A former co-head of UBS AG’s municipal derivatives group faces a fraud charge tied to a $100,000 kickback for steering an investment agreement with a U.S. state to another bank.
Peter Ghavami, a Belgian national living in Moscow, was arrested Dec. 1 after arriving at John F. Kennedy International Airport, the U.S. Justice Department said yesterday. Ghavami, with UBS from 1999 until 2007, is the second former employee of the Zurich-based bank to be ensnared in the federal price-fixing probe of investment contracts governments buy with money raised in the $2.8 trillion municipal bond market.
“Pernicious fraud schemes like the one alleged in this complaint undermine the public’s confidence and trust in the municipal bond and derivatives markets,” Christine Varney, the department’s antitrust division chief, said yesterday in a statement posted on its website.
Eight former bankers and financial advisers, including ex- employees of UBS, JPMorgan Chase & Co. and Bank of America Corp., 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.
Kelly Smith, a UBS spokeswoman in New York, declined to comment.
The arrest of Ghavami is the second action this week to emerge from the four-year investigation. On Nov. 30, former JPMorgan banker James L. Hertz admitted to participating in bid- rigging and fraud conspiracies that delivered profits to Wall Street at taxpayer expense.
CDR Financial Case
In the case against one firm, CDR Financial Products Inc. of Los Angeles, prosecutors say it included more than 200 deals involving about 160 state agencies, local governments and nonprofits from California to Pennsylvania.
Three former CDR employees pleaded guilty to charges this year and agreed to cooperate with investigators. Three others are fighting the charges. CDR itself faces a September trial on related conspiracy charges, according to the Justice Department.
CDR faces a fine of as much as $100 million, if convicted, the government has said. In a statement on its website in October 2009, the company said the charges are “without merit and in fact, a total fiction based on a lack of understanding of the municipal reinvestment market.”
The 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.
The case against Ghavami, also known as Peter Ghavamilahidji according to the Justice Department complaint, was aided by the testimony of a former colleague and cooperating witnesses from CDR and a Charlotte, North Carolina-based financial company. The complaint didn’t identify the company.
Bank of America, based in Charlotte, has been aiding the Justice Department probe since 2007 in return for leniency. 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.
Arranged the Deal
Ghavami worked as a broker in 2001 to an unidentified state that sought a contract to invest bond proceeds, the Justice Department said in its previously sealed complaint, dated Sept. 16. While the agreement was supposed to be awarded to the lowest-cost bidder, Ghavami arranged for the deal to go to the unidentified Charlotte, North Carolina-based bank in exchange for a kickback to be paid to his employer in 2002, according to the complaint.
Ghavami had a certificate, falsely claiming that the price of the investment contract was determined through an arms-length transaction, delivered to the state issuer in November 2001, the complaint said. It said the certificate also stated that Ghavami’s employer didn’t expect to be paid any broker or bidding agent’s fee tied to the contract.
After that bank won the agreement, Ghavami asked the unidentified CDR employee to call the banker and remind him to pay the kickback. In February 2002, Ghavami’s employer received the $100,000, which was “disguised as a ‘re-hedge’ fee,” the government said. Previous pleadings showed that bankers hid kickbacks as sham fees connected to derivative transactions.
At his arraignment yesterday, Ghavami didn’t enter a plea and is being held, according to Alisa Finelli, a Justice Department spokeswoman. She said he is due back in court Jan. 3.
James A. Mitchell, a lawyer with Stillman, Friedman & Shechtman and representing Ghavami, didn’t immediately return a call to his office after regular business hours seeking comment.
So far, 15 former bankers and advisers have been charged in the investigation. Court records obtained by Bloomberg also identify co-conspirators from banks including Citigroup Inc., Lehman Brothers Holdings Inc. and Wachovia Corp. who haven’t been charged.
UBS received a notice from the U.S. Securities and Exchange Commission on Feb. 4, 2008, that the agency was considering suing the bank in connection with the bidding of financial instruments associated with municipal bonds. UBS is cooperating with the Justice Department and the SEC, according to the bank’s latest quarterly report.
After leaving UBS in 2007, Ghavami worked in London for Lehman as head of Russian Capital Markets. In September 2009, he became head of global markets for Troika Dialog, a Moscow-based private investment bank.
In a statement, Troika Dialog said it was aware of the Justice Department’s allegations against Ghavami.
“These allegations relate to the time period several years before Peter joined Troika Dialog,” the bank said in an e-mailed statement.
Ghavami faces as much as 20 years in prison and a $250,000 fine, if convicted, according to the Justice Department.