(Adds information on derivatives in 16th paragraph.)
By Martin Z. Braun and William Selway
May 18 (Bloomberg) -- A telephone call between a
financial adviser in Beverly Hills and a trader in New York
was all it took to fleece taxpayers on a water-and-sewer
financing deal in West Virginia
. The secret conversation was
part of a conspiracy stretching across the U.S. by Wall Street
banks in the $2.8 trillion municipal bond market.
The call came less than two hours before bids were due for
contracts to manage $90 million raised with the sale of West
. On one end of the line was Steven Goldberg
trader with Financial Security Assurance Holdings Ltd. On the
other was Zevi Wolmark,
of advisory firm CDR Financial
Products Inc. Goldberg arranged to pay a kickback to CDR to
land the deal, according to government records filed in
connection with a U.S. Justice Department indictment of CDR
West Virginia was just one stop in a nationwide
conspiracy in which financial advisers to municipalities
colluded with Bank of America Corp., Citigroup Inc., JPMorgan
Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and
11 other banks
They rigged bids on auctions for so-called guaranteed
investment contracts, known as GICs, according to a Justice
Department list that was filed in U.S. District Court in
Manhattan on March 24 and then put under seal. Those contracts
hold tens of billions of taxpayer dollars.
California to Pennsylvania
The workings of the conspiracy
-- which stretched from
California to Pennsylvania and included more than 200 deals
involving about 160 state agencies, local governments and non-
profits -- can be pieced together from the Justice
Department’s indictment of CDR, civil lawsuits
around the country, e-mails obtained by Bloomberg News and
interviews with current and former bankers and public
“The whole investment process was rigged across the
board,” said Charlie Anderson
, who retired in 2007 as head of
field operations for the Internal Revenue Service’s tax-exempt
bond division. “It was so commonplace that people talked
about it on the phones of their employers and ignored the fact
that they were being recorded.”
Anderson said he referred scores of cases
to the Justice
Department when he was with the IRS. He estimates that bid
rigging cost taxpayers billions of dollars. Anderson said
prosecutors are lining up conspirators to plead guilty and
“This will go on for a long time and a lot of people
will be indicted,” he said in a telephone interview.
The U.S. Treasury Department encourages public bidding
for GIC contracts
to ensure that localities are paid proper
market rates. Banks that conspired in the bid rigging for GICs
paid kickbacks to CDR ranging from $4,500 to $475,000 per deal
in at least 10 different transactions, government court-filed
A GIC is similar to a certificate of deposit, but its
rates aren’t advertised publicly. Instead, towns rely on
advisory firms such as CDR to solicit competing offers.
In the bid-rigging deals, CDR gave false information to
municipalities and fed information to bankers allowing them to
win with lower interest rates than they were otherwise willing
to pay, the indictment says. Banks took their illegal gains
from the additional returns and paid CDR kickbacks, according
to the indictment.
Not Guilty Plea
Wolmark, 54, who was indicted
by a federal grand jury in
Manhattan on antitrust, conspiracy and wire fraud charges, to
which he pleaded not guilty, declined to comment when reached
by telephone at CDR’s office. Goldberg, who hasn’t been
charged, declined to comment, says his attorney, John Siffert
Court records in the broadest-ever criminal investigation
of public finance shed new light on how Wall Street’s biggest
banks were cheating cities and towns during the same decade in
which they were setting the stage for a global economic
As the banks were steering the world’s financial system
to the brink of catastrophe by loading more than $1 trillion
of subprime mortgage loans into opaque debt investments
were also duping public officials across the U.S.
Many of the same bankers and advisers who sold public
officials interest-rate swap deals
taxpayers are now subjects of the criminal antitrust
investigation involving GICs.
The swaps are derivatives designed to keep monthly
interest payments low as lending rates change. Municipal-
derivative units of the largest U.S. banks also sold the
, public records across the nation show.
Derivatives are financial instruments used to hedge risks
or for speculation. They’re derived from stocks, bonds, loans,
currencies and commodities, or linked to specific events like
changes in the weather or interest rates. Options and futures
are the most common types of derivatives.
A key witness in the government’s case is a former banker
whom the government hasn’t named, according to a civil lawsuit
filed by Baltimore, Maryland, and six other municipal
borrowers against Bank of America, JPMorgan and nine other
banks. The banker is providing evidence against his peers.
The witness, who was employed by Bank of America Corp.
starting in 1999, has laid out the inner workings of the
scheme in confidential meetings with investigators, according
to the civil lawsuit.
Bank of America, based in Charlotte, North Carolina, has
also been providing prosecutors
with evidence since at least
2007. The bank voluntarily reported its own illegal activity
and agreed to cooperate with the Justice Department’s
antitrust division, according to a press release from the
In exchange, the government promised in an amnesty
not to prosecute the bank. Bank of America
spokeswoman Shirley Norton
in San Francisco said in an e-mail
the firm is continuing to cooperate.
The banker who has been cooperating with the Justice
Department said he overheard his colleagues change Bank of
America’s bids after coaching from brokers or other banks
bidding on the same deal, according to information that the
firm provided to plaintiffs in the civil case filed by seven
At least five former bankers with New York-based
JPMorgan, the second-biggest
U.S. bank by assets, conspired
with CDR to rig bidding on investment deals sold to local
governments, according to the Justice Department list now
At least three other former JPMorgan
bankers are targets
of the investigation, according to filings with the Financial
Industry Regulatory Authority. Six bankers with Bank of
America, the biggest U.S. lender, are also named in the sealed
Justice Department list as participants.
Eighteen employees at 16 other companies, including units
of General Electric Co.
, UBS AG and FSA, then a unit of
Brussels lender Dexia SA, are also cited as co-conspirators by
the Justice Department, according to the list under seal. None
have been charged in the case.
Citigroup spokesman Alex Samuelson
, Dexia spokesman
, GE spokesman Ned Reynolds
, JPMorgan spokesman
, UBS spokesman Doug Morris
, and Ferris
Morrison, a spokeswoman for Wells Fargo & Co., which acquired
Wachovia in 2008, declined to comment.
Former CDR employees Douglas Goldberg
, Daniel Naeh
Matthew Rothman, pleaded guilty
in federal court in Manhattan
in February and March to wire fraud and conspiracy to rig
In October, CDR was charged with criminal conspiracy and
fraud, along with Chief Executive Officer David Rubin
vice president Evan Zarefsky
and Wolmark. They pleaded not
guilty. Rubin, who was also charged with making fraudulent
bank transactions, faces as much as $3 million in fines and
more than 30 years in jail if convicted.
No Law Broken
Rubin declined to comment in a telephone call.
“Mr. Rubin doesn’t think that CDR broke the law in any
of these transactions,” said Laura Hoguet
, his attorney in
Daniel Zelenko, a lawyer for Zarefsky in New York, said
he was confident his client will prevail at trial.
“The government continues to show that it simply doesn’t
understand how this market operated,” Zelenko said in an e-
During more than three years of investigation, federal
prosecutors amassed nearly 700,000 tape recordings and 125
million pages of documents and e-mails regarding public
Municipalities and states raise
$400 billion a year by
selling bonds. They invest much of those proceeds in GICs,
sold by banks or insurance companies. Those accounts hold
taxpayer money and earn interest before public agencies spend
Banks and advising firms illegally siphoned money from
taxpayers by paying artificially low interest rates in the
GICs, the CDR indictment says. The money was intended to build
schools, hospitals, roads and sewers and refinance higher-cost
The bid-rigging schemes were orchestrated by CDR and
other advisory firms, according to the indictment and the
civil suits. Advisers are unregulated private firms hired by
local governments to consult on public finance deals -- and
are almost always paid by the banks that arrange the
transactions or manage the GICs.
CDR, which was located on Wilshire Boulevard in Beverly
Hills, California, during the transactions under
investigation, has provided advice
on more than $158 billion
in public transactions since it was founded in 1986, according
to its website.
CDR helped arrange deals in which financial firms took
millions of dollars in profits from GICs, Bloomberg News
reported in October 2006
. Almost all of the deals were shams:
As much as $7 billion in bond-issue proceeds were invested in
GICs but never spent for the intended purpose of providing
services to taxpayers.
CDR signed off
on interest-rate swaps to municipalities,
as banks took hidden fees
sometimes 10 times as much as they
charged on fixed-rate bond deals, according to data compiled
by Bloomberg. For the public, the swaps were fraught with
In the past decade, banks have peddled swaps the world
over, from Jefferson County, Alabama
-- which was forced to
the brink of bankruptcy -- to the hill towns
of the Umbria
region of Italy. Many of these swaps soured when the credit
crisis began in 2007.
Dozens of municipalities have paid banks billions to get
out of swap contracts. The agency that oversees the San
Francisco-Oakland Bay Bridge said it spent $105 million to
escape its deal in July 2009.
“They were gouging the municipalities,” said retired
IRS investigator Anderson, 59. “Beside the excessive fees,
some of the swap deals just didn’t work. It was just awful.
The same people were involved in the GIC end of the market.”
Bid rigging not only cheated cities and towns, it also
illegally denied the IRS required
taxes from GIC income,
Anderson said. The evidence is clear in telephone recordings
made on GIC desks, he said. “We could hear people talking
about how everyone knew who was going to win the bid. You
could tell it was just everyday business.”
The Securities and Exchange Commission is conducting a
of bid rigging from its Philadelphia office that’s
parallel to the Justice Department investigation.
State attorneys general in California, Connecticut and
Florida are also investigating. Bank of America, JPMorgan,
Fairfield, Connecticut-based GE, and Zurich-based UBS have
disclosed in regulatory filings
that they may be sued by the
The Federal Bureau of Investigation has raided
two of CDR’s competitors, Pottstown, Pennsylvania-based
Investment Management Advisory Group Inc., known as Image, and
Eden Prairie, Minnesota-based Sound Capital Management.
Neither has been charged.
Robert Jones, a managing director of Image, declined to
comment, after answering a call to the firm’s office. Johan
of Sound Capital didn’t return calls seeking
Tape recordings cited in a letter by Justice Department
prosecutor Rebecca Meiklejohn
show how those deals worked. In
two GIC bids for the Utah Housing Corp.
, CDR’s Zarefsky
advised an unidentified trader that his firm could lower its
offer by “a dime,” or 10 basis points (a basis point is 0.01
‘A Couple Bucks’
The West Valley City-based housing agency accepted
contracts with GE’s FGIC Capital Market Services division for
5.15 percent and 3.41 percent in 2001, public records show.
Zarefsky didn’t return calls seeking comment.
“I can actually probably save you a couple bucks here,”
Zarefsky told the trader, according to the letter citing the
The Utah agency, which finances mortgages for low-income
residents, didn’t know that financial firms were cheating it
out of money that could have been used to help home buyers,
said Grant Whitaker, who runs the agency. “It sounds like
somebody got a better deal than we did,” he said in a
Such deals could produce large illegal profits by banks,
said Bartley Hildreth, public finance professor at the Andrew
Young School of Policy Studies at Georgia State University in
A New Wrinkle
“Just a basis point on many of these deals is tens to
hundreds of thousands of dollars,” he said.
This isn’t the first time Wall Street has faced
accusations of reaping excessive fees on investment deals with
public officials. Goldman Sachs Group Inc., Lehman Brothers,
which filed for bankruptcy in 2008, Merrill Lynch & Co. and
other securities firms agreed by 2000 to pay more than $170
million to settle SEC charges
that they had sold overpriced
Treasury bonds to municipalities.
The so-called yield burning drove down the returns
local governments earned and trimmed required payments to the
IRS. The firms neither admitted nor denied wrongdoing.
Even as the banks were settling with regulators, they
devised another way to burn yield, this time by skimming money
from GICs, according to the indictment, which said the
conspiracy went from 1998 to at least 2006.
In the lawsuit against Bank of America and JPMorgan filed
in New York in June 2009, the city of Baltimore, two
Mississippi universities and four other municipal borrowers
say that bankers from those two companies colluded in bidding
for GIC contracts in Pennsylvania
At a holiday party sponsored by advising firm Image at
Sparks Steak House in Manhattan early in the past decade, the
Pennsylvania deals were discussed by the Bank of America
trader who is cooperating with prosecutors and Sam Gruer
JPMorgan, the civil antitrust lawsuit says.
The Bank of America trader told Gruer that he was happy
that the two banks weren’t “kicking each other’s teeth out”
on bidding for certificates of deposits for bond proceeds, the
suit says. That information was provided by Bank of America to
Gruer, who was informed by prosecutors in 2007 that he
was a target
of the investigation, declined to comment.
Coaching a Bidder
The trader who is now a federal witness joined Bank of
America after being recommended by Image, according to
information that the bank turned over to the Baltimore-led
plaintiffs. He was assigned by Phil Murphy
, who headed the
municipal trading desk, to be Bank of America’s point person
for investment contracts bid by Image, the lawsuit says.
Image coached Bank of America in winning an investment
contract in Pennsylvania, according to an internal e-mail
exchange in May 2001 between Bank of America trader Dean
and Image’s Peter Loughhead that was obtained by
Bloomberg News. The e-mail was provided to Bloomberg by a
person who got it from Bank of America and asked to remain
Loughead, who ran bids for Image, advised Pinard on how
much to offer for managing the cash fund for a $10 million
bond issued by the sewer authority of Springfield Township
York County, 100 miles (161 kilometers) west of Philadelphia.
‘Don’t Fall on Any Swords’
said in the e-mail to Loughead that Bank of
America was willing to pay the town as much as $40,000 upfront
to win the deal. Loughead wrote that the bank didn’t need to
pay that much.
“Don’t fall on any swords,” Loughead wrote to Pinard
the day before bids were submitted. He suggested that the bank
could win the contract with a bid of slightly more than
$30,000. The next day, Bank of America offered $31,000. It won
the bidding, authority records show.
Loughead didn’t return calls seeking comment. Pinard
didn’t respond to telephone requests for an interview and no
one responded to a knock on the door at his Charlotte home.
Image ensured that Bank of America would dominate GIC
deals in Pennsylvania by soliciting sham bids from other banks
to make the process look legitimate, according to testimony
from the trader cooperating with the Justice Department.
Bank of America would return the favor to Image by
submitting so-called courtesy bids at the adviser’s request,
allowing JPMorgan to win some of the deals, according to
information that Bank of America gave plaintiffs’ attorneys.
Bank of America has cooperated with the municipalities
that were suing the bank as part of its 2007 amnesty agreement
with the Justice Department.
Traders such as FSA’s Goldberg often had worked for
several banks and insurance companies that had a role in GIC
contracts, according to employment records with Finra, the
self-regulator of U.S. securities firms. CDR employees went on
in the derivative departments of Deutsche Bank AG and
UBS, the records show.
Before joining Bank of America, Pinard, 40, worked at
Wheat, First Securities Inc. in Philadelphia with two bankers
who would later join Image, according to broker registration
“Few people understand this part of public finance,”
Georgia State’s Hildreth said. “It is a very small band of
brothers who know the market. So, of course, they are going to
reap the benefits.”
For nearly a decade, CDR founder Rubin, Wolmark, and
Zarefsky helped fix prices on investment deals that cheated
taxpayers in at least 34 states, according to their
indictments and records filed in the case.
FSA’s Goldberg, who received a bachelor’s degree in
accounting from St. John’s University in Queens, New York,
worked with CDR employees on GIC deals, according to the
indictment and public records. Goldberg worked from 1999 to
2001 at GE, which gets 35 percent of its revenue from
Goldberg was referred to only as “Marketer A” in the CDR
indictment. “Marketer A” was then later identified as FSA’s
Steven Goldberg in the Justice Department list of co-
At GE, Goldberg worked with Dominick Carollo, a senior
investment officer for FGIC, and Peter Grimm
, who worked there
from 2000 until at least 2006, according to court documents
and public records. GE sold FGIC in 2003 to a group led by
mortgage insurer PMI Group Inc.
Goldberg and Grimm
worked with CDR to increase their
gains on GIC deals, according to the CDR indictment and
conspirator list. Carollo left GE in 2003, joining the
derivatives unit of Royal Bank of Canada. Grimm and Carollo
didn’t respond to telephone calls and e-mails seeking comment.
Goldberg continued to participate in the conspiracy after
he left for FSA in 2001 and used swap deals
Royal Bank of Canada and UBS to funnel kickbacks to CDR,
according to the indictments and the Justice Department list
of conspirators. Royal spokesman Kevin Foster
said the company
is cooperating the government.
FSA, Royal Bank of Canada and UBS all worked on public
finance deals in West Virginia that prosecutors say involved
At least three times, Goldberg conspired with CDR to pick
up deals with West Virginia agencies, according to a guilty
plea by former CDR employee Rothman and other records filed in
federal court in Manhattan. Among them was a $147 million
investment contract with the West Virginia School Building
That state’s schools need every penny they can get, said
Mark Manchin, executive director of the school authority
17 percent of West Virginians below the poverty line in 2008,
the state was 45th among the 50 U.S. states, according to a
2009 Census Bureau report. Manchin said some students study in
dilapidated, century-old buildings.
“It’s just raw greed at the expense of the most
vulnerable,” he said in a telephone interview. “With
deteriorating facilities all over the state, that money is
what we use to build schools.”
Bank of America’s municipal derivatives division, which
was formed in 1998, worked on the 14th floor of the Hearst
Tower in Charlotte. The space was so tight that the banker
who’s cooperating with the Justice Department said he could
hear others in the office change their bids when they got word
from financial advisers, according to information Bank of
America gave Baltimore.
Bank of America’s Murphy told the banker helping
prosecutors that Image would use sham auctions to steer deals
to Bank of America if the employee told Image that he “wanted
to win” and “would work with” Image, according to the civil
suit filed by Baltimore. Murphy declined to comment.
They would use verbal cues to communicate. The banker
would ask whether the bid was a “good fit” to get
information on competing bids from Image. Sometimes Image’s
said Bank of America’s bids were
“aggressive,” or too high, and had to be reworked.
At other times, Stallone would ask the banker to bid a
specific number, according to the civil suit.
Stallone didn’t respond to messages left for him at work
or to a list of questions faxed and e-mailed to Image.
Like Financial Security Assurance, Bank of America also
paid kickbacks to brokers for their help in getting deals,
according to the Baltimore lawsuit, which based its
allegations on information provided by Bank of America.
On June 28, 2002, Douglas Campbell, a former municipal
derivatives salesman at Bank of America, wrote in an e-mail
his boss, then managing director Murphy, that he had paid
$182,393 to banks and brokers not tied to any particular
Three payments totaling $57,393 went to CDR, which played
no role in any transaction connected to that amount. A copy of
the e-mail was contained in a North Carolina lawsuit filed by
Murphy against Bank of America in 2003.
“The CDR fees have been part of the ongoing attempt to
develop a better relationship with our major brokers,”
The bid rigging in GIC contracts has reduced public
funding for schools and housing across the U.S.
“If this was going on in a small state like West
Virginia, it must have been huge elsewhere,” the state’s
Assistant Attorney General Doug Davis said.
For Related News and Information:
For map showing municipalities affected, click here.
Map of state and municipal issuers with data: SMUN MAP
Municipal bond market investigations STNI MUNIPROBE
Top Legal Stories: TLAW
Top muni-bond news: MUNT
--Editors: Jonathan Neumann
, William Glasgall
To contact the reporters on this story:
in San Francisco at +1-415-743-3511 or
Martin Z. Braun
in New York at +1-212-617-6849 or
To contact the editor responsible for this story:
Jonathan Neumann at +1-609-279-4602 or email@example.com