MTA Asks U.S. to Make Firms Repay Profits

The Los Angeles County Metropolitan Transportation Authority on Tuesday asked U.S. regulators to force Wall Street firms to pay back as much as $1 billion in allegedly illegal profits they have earned from complex bond deals since 1990.

The Internal Revenue Service is going after state and local governments for taxes they did not realize they had to pay when the bond refinancing deals were arranged. The municipalities say they are not liable because they were deceived by bond underwriters, who made big profits in the process.

Municipalities are generally not allowed to invest proceeds from tax-exempt bond issues in taxable U.S. Treasury securities with higher yields. An exception is when profits from the Treasury bonds are used to pay off outstanding municipal bonds with higher rates. Any excess profit from such a refinancing must be turned over to the IRS.

As interest rates dropped in the early 1990s, thousands of municipalities cut their debt service costs by selling new bonds at lower rates and buying Treasury securities to pay off their old bonds.

But the MTA, in a 43-page letter to the IRS, said many states and localities were not aware they had excess profits, because the Wall Street firms that arranged the refinancings overcharged them for the Treasury securities.

In the last year, probes of specific refinancings turned up alleged overcharges by Wall Street firms. The probes occurred in the wake of allegations by whistle-blower Michael Lissack, a former investment banker.

L.A. County conducted one such investigation and filed suit, along with Lissack, against Lazard Freres & Co. in April.