Bank of America Corp. agreed to pay $137 million in restitution for its involvement in a conspiracy to rig bids on 88 municipal bond contracts, the U.S. Securities and Exchange Commission and Justice Department said.
Bank of America, based in Charlotte, North Carolina, agreed to pay $36 million to settle an SEC case. The bank will pay an additional $101 million to resolve investigations by other federal and state agencies, the SEC said.
Bank of America has been aiding a nationwide Justice Department antitrust probe of the $2.8 trillion municipal market since at least 2007 in return for leniency. The investigation has ensnared more than a dozen banks, including JPMorgan Chase & Co., UBS AG, and Wachovia Corp, which was acquired by Wells Fargo & Co. in 2008, according to documents filed in federal court.
The company’s “cooperation has led to an aggressive, ongoing investigation by the Department of Justice into anticompetitive activity in the municipal bond derivatives industry,” Christine Varney, who heads the Justice Department’s Antitrust Division, said in a statement.
Bank of America won’t be prosecuted as long as it continues to cooperate with the government.
The settlement also involves 20 states, the Office of the Comptroller of the Currency, the Internal Revenue Service and the Federal Reserve Board, Connecticut Attorney General Richard Blumenthal said in a release.
“Bank of America is pleased to put this matter behind it and has already voluntarily undertaken numerous remediation efforts,” the company said in a statement. The bank, which is still facing civil antitrust cases filed by Baltimore, Virginia’s Fairfax County and others won’t be subject to triple damages in those cases if it cooperates with plaintiffs.
Eight one-time bankers and financial advisers, including former employees of UBS, JPMorgan and Bank of America, have pleaded guilty in connection with the municipal bond investment bid-rigging probes.
In a case against one broker, CDR Financial Products Inc. of Los Angeles, prosecutors say the conspiracy included more than 200 deals involving state agencies, local governments and nonprofit groups from California to Massachusetts, according to documents filed in federal court. The scheme may have cost taxpayers more than $1 billion, according to Steven Feinstein, a finance professor at Babson College in Wellesley, Massachusetts.
The agreement with Bank of America for its conduct from 1997 to 2002 is the antitrust division’s first in the case, Varney said in a conference call with reporters. The Justice Department is still “looking carefully” at the amount municipalities lost, Varney said. She declined to comment on the probe saying it was ongoing.
“We will use any and all tools at our disposal to prosecute corruption in the municipal bond market,” Varney said in the teleconference. “These are taxpayer dollars that are being defrauded and we will not tolerate it.”
Bank of America, which wasn’t the leader or organizer of the bid-rigging conspiracy, according to the Justice Department, agreed to pay disgorgement and interest ranging from $8,418 to Missouri’s development finance agency to $6.2 million to Massachusetts, according to the SEC.
“This settlement means that government agencies facing lower budgets will recover millions of dollars in restitution for money that they were deprived of by some unscrupulous bond- derivative investment advisers,” said Jerry Brown, California attorney general and governor-elect, in a news release today.
On Dec. 1, Peter Ghavami, the former co-head of UBS’s municipal derivatives group, was arrested as part of the four- year investigation after arriving in John F. Kennedy International Airport.
Ghavami, a Belgian national living in Moscow, faces a fraud charge tied to a $100,000 kickback for steering an investment agreement with a U.S. state to another bank.
Former JPMorgan banker James L. Hertz on Nov. 30 admitted to participating in bid-rigging and fraud conspiracies and agreed to cooperate with prosecutors.
The Justice Department’s criminal investigation centers on investment agreements that municipalities enter 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 bidding for the contracts so they could carve up the market. In some cases, bankers admitted paying kickbacks to brokers.
In a $65.2 million bond issue for the Beacon Tradeport Community development district in Florida handled by Bank of America, the bank recommended the broker who was handling the investment bids. Bank of America told the broker what it planned on bidding, allowing the broker to advise other banks where they shouldn’t bid, the SEC said.
Bank of America paid the broker a $50,000 kickback for steering the bids by disguising it as a fee in another deal.
The bank neither admitted nor denied the SEC’s findings in agreeing to settle a related securities-fraud complaint, the agency said.
In September, Douglas Lee Campbell, a former municipal derivatives executive with the bank, pleaded guilty and agreed to cooperate. In May, Mark Zaino, who worked for UBS’s municipal bond and derivatives trading desk from 2001 to 2006, pleaded guilty to participating in a conspiracy to rig bids for the contracts.
Bank of America’s cooperation is an example of a Justice Department program under which the first company in a cartel to inform prosecutors about the illegal collusion is shown leniency. The program had been renewed on an annual basis until Varney earlier this year successfully lobbied Congress to extend the program until 2020.
“Any time you have a law that automatically sunsets every year, you create a lot of uncertainty,” she said in an interview last month. “If you’re a lawyer counseling a client, you’re not so sure you want to recommend that they take advantage of the leniency program when you’re not sure the leniency program is going to be there.”
To contact the editor responsible for this story: Mark Silva in Washington at firstname.lastname@example.org