Issue: Fraud and bid-rigging
Introduction: Use of Municipal Derivatives
Designing and constructing capital projects often takes several years, resulting in a gap between when the bond funds are received and when the funds are all spent. It serves the public interest for governments to gain interest on bond monies.
Municipal derivatives are investment vehicles that allow a municipal bond issuer to generate a higher rate of return from bond proceeds than would be obtained if the bond funds were placed in a traditional savings account. A Guaranteed Investment Contract is one type of municipal derivative product.
Government Investigations Into Municipal Derivatives
The United States Department of Justice’s Antitrust Division, the Internal Revenue Service, and the Securities & Exchange Commission are conducting multi-year investigations into the municipal derivatives industry. As part of those investigations, Bank of America Corp. has announced that it received conditional acceptance into the Antitrust Division’s corporate amnesty program, admitting its participation in illegal practices. Bank of America later agreed to pay $137.5 million in restitution to federal and state agencies for its participation in the conspiracy. Four other financial institutions subsequently agreed to pay restitution, penalties, and disgorgement totaling approximately $608 million in connection with the municipal derivatives conspiracy.
On October 29, 2009, a federal grand jury charged CDR Financial Products Inc. and executives at the company with participating in fraud and bid-rigging conspiracies related to municipal derivatives.
In a nine-count indictment filed in a New York federal court, U.S. Department of Justice prosecutors allege that company executives secretly manipulated the bidding process by designating in advance who would be the winning bidder for certain investment agreements. The department also charged that CDR took kickbacks from bidders, asked certain bidders to submit intentionally losing bids, and provided co-conspirators with information on the bids of competitors. The company ultimately pled guilty to various criminal charges. To date, nineteen people have pled guilty or been convicted of criminal charges arising out of the municipal derivatives investigation.
California municipalities file lawsuit
On April 23, 2008, the City of Oakland filed a federal antitrust lawsuit against national financial firms including AIG Financial Products, Bank of America, JPMorgan Chase, and Wachovia Bank.
The County of Alameda, City of Fresno, and Fresno County Financing Authority have also filed cases alleging anti-competitive conduct in the sale of municipal derivatives. Lieff Cabraser serves as co-counsel to these municipalities in their cases. Click here to read their joint complaint. The complaint charges that defendants conspired to give cities, counties, school districts, and other governmental agencies artificially low bids for guaranteed investment contracts, swaps, and other municipal derivatives products, which are used by public entities use to earn interest on bond proceeds.
The complaint also charges that defendants met secretly to discuss prices, customers, and markets of municipal derivatives sold in the U.S. and elsewhere; intentionally created the false appearance of competition by engaging in sham auctions in which the results were pre-determined or agreed not to bid on contracts; and covertly shared their unjust profits with losing bidders to maintain the conspiracy.
Lieff Cabraser has aggressively advanced its clients’ litigation since filing.
The Judicial Panel on Multidistrict Litigation transferred all related cases to the United States District Court for the Southern District of New York and assigned them to the Honorable Victor Marrero. Read Judge Marrero’s case management order.
On April 26, 2010, Judge Marrero denied defendants’ motions to dismiss Lieff Cabraser’s clients’ cases. Read the Court’s order. Most of the Defendants in this case settled in 2015. Further prosecution claims continue with others.
Contact Plaintiffs’ Counsel
Please feel free to use the form below to contact an attorney at Lieff Cabraser concerning this litigation. We welcome inquiries from public entities nationwide. Across the country, cities, counties, school districts and other public entities have been overcharged in the tens of millions of dollars, if not more.