Munibond racketeering rife - Feds have multi-agency investigation

Bid rigging, tax evasion and other forms of racketeering are rife in the municipal bond business and a huge multijurisdiction criminal investigation has been underway for several years now, the New York Times reports in its business pages. Public toll agencies base almost all their longterm financing on the municipal bond markets so it is of great interest within the US toll industry.

The criminal investigation started as an IRS affair but has ballooned to involve FBI, USDOJ, SEC, and several state law enforcement agencies.

"“It’s rare to sell a Senate seat, but it’s not rare to sell a bond deal. Pay-to-play in the municipal bond market is epidemic. It looks as if there has been price-fixing and bid-rigging on a major scale," a recently retired IRS manager Charles Anderson told the Times.  Anderson was manager of tax-exempt bond operations at the IRS.

The Times report also quotes Michael Hausfeld an anti-trust lawyer in Washington who represents some of the state and municipal governments caught up in the federal dragnet as saying the munibond investigation is "one of the longest-running, most economically pervasive antitrust conspiracies ever to be uncovered in the US."

He says his clients among public sector authorities are victims of huge industry scams and fixes.

Anderson cited an estimate of $4b/year being misappropriated.

Christopher Taylor formerly executive director of the Municipal Securities Rulemaking Board, a regulatory body says tapped telephone calls have produced evidence of organized bid rigging in which supposedly independent financial advisers tell bankers:  "We want you to bid on this deal, but you’re not going to get it — you’re going to get the next one. We want you to submit a sloppy bid.”

Taylor said there is evidence of payments by municipalities to banks who have done nothing in return for not competing with a bank selected by the fixers to get the deal.  The Justice Department's anti-trust division and the US Attorney's office in southern New York are leading a major investigation of munibond bid-rigging.

Another angle to the investigation is the charge that a large number of loans were wrongly certified as tax-exempt by financial advisers who knew they didn't qualify, the Times report says.

30 financial services companies at least are involved to the extent of being subpoenaed including JPMorgan, Merrill Lynch and AIG.

In 2006 the FBI conducted raids on three suspect firms including CDR Financial Products (CDRFP) of Beverly Hills CA. New Mexico Gov Bill Richardson is involved because of campaign contributions he received from CDRFP and its appointment by Richardson as the state's adviser for a $1.5b borrowing to raise money for road construction.

Richardson stepped down as President-elect Obama's Commerce Secretary apparently because of potential trouble arising from his dealings with CDRFP.  Its president David Rubin gave $100k to Richardson's political fund.

CDRFP and a Philadelphia area firm IMAGE are cited in indictments of former Philadelphia City Treasurer Corey Kemp who now is serving a 10 year jail term for accepting bribes for steering bond business to favored financial firms. Neither firm has been charged with any legal offense.

Many state and municipal officers around the country have complained that financial services companies selling swaps and other derivatives misled them, but there are also allegations of some accepting large bribes to put money into these risky investments. Jefferson County Alabama covering the state's largest city Birmingham is facing a large bankruptcy from swap investments gone bad. CDRFP was the county's principal financial adviser, the Times says.

Any wrongdoing is denied by Rubin in a Note to Clients and Friends: http://www.cdrfp.com/letter.html

Rubin, 45 and founder of CDRFP says he is "an unabashed supporter of Democratic causes and public figures."

Times report http://www.nytimes.com/2009/01/09/business/09insure.html?em

BACKGROUND: The US is unusual in the extent to which its capital market is divided into taxable and tax-free bonds by the tax code. In most countries public authorities borrow on the same basis as commercial business.

TOLLROADSnews 2009-01-10