"The Justice Department is committed to protecting the competitive process and will hold accountable individuals and companies who participate in illegal and anticompetitive conduct," Assistant U.S. Atty. Gen. Christine Varney, who heads the antitrust division, said in a statement about the CDR indictment. (Haraz N. Ghanbari / Associated Press / May 11, 2009) |
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CDR Financial Products Inc. of Beverly Hills, its founder and two other employees of the advisory firm were indicted Thursday by a federal grand jury on charges of conspiring to rig bidding on investment contracts sold to local governments.
The indictment in U.S. District Court in New York alleges that CDR and its employees, who ran the auctions for the investment work, awarded the deals to favored firms in exchange for kickbacks. The government alleges that the conspiracy cost taxpayers by allowing the banks to pay below-market rates.
"The Justice Department is committed to protecting the competitive process and will hold accountable individuals and companies who participate in illegal and anticompetitive conduct," Assistant U.S. Atty. Gen. Christine Varney, who heads the antitrust division, said in a statement.
Indicted were CDR founder David Rubin; Zevi "Stewart" Wolmark, CDR's former chief financial officer and managing director; and Evan Zarefsky, CDR's vice president. The charges are the first to result from a more than three-year investigation into the municipal bond market that has drawn in more than a dozen banks, insurers and local government advisors.
Allan Ripp, a spokesman for CDR, said the firm hasn't had a chance to fully review the complaint. He dismissed allegations that the firm participated in a conspiracy. Rubin's attorney, Donald Etra, said his client would defend against the charges.
"We believe the indictment has no merit," Etra said. "The bottom line is that David Rubin did nothing wrong."
The investigation and the charges filed against CDR and its employees center on so-called guaranteed investment contracts, which local governments buy with the proceeds of municipal bonds. Under the deals, banks and insurance companies agree to pay a fixed rate of return until the money is needed to pay for construction projects.
The allegations are reminiscent of the yield-burning scandal of the 1990s, when Wall Street banks overcharged local governments for Treasury bonds they purchased with their own bond money. Securities firms agreed to pay more than $170 million to settle SEC allegations of yield burning.
The Justice Department's investigation into bid rigging is ongoing. Bank of America Corp. in 2007 agreed to cooperate with the department in exchange for leniency. Others, including JPMorgan Chase & Co. and UBS, have disclosed they may face charges by the Justice Department or the Securities and Exchange Commission in connection with the investigation.
A conspiracy to fix prices on the investments would have cost taxpayers by giving them lower returns than they would receive in a competitive auction. It would also cost the federal government, whose regulations require issuers of tax-exempt bonds to pay as taxes much of what they earn on the investments.
"This case is fundamentally about collusion, the illegal rigging of a purportedly competitive bidding process," Joseph M. Demarest Jr., assistant director in charge of the FBI office in New York, said in a statement. "The result was lower rates of return on the investment of bond proceeds for the state and local governments that hired CDR.
"In a climate of economic austerity, the conduct of the defendants and co-conspirators seems particularly predatory," Demarest said.
According to the indictment, the CDR employees decided who would win investment contracts in advance and solicited sham bids from other institutions to cover it up. In exchange, according to the indictment, the firm received kickbacks, masked as fees for other transactions, on at least 10 occasions from 2001 to August 2005. The amounts ranged from $4,500 to $475,000, according to the indictment.
A bid-rigging count against Rubin and the other employees carries a maximum 10-year prison term, prosecutors said. Other charges include conspiracy, wire fraud, making of false statements and a fraudulent bank transaction count. Not every defendant is accused of each crime. CDR faces a maximum fine of $100 million for bid rigging.
The indictment in U.S. District Court in New York alleges that CDR and its employees, who ran the auctions for the investment work, awarded the deals to favored firms in exchange for kickbacks. The government alleges that the conspiracy cost taxpayers by allowing the banks to pay below-market rates.
"The Justice Department is committed to protecting the competitive process and will hold accountable individuals and companies who participate in illegal and anticompetitive conduct," Assistant U.S. Atty. Gen. Christine Varney, who heads the antitrust division, said in a statement.
Indicted were CDR founder David Rubin; Zevi "Stewart" Wolmark, CDR's former chief financial officer and managing director; and Evan Zarefsky, CDR's vice president. The charges are the first to result from a more than three-year investigation into the municipal bond market that has drawn in more than a dozen banks, insurers and local government advisors.
Allan Ripp, a spokesman for CDR, said the firm hasn't had a chance to fully review the complaint. He dismissed allegations that the firm participated in a conspiracy. Rubin's attorney, Donald Etra, said his client would defend against the charges.
"We believe the indictment has no merit," Etra said. "The bottom line is that David Rubin did nothing wrong."
The investigation and the charges filed against CDR and its employees center on so-called guaranteed investment contracts, which local governments buy with the proceeds of municipal bonds. Under the deals, banks and insurance companies agree to pay a fixed rate of return until the money is needed to pay for construction projects.
The allegations are reminiscent of the yield-burning scandal of the 1990s, when Wall Street banks overcharged local governments for Treasury bonds they purchased with their own bond money. Securities firms agreed to pay more than $170 million to settle SEC allegations of yield burning.
The Justice Department's investigation into bid rigging is ongoing. Bank of America Corp. in 2007 agreed to cooperate with the department in exchange for leniency. Others, including JPMorgan Chase & Co. and UBS, have disclosed they may face charges by the Justice Department or the Securities and Exchange Commission in connection with the investigation.
A conspiracy to fix prices on the investments would have cost taxpayers by giving them lower returns than they would receive in a competitive auction. It would also cost the federal government, whose regulations require issuers of tax-exempt bonds to pay as taxes much of what they earn on the investments.
"This case is fundamentally about collusion, the illegal rigging of a purportedly competitive bidding process," Joseph M. Demarest Jr., assistant director in charge of the FBI office in New York, said in a statement. "The result was lower rates of return on the investment of bond proceeds for the state and local governments that hired CDR.
"In a climate of economic austerity, the conduct of the defendants and co-conspirators seems particularly predatory," Demarest said.
According to the indictment, the CDR employees decided who would win investment contracts in advance and solicited sham bids from other institutions to cover it up. In exchange, according to the indictment, the firm received kickbacks, masked as fees for other transactions, on at least 10 occasions from 2001 to August 2005. The amounts ranged from $4,500 to $475,000, according to the indictment.
A bid-rigging count against Rubin and the other employees carries a maximum 10-year prison term, prosecutors said. Other charges include conspiracy, wire fraud, making of false statements and a fraudulent bank transaction count. Not every defendant is accused of each crime. CDR faces a maximum fine of $100 million for bid rigging.
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