17 Banks to Pay $140 Million in Bond Fraud Case

Seventeen investment banks agreed Thursday to pay a total of about $140 million to resolve charges that they overpriced Treasury securities sold to municipalities, ending a five-year nationwide probe into municipal bond fraud.

“This global settlement is a milestone in the federal government’s effort to resolve the problem of yield-burning in a way that protects innocent municipalities and bondholders,” said Arthur Levitt, chairman of the Securities and Exchange Commission.

Salomon Smith Barney, a unit of Citigroup Inc., will pay the largest portion of the settlement, $38 million. PaineWebber Inc. will pay $21.6 million, and Dain Rauscher Corp. will pay $11 million.

Yield-burning occurs when investment banks sell Treasury bonds at excessive prices to state and local governments that need them to refinance outstanding municipal debt. By marking up the price of the bonds, they “burn” down the yield. Underwriters allegedly pocketed money that should have gone to the federal government or, in some cases, the municipalities.

Settlement of the case culminates a lengthy federal investigation that cast a pall over the $1.5-trillion municipal bond market.