Bankers Rigging Municipal Contract Bids Admit to Cover-Up Lies

Bankers Rigging Municipal Contract Bids Admit Cover-Up Lies
Taxpayers were the victims because, by fixing the bids, Bank of America paid municipalities less than it would have had there been honest auctions. Photographer: Andrew Harrer/Bloomberg

Nov. 24 (Bloomberg) -- In an 11th-floor federal courtroom in Manhattan on a gray September afternoon, a banker stood with a somber face and admitted to rigging bids for contracts to invest bond proceeds and then lying about it -- as part of the biggest criminal conspiracy in the history of the 198-year-old municipal finance market.

In the room with cherry-wood-colored paneling, Douglas Campbell, who was once one of Bank of America Corp.’s most successful derivatives salesmen, described in spare language how he had violated the law, Bloomberg Markets magazine reports in its January issue.

“I had conversations prior to the bid with the broker about who the bidders were going to be and who was going to win or lose,” Campbell, slim with sandy-blond hair, told U.S. District Judge William Pauley.

Taxpayers were the victims because, by fixing the bids, Bank of America, the largest U.S. bank by assets, paid municipalities less than it would have had there been honest auctions. In his Sept. 9 court confession, Campbell, 45, repeatedly told the judge that his illegal actions came at the expense of the public.

“Kind of a common theme here,” the banker said.

Campbell -- who former co-workers describe as an upbeat family man with two children -- is cooperating with prosecutors. He pleaded guilty to antitrust, conspiracy and wire fraud charges.

Paying Kickbacks

He admitted paying kickbacks to win deals to CDR Financial Products Inc., a Los Angeles-based firm that had been hired by municipalities to run auctions for investment contracts. He’s one of seven bankers and brokers who have pleaded guilty to conspiracy and fraud charges.

Six others, including three CDR executives, have been indicted and have pleaded not guilty. The investigation is still under way, according to the Justice Department.

The bankers routinely rigged bids and lied about their crimes between 1998 and 2005, documents filed in court say. Following every transaction, the bankers fraudulently signed a pledge certifying that they had adhered to U.S. Treasury Department rules barring them from seeing other bids.

“When I participated in this scheme, I knew it was illegal,” Mark Zaino, a former banker with UBS AG, told a U.S. District Court judge in New York in May, when he pleaded guilty.

Hiding Tracks

These bankers took other steps to hide their tracks. Campbell used a personal identification number to reach a bidding agent with Piper Jaffray Cos. directly on his BlackBerry, according to court-filed documents. That allowed his e-mails to stay beyond Bank of America’s view. Bankers routinely used mobile phones instead of the bank’s tape-recorded telephone lines, according to the documents.

Campbell left Bank of America in 2002 to work for the municipal derivatives unit of Piper Jaffray, which he left in 2007.

The U.S. government has scorned Wall Street for packaging and selling subprime mortgages that played a central role in the longest recession since the Great Depression. Only four bankers have been criminally indicted; two were convicted, the other two acquitted.

In rooms in Manhattan federal court, the Justice Department is having more success establishing that many of the same banks fleeced taxpayers by investing, at below-market rates, some of the $400 billion of bond proceeds raised each year. Details of the scope and depth of this nationwide financial conspiracy are coming to light almost without notice, as one defendant after another appears to face justice.

Taxpayers Losing

“There were hundreds of these deals, and taxpayers across the country are losing out because of it,” says Christopher Taylor, who was executive director of the Municipal Securities Rulemaking Board, the national regulator of the bond market, from 1978 to 2007.

“It was see no evil and hear no evil by everybody involved,” he says. “It was a conspiracy of silence.”

Municipalities have lost more than $1 billion because of bid rigging, estimates Steven Feinstein, a finance professor at Babson College in Wellesley, Massachusetts.

“That money, instead of going to citizens, goes to Wall Street banks,” he says.

Some of the top derivatives traders at the world’s largest banks stood to gain because their bonuses grew larger as they won more bids.

Sharing the Revenue

Campbell’s boss, Phil Murphy, signed a contract with the bank promising him 10 percent of any revenue he amassed in excess of $9 million, court-filed documents show. The Bank of America municipal-derivatives group, run by Murphy, captured $100 million in revenue in 2001, according to former Bank of America employees familiar with the unit. Campbell alone brought in at least $20 million that year.

Murphy, who hasn’t been charged, is listed as an unindicted co-conspirator in Justice Department documents. Now a financial adviser to municipalities, he declined to comment. So did Campbell, as did Charlotte, North Carolina-based Bank of America spokeswoman Shirley Norton.

In January 2007, Bank of America reached an amnesty agreement with the Justice Department’s Antitrust Division. It voluntarily reported its own illegal activity and agreed to assist prosecutors. It has provided investigators with documents, e-mails and tape recordings of phone calls, court records show.

In return for its continued cooperation, the bank won’t be prosecuted. Chief Executive Officer Brian Moynihan declined to comment. Piper Jaffray CEO Andrew Duff declined requests for comment.


Murphy’s successor, Dean Pinard, and four other former Bank of America employees are unindicted co-conspirators, according to a Justice Department list. U.S. prosecutors have also named unindicted co-conspirators from Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and eight other firms.

The bankers cited as conspirators fixed bids on auctions in more than 200 deals across the U.S. for so-called guaranteed-investment contracts, known as GICs, according to Justice Department documents.

Those contracts hold the proceeds of municipal bond sales until the money is used. Banks that conspired in the bid rigging for GICs paid kickbacks to brokers ranging from $4,500 to $475,000, court-filed documents show.

While a GIC is similar to a certificate of deposit, its rates aren’t advertised publicly. Instead, towns rely on advisory firms such as CDR to solicit competing offers.

Treasury Pays, Too

Rigged GIC deals not only deprive local taxpayers of full investment gains; in some cases, these transactions defraud the Treasury Department, according to the CDR indictment.

Federal tax law requires that when municipal bond proceeds earn more than a certain limit, the excess profit should go to the Treasury. By rigging bids, banks or advisers kept money that should have gone to the Internal Revenue Service, according to the CDR indictment.

Many of the same bankers and advisers who worked together in the GIC deals had sold to public officials interest-rate swaps that backfired for taxpayers, according to public records of the transactions.

Across the U.S. -- from Erie, Pennsylvania, to Jefferson County, Alabama, to Los Angeles -- public agencies have paid more than $4 billion in penalties on these swap deals in the past decade as lending rates went against them. The swaps are derivatives designed by banks to keep monthly interest payments low for municipalities as rates change. During the financial havoc that began in 2007, the swaps did the opposite, creating the taxpayer losses.

Hiding Kickbacks

Derivatives are financial contracts used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.

Derivatives trading was largely unregulated until last July, when President Barack Obama signed into law the Dodd-Frank finance reform bill. The law allows government authorities to write rules on derivatives trading.

Bankers used swap contracts to launder kickbacks to advisers who rigged the GIC deals, according to the Justice Department’s indictment of CDR, which has advised local governments on $55 billion in derivatives and investment transactions since 2000.

Exotic Pays Better

Bankers paid sham fees to advisers, with the money disguised as costs for brokering those derivative deals, according to the guilty plea of former UBS banker Zaino.

“There’s absolutely no doubt that you got paid for the exotic stuff a whole lot better than you got for the real conservative, bread-and-butter financings,” says Emily Evans, a former municipal banker with J.C. Bradford & Co. in Nashville, Tennessee, who now sits on the city’s Metropolitan Council.

From 1998 to 2002, from rows of narrow desks on the trading floors in Bank of America’s Charlotte headquarters, Campbell and Murphy built the municipal derivatives and GIC business from scratch, documents in court cases show.

In exchange for financial advisers giving the bank the inside track for bids on GICs, Campbell pushed Bank of America’s public-finance bankers to get work for the brokers, according to his guilty plea. Murphy made similar recommendations, according to former employees and internal bank e-mails.

Arranging Introductions

Murphy introduced Martin Stallone, managing director of Pottstown, Pennsylvania-based Investment Management Advisory Group, known as Image, to the Bank of America underwriters handling a bond issue for the Beacon Tradeport Community Development District in Florida, according to a Feb. 26, 2002, e-mail from Murphy. He pressed the bankers to have Image handle bidding for investing the proceeds set up under the deal.

“Our hope is that Image will be hired by the client to conduct the competitive bidding,” Murphy wrote.

Image also granted favors to Bank of America. One example was in Pennsylvania. There, Stallone handed GIC deals to the bank after soliciting intentionally losing bids from rival firms to make it appear that there had been competitive bidding, according to information that Bank of America supplied to the city of Baltimore, a Sacramento, California, agency and other municipalities that are suing Bank of America. The bank provided the information to the plaintiffs as part of settlement talks.

Murphy brought in $2.2 million in revenue in 2002 just from derivatives deals tied to bond sales for Biola University, a Christian university in La Mirada, California, according to Bank of America e-mails. Campbell also brought in $1.7 million that year from Rickenbacker Port Authority in Columbus, Ohio, and $750,000 on the Beacon deal.

Lucrative Career

The derivatives trade proved lucrative to Murphy, whose pay swelled more than 10-fold from 1987 to 1998 as he moved up to become head of the municipal derivatives unit at Bank of America, documents filed in court show.

Murphy, 52, grew up in Montville Township, New Jersey, a bedroom community about 30 miles (48 kilometers) west of New York City. His father, Leonard, was a vice president at Consolidated Edison Inc., and headed the utility’s operations in the borough of Staten Island. Murphy’s mother, Carol, was involved in local Republican politics, serving on Montville’s council and then as a Morris County legislator for nine years. From 1993 to February 2001, she served in the state assembly, according to public records.

Leaving New York

Murphy went to Syracuse University, where he graduated with a degree in economics in 1980. He received a Master in Business Administration from Fordham University in 1985. His first job on Wall Street was selling derivatives at Toronto-Dominion Bank in 1987. He quit in 1990, moving to Sumitomo Mitsui Banking Corp.’s New York office in the World Trade Center. That building was struck by terrorists in 1993, when a truck bomb in the parking garage of the north tower killed six people.

The incident shook Murphy, according to people who worked with him, and he looked for a job outside of New York. He landed at First Union Corp. in Charlotte. He became one of its top salesmen, handling interest-rate swaps and other derivatives contracts, says Steven Kohlhagen, who hired Murphy.

In the mid-1990s, Murphy convinced Kohlhagen, who headed the First Union’s fixed-income-derivatives unit, to start selling derivatives to municipalities.

“A lot of the ambitious derivatives guys were always looking at the next big thing,” says Kohlhagen, who’s now retired. “Murphy thought it would be an extremely profitable business.”

$1.2 Million Bonus

Murphy was right. In 1996, he earned a $1 million bonus, according to documents filed in court. The following year, it swelled to $1.2 million.

Murphy lobbied Kohlhagen to bring Campbell to First Union, Kohlhagen says. He says he hired Campbell because of his knowledge of the brokers who worked in the municipal bond market. Campbell joined First Union from E.A. Moos & Co., a local underwriting firm in New Jersey.

“There’s a whole gray area in the municipal market; that’s where Doug came from,” Kohlhagen says, referring to the fact that advisers were unregulated. Campbell worked closely with Murphy, and the two left for Bank of America together, Kohlhagen says.

“Doug and Phil were a team,” Kohlhagen says. “I would be dumbfounded if while they were at Bank of America, Doug did anything that Phil didn’t know about and approve.”

Murphy agreed to a contract with Bank of America in June 1998 giving him a signing bonus of $325,000 and a guarantee of at least $1.15 million in eight months. That’s when he was promised 10 percent of any revenue above $9 million, court documents show.

Colleagues Reunite

By mid-1999, Murphy and Campbell were joined by two former First Union colleagues, Jay Saunders and Dean Pinard. Within three years, the small group made more in revenue for Bank of America than its corporate derivatives unit. Pinard knew Image well. After graduating from Villanova University, he went to work at Wheat First Securities Inc. in Philadelphia with two bankers who later joined Image, broker registration records show.

The Bank of America marketers in Charlotte sat so close that they could hear each other’s conversations, according to Bank of America internal documents and information provided to the Baltimore plaintiffs.

The bankers used verbal cues to communicate about bids for GICs. One would ask whether a bid was a “good fit” to get information on competing bids from Image, according to the information Bank of America gave the plaintiffs.

Sometimes Image’s Stallone said Bank of America’s bids were “aggressive,” or too high, and had to be reworked. At other times, Stallone asked the banker to bid a specific number, according to the suit. Stallone and Pinard didn’t return calls seeking comment.

False Records

After each rigged deal, a banker would sign a false statement saying the transaction was conducted properly, Campbell told the federal judge when he pleaded guilty in September.

“That bidding certificate in these circumstances was signed either by myself or by somebody else with my knowledge that it was a fraudulent certificate,” Campbell told the judge.

Even as the Justice Department builds up guilty pleas and continues its probe, the banks haven’t settled their debt to the public. “The conspiracy was outrageous,” former municipal finance regulator Taylor says. “There were hundreds of deals and that means losses for taxpayers.”

To contact the reporters on this story: William Selway in Washington at; Martin Z. Braun in New York at

To contact the editor responsible for this story: Jonathan Neumann at