CoreStates Settles in Muni Tax Fraud Case
The federal settlement Thursday of a Pennsylvania municipal tax-fraud case may pave the way for resolution of similar cases nationwide, including one involving the Los Angeles County Metropolitan Transportation Authority, experts said.
The Justice Department, Internal Revenue Service and Securities and Exchange Commission announced a $3.7-million settlement with CoreStates Financial Corp. of Philadelphia stemming from alleged abuses by CoreStates’ brokerage unit in a series of municipal-bond deals from 1992 to 1995.
The federal agencies accused CoreStates’ Meridian Capital Markets unit of “yield burning"--a practice in which a brokerage illegally overcharges a municipality for Treasury securities used in a debt refinancing transaction called an advance refunding. Excess profit on such deals that’s supposed to be turned over to the U.S. Treasury is instead retained by the brokerage.
CoreStates neither admitted nor denied wrongdoing in agreeing to the settlement.
Michael Lissack, a former Smith Barney executive who brought the Meridian case to the attention of authorities, also acted as whistle-blower in the MTA case.
Los Angeles County, in a lawsuit scheduled to come to trial in October, accuses the firm Lazard Freres & Co. of overcharging the MTA by more than $3 million in a refunding deal.
According to Erika A. Kelton, a San Francisco-based attorney for the MTA, the Meridian settlement is a breakthrough because it shows that three federal agencies with differing agendas can cooperate in a joint enforcement action.
Moreover, she said, it “sends a strong signal to other Wall Street investment banks that their liability is significant and that they’re going to have to face it.”
Kelton said she could not comment on whether the MTA and Lazard are discussing a settlement.
Lazard has denied wrongdoing in the case, contending its fees were appropriate given the risks it took.
The IRS has notified many municipalities that because of yield-burning abuses, their bonds may lose their tax-exempt status--in which case the municipalities would owe millions of dollars in taxes.
The municipalities have argued that they were unaware of the abuses, did not share in the profits and therefore should not be hit with the tax bill.
The Meridian settlement may provide some comfort on that score, since the brokerage and not the municipalities is being held responsible.
Most of the $3.7 million that Meridian agreed to pay will go to the Treasury, although a small portion will be returned to Pennsylvania municipalities, CoreStates said.