Three former bankers with a General Electric Co. unit that sold investment contracts to state and local governments were indicted for conspiring to profit at taxpayers’ expense by rigging bids, showing the broadening scope of a Justice Department investigation of municipal finance.
Dominick Carollo, Steven Goldberg and Peter Grimm, all of whom once worked for finance units of General Electric, were charged with fraud and conspiracy, the Justice Department said. They allegedly paid kickbacks to local government brokers, who were hired to solicit competitive bids for investment deals, to win the bidding and increase their profits.
“The individuals charged today allegedly participated in complex fraud schemes and conspiracies to manipulate what was supposed to be a competitive process,” Christine Varney, assistant attorney general in charge of the Justice Department’s Antitrust Division, said yesterday in a statement.
The charges are a result of an antitrust investigation, begun more than three years ago, into the $2.8 trillion municipal bond market. The probe has drawn in more than a dozen banks and financial services companies, including JPMorgan Chase & Co., Bank of America Corp. and UBS AG, according to court records and regulatory filings.
The case centers on guaranteed investment contracts, known as GICs, that municipalities purchase with money raised by selling bonds, allowing them to earn a return until the funds are needed for schools, roads and other public works.
The U.S. Treasury Department encourages public bidding for GICs to ensure that localities are paid proper market rates. Prosecutors allege that bankers submitted sham bids and acted through the brokers to carve up the market for themselves, then compensated the brokers with kickbacks disguised as fees on derivative transactions.
In October, three executives from Los Angeles-based CDR Financial Products Inc. were indicted and have since decided to fight the charges. Three others who worked at CDR pleaded guilty this year and agreed to cooperate with prosecutors. In May, a former UBS banker, who also agreed to cooperate, pleaded guilty, marking the first time a bank employee admitted to participating in the alleged conspiracy.
Yesterday’s indictment also involves Goldberg and Carollo’s work after they left GE. Goldberg went to Financial Security Assurance Holdings Ltd., a former unit of Brussels-based Dexia SA, while Carollo went on to work for Royal Bank of Canada.
GE Assists Probe
Russell Wilkerson, a spokesman for GE Capital, said the company is assisting in the investigation.
“We have been cooperating with authorities on this investigation and will continue to do so,” he said.
Yesterday’s indictment says CDR wasn’t the only adviser who rigged bids. The 12-count indictment refers to four other unidentified investment contract brokers, including “Broker A,” based in Pottstown, Pennsylvania, who weren’t charged. Investment Management Advisory Group Inc., based in Pottstown, was raided by the Federal Bureau of Investigation in November 2006.
A message left with a receptionist for executives of Investment Management Advisory Group Inc., or IMAGE, wasn’t returned. Two Philadelphia-based lawyers that represented IMAGE, Timothy Hoeffner at DLA Piper LLP, and James Becker at Buchanan Ingersoll & Rooney PC didn’t return calls and e-mails.
Units of Fairfield, Connecticut-based General Electric, the world’s biggest maker of jet engines, were previously identified in court documents as “Provider B,” according to records obtained by Bloomberg that are now under seal. GE wasn’t mentioned in yesterday’s indictment, which refers to the three men as working for “Provider B.”
The misconduct alleged in the indictment is similar to the so-called yield-burning scandals of the 1990s, when brokers overcharged local governments on Treasury bonds they bought with the proceeds of bond sales.
In many cases, Internal Revenue Service regulations require local governments to pay the Treasury Department a portion of their earnings on investments purchased with the proceeds of tax-exempt bonds. That means the U.S. government also loses when localities are overcharged. The IRS has the power to strip bonds of their tax exemptions if agencies run afoul of the rules, which would also cost investors.
“The elaborate schemes outlined in the indictment boil down to efforts by these defendants to subvert the competitive bidding process for investment agreements,” FBI Acting Assistant Director-in-Charge George Venizelos said in yesterday’s statement. “In the process, they defrauded public entities -- and therefore, the public -- and put bondholders at risk.”
The indictments provide fresh details of the workings of the alleged conspiracy. On May 19, 2004, one day before bids were due for a state housing agency to invest bond proceeds, CDR suggested to Grimm that he could lower the rate he was prepared to bid because the agency would have to return any money it earned at a higher rate to the IRS. The next day, after checking with CDR to confirm the lower rate, Grimm won the bid.
Grimm, 46, didn’t return messages left at his home or most- recent employer, Lamont Financial Services Corp.. John Siffert, an attorney for Goldberg, 47, declined to comment, and Goldberg didn’t return a call to his home seeking comment. Carollo, 56, didn’t return a message left at his home.
The conspiracy continued after Goldberg left GE, according to the indictment.
In one case, in 2002, “Broker A” advised Grimm to “back off” his bids on one such contract so that Goldberg, then at FSA, could win. In return, the broker told Grimm he would find him another one soon “where I will ask him not to sharpen his pencil quite so.”
The broker said he would “rather have each of you make some money alternatively.” Grimm agreed, lowering the offer he submitted to ensure that his competitor would win.
The Justice Department said its investigation is continuing.
The case is United States of America v. Carollo, 10-cr- 00654, U.S. District Court, Southern District of New York.