agreements (repos), and forward purchase agreements (FPAs). The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality. According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products. Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. Without admitting or denying the allegations in the SEC’s complaint, Wachovia has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933 and has agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval. Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry. Others charged prior to Wachovia are: J.P. Morgan Securities LLC – $228 million settlement with SEC and other federal and state authorities on July 7, 2011. UBS Financial Services Inc. – $160 million settlement with SEC and other federal and state authorities on May 4, 2011. Banc of America Securities LLC – $137 million settlement with SEC and other federal and state authorities on Dec. 7, 2010. In a related action to the Banc of America matter, the SEC today charged the firm’s former vice president and marketer Dean Pinard for his role in various improper bidding practices. Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation. Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment adviser, municipal securities dealer, or municipal advisor. The SEC’s investigation, which is continuing, has been conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers, who are members of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office. The SEC thanks the other agencies with which it has coordinated this enforcement action, including the Antitrust Division of the U.S. Department of Justice, Federal Bureau of Investigation, Internal Revenue Service, Office of the Comptroller of the Currency, and 26 State Attorneys General.”