Financial Regulatory Forum

CDR Financial, execs indicted in U.S. municipal bond probe

October 30, 2009

   By Diane Bartz
WASHINGTON, Oct 29 (Reuters) – A California financial products firm, two of its current executives and a former executive were indicted on Thursday for bid rigging and fraud related to municipal bond contracts, the Justice Department said.The indictments against CDR Financial Products Inc, also known as Dunhill Insurance Services Inc, and the executives come after a three-year investigation that touched some of the biggest names in the nearly $3 trillion municipal bond industry.

A number of California municipal governments have sued CDR Financial alleging bid rigging, said Nanci Nishimura, an attorney at Cotchett, Pitre & McCarthy. The firm is representing Los Angeles and Stockton, Calif., as well as San Diego, San Mateo and Contra Costa counties in lawsuits against CDR Financial.

“We will be filing more,” said Nishimura. “It will be soon — very, very, very soon.”

Further charges are possible as the indictment refers to unnamed co-conspirators. Additionally, lawyers for other municipal governments are pressing lawsuits against CDR Financial.

Michael Hausfeld’s law firm Hausfeld LLP has filed suit on behalf of Baltimore and municipalities in Mississippi.

“CDR served as the nucleus in orchestrating and carrying out the bid rigging and fraud,” he said.

The indictments did not provide details of where the alleged crimes took place but noted records of long-distance telephone conversations across the United States.

The indictments filed in the U.S. District Court for the Southern District of New York charged CDR and the executives harmed municipalities and taxpayers by robbing them of potentially higher yields for their funds.

CDR Financial spokesman Allan Ripp said the indictments are based on a “fundamental misunderstanding” of the municipal debt market.

“Some of these allegations go back 11 years for transactions. It’s CDR’s contention the government was overreaching, pulling out all sorts of dramatic, overheated rhetoric, creating a fiction,” Ripp said.

“There was no way they (CDR) could control and restrain trade … The government has kind of imbued CDR with all sorts of powers the firm just did not have,” Ripp said. “CDR is going to aggressively defend and fight this case.”

CDR FOCUS OF AN EARLIER PROBE
The company had been at the center of an earlier probe that cost New Mexico Governor Bill Richardson a shot at being President Barack Obama’s commerce secretary.

Richardson withdrew his name from consideration because of a separate grand jury probe in New Mexico into allegations that CDR’s donations to his political action committees were linked to its winning a state contract worth $1.4 million.

A spokesman for Richardson said no indictments arising from the probe had been filed in the state.

The current probe focuses on an alleged conspiracy dating back to 1998. The indictment charges that CDR and its executives rigged bids for investment agreements. The money invested was primarily cash municipalities had raised for public projects but did not need immediately.

The indictment says CDR and its executives took kickbacks from investment managers to decide in advance that they would win the right to manage the funds for lucrative payments.

The indictment names CDR along with David Rubin, its owner and president, vice president Evan Andrew Zarefsky and former chief financial officer and managing director Zevi Wolmark, also known as Stewart Wolmark, the Justice Department said.

If convicted on all charges, Rubin would face 68 years in prison, Zarefsky would face 43 and Wolmark 38. Attempts to reach Rubin, Wolmark and Zarefsky were not immediately successful.

“The indictment charges that CDR, Rubin, Wolmark and Zarefsky secretly manipulated and controlled the competitive bidding process in numerous ways to enrich themselves and the co-conspirator providers of the investment agreements, at the expense of the municipalities, the IRS, or both,” the Justice Department
said.

The department said the charges were the first to be filed in its ongoing bid-rigging investigation into the municipal bond industry.

“It is probably accurate to generalize that in light of the investigation over the last three years, that oversight by counsel and issuers of the bidding process has probably tightened somewhat,” said Roger Davis, partner at Orrick, Herrington & Sutcliffe LLP, in San Francisco

“The publicity surrounding the investigation has already had an effect on the market.”

Further indictments seem likely. The indictment refers to unnamed co-conspirators who were providers of the investment agreements. Bank of America <BAC.N> entered into a leniency agreement with the Justice Department in connection with a probe into bidding practices, the bank said in a statement in February 2007.

In a leniency agreement, the department promises not to bring criminal charges in exchange for the company’s information about wrongdoing.
(Reporting by Jeremy Pelofsky, Diane Bartz and Jim Christie; Editing by David Gregorio and Bernard Orr) ((Diane.Bartz@ThomsonReuters.com; +1 202 898 8313))

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