Ex-JPMorgan Banker Pleads Guilty to Rigging Bids on Municipal Bond Deals
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A former JPMorgan Chase & Co. banker pleaded guilty to rigging bids for municipal-bond investment contracts, becoming the eighth person to admit joining the biggest conspiracy in the $2.8 trillion market’s history.
James L. Hertz, whom the Justice Department said worked for a Manhattan-based financial institution that it didn’t name, acknowledged bid-rigging and fraud conspiracies yesterday, according to a department news release. He agreed to cooperate with prosecutors. Hertz, 53, of Cranford, New Jersey, worked at New York-based JPMorgan from 1994 through 2008, according to records filed with the Financial Industry Regulatory Authority.
“Hertz and co-conspirators designated in advance which co- conspirator provider, either his employer or another financial institution, would be the winning bidder for certain investment agreements or other municipal finance contracts,” the Justice Department said.
Former bankers at Bank of America Corp. and UBS AG have pleaded guilty to cheating taxpayers by conspiring with brokers to pay states and local governments below-market rates on investments purchased with bond proceeds. One branch of the conspiracy stretched from California to Pennsylvania and included more than 200 deals involving about 160 state agencies, local governments and nonprofits.
Municipalities may have lost more than $1 billion because of bid-rigging, said Steven Feinstein, a finance professor at Babson College in Wellesley, Massachusetts.
In January 2007, Bank of America reached an amnesty agreement with the Justice Department’s Antitrust Division. It reported its own illegal activity and agreed to assist prosecutors. It has given investigators documents, e-mails and recordings of phone calls, court records show.
Three former executives of Los Angeles-based investment broker CDR Financial Products and another three employees of a General Electric Co. unit were indicted and have pleaded not guilty, according to court records. U.S. prosecutors named former bankers at Citigroup Inc., Lehman Brothers Holdings Inc., Wachovia Corp. and eight other banks as unindicted co- conspirators.
In September 2008, JPMorgan said it would stop selling derivatives -- financial instruments whose value is tied to another security -- to municipal borrowers. The bank has disclosed in company filings that it’s facing a civil suit by the U.S. Securities and Exchange Commission related to municipal-bond investment contracts and derivatives.
A JPMorgan spokeswoman, Jennifer Zuccarelli, said the bank is co-operating with the Justice Department and it fired Hertz in 2007, after he failed to assist the company with its own probe into the dealings of the municipal derivatives unit.
The criminal investigation centers on investments that municipalities buy with money raised through bond sales. The so- called guaranteed investment contracts let them earn a return until the cash is needed for schools, roads or other public works. The U.S. Treasury Department encourages competitive bidding to ensure that localities get market rates.
Prosecutors have said that favored bankers got inside information from brokers who handled the bidding so they could carve up the market. In some cases, bankers admitted paying kickbacks to brokers.
He is one of five former JPMorgan bankers who received letters informing them that they’re targets of the Justice Department probe, according to employment records filed with regulators.
Hertz received tips from a Minnesota-based person identified only as Broker E who worked for local governments, according to the charges. The information about competitors’ bids allowed Hertz to alter his offers to win contracts, prosecutors wrote.
He conspired with another bank, identified as Financial Institution A, to fix prices and submit intentionally losing bids to give the appearance of a legitimate auction and comply with U.S. Treasury regulations, according to court documents released today.
In 2001, Hertz competed for a derivative contract with an unnamed state university that would go to the firm allowing the school to pay the lowest interest rate, according to the charges. Hertz initially told Broker E he would accept 4.029 percentage points.
The co-owner of the broker handling the bid signaled that Hertz could raise his offer to 4.039, which Hertz did, the court papers said. He got the deal.
In another transaction based on the lowest price a town could pay for a portfolio of securities, the broker, after collecting other bids, advised Hertz to raise his bid by $5,000. He did so and won the contract, according to the charges.
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