Three former General Electric Co. bankers defrauded cities and the Internal Revenue Service in a bid-rigging scheme involving municipal bonds, a prosecutor told jurors at the start of a fraud trial in Manhattan federal court.
Dominick Carollo, Steven Goldberg and Peter Grimm face charges of conspiracy to commit fraud by manipulating auctions for municipal bonds. The government claims that from August 1999 to November 2006 the men gave kickbacks to brokers hired by local governments to solicit bids, to win auctions and to increase their profits.
“These defendants lied and cheated cities and towns that were trying to raise money for public projects,” Wendy Waszmer, a Justice Department lawyer, said today in her opening statement. Waszmer said the defendants were improperly given information about other bidders, putting them in a position “like playing poker and knowing everyone’s cards.”
The charges grew out of a five-year investigation by federal antitrust prosecutors into the $3.7 trillion municipal bond market. In December, GE agreed to pay $70.4 million to resolve its part of the investigation. The defendants deny any wrongdoing. Bank of America Corp., JPMorgan Chase & Co., UBS AG and Wells Fargo & Co. have acknowledged illegal activities by former employees and paid more than $670 million in restitution and penalties.
In December, CDR Financial Products Inc. and its founder, David Rubin, pleaded guilty less than a week before they were to be tried on bid-rigging charges. Several former CDR employees are scheduled to testify in the trial that began today.
The case is focused on guaranteed investment contracts, or GICs, which cities buy with the money raised from selling bonds. The arrangement lets the cities earn money on the funds until they’re used for projects including new nursing homes, hospitals and roads.
Prosecutors said they intend to introduce recorded telephone calls made by the defendants as evidence of the scheme, Waszmer said. A lawyer for Goldberg told jurors that the recordings will show his client doing legitimate business.
“Thank goodness for the tapes,” said defense attorney John Siffert. “Because they will show he never agreed to defraud the cities out of any property, much less the IRS.”
In the afternoon, Douglas Goldberg, a former CDR employee who pleaded guilty and is cooperating with the government, testified about helping GE win bids, at the direction of Rubin and CDR former chief financial officer Stewart Wolmark, in exchange for later fees on swap transactions. Wolmark and former CDR vice president Evan Zarefsky pleaded guilty to their roles in the scheme in January.
In his testimony today, Douglas Goldberg testified about arranging for GE’s Steven Goldberg, no relation, to submit winning bids on several deals. In one case, he testified, GE’s Goldberg bid a 5.04 percent return for CDR’s client, the Port Authority of Allegheny County, Pennsylvania.
Douglas Goldberg said he allowed CDR to then reduce its bid to 5.00 percent to its profit at the expense of the Port Authority. In exchange, CDR received $57,400 in fees for a swap transaction about two weeks later, Douglas Goldberg testified.
“We did have an agreement with them for him to win the transaction,” Douglas Goldberg testified today. “I allowed him to review other bids and to reduce his bid.”
Douglas Goldberg will continue on the stand tomorrow.
The case is U.S. v. Carollo, 10-cr-00654, U.S. District Court, Southern District of New York (Manhattan).