May 18 (Bloomberg) -- Bear Stearns Cos., UBS AG, Piper Jaffray Cos., Wachovia Corp. and four other banks said they were subpoenaed as part of a U.S. investigation of Wall Street's sales of investments and derivatives to local governments.

The disclosures were contained in quarterly filings that bond underwriters make with the California treasurer, which were obtained by using public records laws. In the filings covering the six-month period ended in March, Cain Brothers, George K. Baum & Co., Morgan Keegan & Co. and JPMorgan Chase & Co. also said they were contacted by U.S. regulators.

``These subpoenas were issued as part of a broad, industry- wide investigation,'' New York-based Bear Stearns wrote in a filing with the California treasurer's office.

The documents offer the broadest look yet at the Wall Street banks involved in the widest criminal investigation ever of the municipal bond market. The disclosures add to the list of more than a dozen financial advisers, insurers and banks that have disclosed being subpoenaed by the Justice Department or the Securities and Exchange Commission.

Federal investigators are probing whether Wall Street banks and financial advisers conspired to rig the bidding for the investments that local governments buy with some of the $400 billion raised each year by selling municipal bonds. The regulators also sought information on complex derivatives, financial products that derive their value from underlying bonds, an aspect of the investigation highlighted by the California documents.

Looking at Derivatives

The disclosures also offer evidence that the U.S. investigation involves more than the bidding practices for investment contracts. Five of those subpoenaed reference derivatives, a fast-growing and lucrative business for banks seeking to help governments lock in future interest rates and guard against swings in borrowing costs.

UBS and Bear Stearns both said that investigators sought information on derivatives sold to municipal borrowers as well as information related to guaranteed investment contracts, which local governments frequently buy with the proceeds of bond sales.

Morgan Keegan & Co., another subpoenaed firm, also notes that the SEC sought information on a bond and derivative transaction the Memphis, Tennessee-based firm handled. Wachovia, based in Charlotte, North Carolina, said the two regulators are looking at ``competitive bid practices in the municipal derivatives market.''

Conduct Probed

UBS, the second-largest underwriter of municipal bonds in the U.S. after Citigroup Inc., said it was subpoenaed in November by both the antitrust unit of the Justice Department and the SEC.

``The two subpoenas concern UBS's conduct relating to derivative transactions entered into with municipal bond issuers, and to the investment of proceeds of municipal bond issuances,'' UBS said in its filing. Doug Morris, a spokesman for Zurich-based UBS declined to comment.

Morgan Keegan spokeswoman Gail Rimer had no immediate comment. Christy Phillips-Brown, a spokeswoman for Wachovia; Rob Litt, a spokesman for Minneapolis-based Piper Jaffray; Russell Sherman, a spokesman for New York-based Bear Stearns, and Brooke Harlow, a spokeswoman for New York-based JPMorgan, declined to comment about the disclosures. Cain Brothers managing director Michael Fitzsimons and George K. Baum chief executive officer Jonathan Baum didn't return phone calls seeking comment.

One Wins Leniency

Since the investigation became public in November, firms including Societe Generale and American International Group Inc., the world's largest insurance company, have disclosed receiving subpoenas as part of the investigation. Charlotte- based Bank of America Corp. in January won leniency from the Justice Department in return for cooperating with the probe into the bidding practices for municipal derivatives.

Piper Jaffray said the investigation by the SEC and Justice Department covers brokers of guaranteed investment contracts and ``various muni practices.'' The SEC has sought recordings of telephone calls and e-mails by certain investment bankers in connection with the investigation, Piper Jaffray said.

Investigators are ``reviewing for potential SEC rule violations and violations of federal antitrust law,'' Piper Jaffray wrote in a March 16 filing with California marked ``privileged and confidential.''

JPMorgan, which said it doesn't believe itself to be a target of the probe, said it was contacted by the Justice Department and SEC regarding the bidding for investment contacts ``and related matters in public finance.'' Morgan Keegan, which also said it isn't a target, was queried about the reinvestment of bond proceeds.

Departments, Advisers

At Wall Street banks, the same departments typically handle the business of selling municipal derivatives and so-called guaranteed investment contracts, which provide local governments a fixed rate of return on bond proceeds until the money is needed for projects like schools and roads. Local governments also rely on the same financial advisers to assist them with those two products.

In November, three firms that evaluate bids for investments sold to government borrowers and also render advice on derivatives -- CDR Financial Products Inc., Investment Management Advisory Group Inc. and Sound Capital Management -- were raided by federal investigators.

The regulatory investigations are probing matters previously examined by the Internal Revenue Service, which has been using its power to audit tax-exempt bond issues to investigate bid-rigging for investment contracts.

Yield Burning

Municipal borrowers aren't allowed to profit by investing the proceeds of tax-exempt bonds in higher yielding securities like Treasury bonds. Because those profits, known as arbitrage, must be repaid to the IRS, the sale of overpriced investments to local governments can rob the federal government of revenue, as it did with excessively marked-up Treasury bonds in the so- called yield burning scandals of the 1990s.

The IRS has also looked into whether excessive fees on interest-rate swaps and other derivative products, such as forward purchase agreements, can be used to do the same thing, since borrowers are allowed to use investment earnings to pay for those products.

George K. Baum, the Kansas City, Missouri underwriter that in November settled IRS allegations that it illegally diverted profits on municipal bond deals, is also involved in the federal investigations, according to its filing.

``The firm is one of a number of municipal bond underwriters, banks, insurers and financial advisers responding to subpoenas from the Department of Justice and the Securities and Exchange Commission requesting information on investment contracts and derivative products associate with municipal bond issues,'' Baum vice president Charles Youtz wrote in a letter dated Jan. 23. ``We do not anticipate any impact on the reputation of financial viability of the firm.''

To contact the reporter on this story: William Selway in San Francisco at at wselway@bloomberg.net.

Last Updated: May 18, 2007 15:01 EDT