MORE BID RIGGING CHARGES IN THE MUNY MARKET

Federal and state law enforcement officials are continuing their investigation into bid rigging and manipulation in the municipal bond market. Last week GE Funding Capital Market Services, Inc. became the latest market participant to settle. The firm resolved possible charges with the DOJ, the SEC, the IRS, and 25 state attorneys general. See, e.g., SEC v. GE Funding Capital Market Services, Inc., Civil Action No. 2:11-cv-07465 (D.N.J. Filed Dec. 23, 2011).

The actions involving GE Funding, as well as prior cases, centered on the reinvestment of funds from the sale of municipal bonds. IRS regulations require that those funds be invested at fair market value which is generally established through a competitive bidding process.

In the cases involving GE Funding, the firm is alleged to have manipulated the bidding process from 1999 through 2004. During that period former GE Funding traders entered into agreements to manipulate the bidding process and made payments and engaged in other activities related to those agreements which continued through 2006. In connection with those agreements GE Funding is alleged to have won numerous bids through a practice called “last looks” under which it obtained information regarding competitor bids prior to bidding. The firm also deliberately submitted losing bids to facilitate other arrangements in the market. Collectively, these actions, which involved at least 328 municipal bond reinvestment transactions in 44 states and Puerto Rico, jeopardized the tax-exempt status of billions of dollars in municipal securities.

GE Funding settled with the DOJ by admitting and accepting responsibility for its anticompetitive and manipulative actions. The firm entered into a non-prosecution agreement with the Justice Department. It also agreed to pay a total of $70 million in disgorgement, penalties and restitution in conjunction with its settlements with the DOJ, SEC, IRS and the states. The settlement with the DOJ took into consideration the cooperation of the firm.

In settling with the SEC, the firm consented to the entry of a permanent injunction without admitting or denying the allegations in the complaint, except as to jurisdiction, prohibiting future violations of Securities Act Section 17(a). GE Funding also agreed to pay $10.5 million as a civil penalty along with disgorgement of $10,625,775 with prejudgment interest. The Commission also acknowledged the cooperation of the company.

The settlement with GE Funding is the latest in the on-going investigations into manipulative and anticompetitive actions in the municipal bond market. Previously, Wachovia, now known as Wells Fargo, JPMorgan Chase & Co. and UBS AG entered into settlements based on similar allegations. In addition, criminal charges have been brought against 18 former executives of financial services companies and one is cooperating with the government. Nine executives have pleaded guilty. The investigations are continuing.