The former co-head of UBS AG’s municipal derivatives group and two colleagues were indicted in the U.S. government’s multiyear investigation of bid-rigging on investment contracts.
“The individuals charged today allegedly participated in complex fraud schemes and conspiracies that subverted competition in the market for municipal finance contracts and deprived municipal bond issuers of the benefits of their investments,” said Christine Varney, the department’s antitrust chief.
The Justice Department’s antitrust division has ramped up its more than four-year criminal investigation of the $2.8 trillion municipal bond market in the past few weeks. On Dec. 7, Bank of America Corp. agreed to pay $137 million in restitution for its involvement in the bid-rigging conspiracy.
Ghavami, a Belgian citizen living in Moscow, was arrested Dec. 1 after arriving at John F. Kennedy International Airport in New York. A former JPMorgan Chase & Co. banker, James Hertz, pleaded guilty Nov. 30.
“Peter Ghavami will plead not guilty and fight this case,” said James Mitchell, his lawyer, in a telephone interview.
Heinz couldn’t be reached for comment, and Welty hung up on a reporter. Kelly Smith, a UBS spokeswoman in New York, declined to comment.
The Justice Department didn’t identify which company employed Ghavami, Heinz and Welty. Records filed with the Financial Industry Regulatory Authority show they worked for UBS.
Heinz was also charged with witness tampering in addition to fraud and conspiracy. In 2006, after learning about the Justice Department’s investigation, he told one conspirator to meet with another to coordinate their stories about a rigged deal, according to the indictment.
Since October 2009, nine bankers and brokers have been indicted and eight pleaded guilty for cheating taxpayers by conspiring with brokers to pay states and local government below-market rates on investments purchased with bond proceeds.
The government has identified more than a dozen firms, including JPMorgan, units of General Electric Co. and Societe Generale SA as unindicted co-conspirators in a criminal case brought by the Justice Department against a Los Angeles investment broker, according to court records.
Talking Among Themselves
The investigation centers on investment agreements that municipalities enter into 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.
The charges say that between 2001 and 2006, rival bankers decided among themselves who would win the bidding for particular investment contracts, rather than letting them be determined at a competitive auction.
Working With Rival
In one deal for an unidentified state financing agency in June 2002, Welty agreed to buy the securities underlying the investment agreement from a rival in exchange for the competitor’s not bidding on the auction, which UBS ultimately won, according to the indictment.
The bankers also participated in a bid-rigging scheme orchestrated by CDR Financial Products Inc., the Los Angeles firm that was the first to face charges under the investigation, in October 2009, prosecutors said. Three former employees of that firm have since pleaded guilty, while three others are fighting the charges and deny wrongdoing.
Prosecutors said Ghavami, Heinz and Welty paid kickbacks to CDR in exchange for inside information about competing bids and used that information to win deals.
On June 5, 2002, after winning an investment agreement for a school district, Ghavami arranged a $65,000 kickback to CDR that was disguised as a fee for brokering an interest-rate swap, according to the indictment. Swaps are derivatives designed by banks to protect against changing interest rates.
Prosecutors said the CDR case included more than 200 deals involving about 160 state agencies, local governments and nonprofits from California to Pennsylvania.
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