Oct. 30 (Bloomberg) -- CDR Financial Products Inc., founder David Rubin and two company employees were indicted by a U.S. grand jury for allegedly taking kickbacks that allowed firms to make excessive profits on investments sold to local governments.

The nine-count indictment returned in federal court in Manhattan alleges that CDR and its employees, hired by local governments to solicit competitive bids for investment deals, steered work to favored firms. The government says CDR conspired to fix prices on the agreements, delivering profits to the financial companies at taxpayers’ expense across the U.S.

“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 Federal Bureau of Investigation 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.”

The charges are the first to result from a more than three- year investigation into the municipal bond market and are the latest legal challenge to CDR, whose political contributions to New Mexico Governor Bill Richardson were the subject of a separate U.S. inquiry. The federal investigation into bid- rigging is continuing and has already drawn in some two dozen banks, insurers and local government advisers.

Reviewing Complaint

Also indicted yesterday were Zevi “Stewart” Wolmark, CDR’s former chief financial officer and managing director, and Evan Zarefsky, CDR’s vice president. Allan Ripp, a CDR spokesman, said the firm hasn’t had a chance to fully review the complaint. He dismissed allegations that the company participated in a conspiracy. Rubin’s attorney, Donald Etra, said his client will defend himself against the charges.

“We believe the indictment has no merit,” Etra said. “The bottom line is that David Rubin did nothing wrong.”

The government alleges the conspiracy started in 1998 and continued until November 2006, the same month CDR was raided by the FBI.

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, CDR received kickbacks, masked as fees for other transactions, on at least 10 occasions from November 2001 to August 2005. The amounts ranged from $4,500 to $475,000, according to the indictment.

In one deal involving a municipal port facility in September 2002, Wolmark informed an unnamed investment provider about bids submitted by three others, according to the indictment. After the unnamed provider won the bid, it entered into “a swap” with another financial institution, which then paid CDR a $25,000 kickback in the form “hedge fee,” the indictment said.

Democratic Party

Rubin, a prominent Democratic fundraiser, and the firm he founded in 1986 have drawn scrutiny in recent years. CDR also advised Jefferson County, Alabama, on derivative trades that have pushed the county close to bankruptcy and were at the center of Birmingham Mayor Larry Langford’s bribery conviction this week. CDR wasn’t charged with wrongdoing.

In New Mexico, CDR received almost $1.5 million in fees from the New Mexico Finance Authority in 2004 after donating $100,000 to Richardson-affiliated political groups.

Neither the governor nor CDR was charged in a yearlong probe, which prompted Richardson to withdraw from consideration to become President Barack Obama’s commerce secretary.

Political Donations

Rubin has also given to other prominent politicians, including Obama, who received $31,800, according to Federal Election Commission records. He also donated a total $133,000 to the Democratic National Committee and the Democratic Congressional Campaign Committee, records show.

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 for which the funds were originally raised.

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 bond proceeds. Securities firms agreed to pay more than $170 million to settle SEC allegations of yield burning.

Continuing Investigation

The Justice Department’s investigation into bid-rigging is continuing. Bank of America Corp. in 2007 agreed to cooperate with the department in exchange for leniency. Others, including JPMorgan Chase & Co. and UBS AG, have disclosed they may face charges by the Justice Department or the Securities and Exchange Commission in connection with the probe.

“The Justice Department is committed to protecting the competitive process and will hold accountable individuals and companies who participate in illegal and anticompetitive conduct,” Christine Varney, the assistant U.S. Attorney General who heads the antitrust division, said in a statement.

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.

The allegations of profiting at taxpayer expense come as local governments suffer from the fallout of the U.S. recession and the lingering impact of interest-rate derivative deals that firms such CDR advised them to enter.

“In a climate of economic austerity, the conduct of the defendants and co-conspirators seems particularly predatory,” Demarest, the FBI official, said.

A bid-rigging count against Rubin and the other employees carries a maximum 10-year prison term, prosecutors said. Other charges in the case include conspiracy, wire fraud, making 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.

To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net.

Last Updated: October 30, 2009 00:01 EDT