Muniland’s serial offenders

January 3, 2012

There has been a lot of reporting about the tearful municipal advisor from California who pled guilty to charges of bid-rigging in municipal bond market. From Bloomberg:

CDR Financial Products Inc. and its founder, David Rubin, pleaded guilty less than a week before trial on charges tied to a federal investigation of bid- and auction-rigging in the municipal bond market.


“Mr. Rubin and his firm were trusted with public money and confidence to assist municipalities with issuing bonds,” FBI Assistant Director in Charge Janice Fedarcyk said in a news release. “Contrary to his agreement and the law, Mr. Rubin shirked his responsibilities while defrauding taxpayers. Thankfully, the bid-rigging scheme, where Mr. Rubin decided the winners and losers, is over.”

This is a big muniland story that has been simmering for five years. The recent reporting has focused on the central actors of the scheme like Rubin, but the other parties to this fraud, the Wall Street banks, have sidled out of the spotlight. I certainly hope the Department of Justice has not dropped its efforts to prosecute the banks for the damage they caused to municipalities.

The FBI and Department of Justice collected over 800,000 tape recordings and 125 million pages of documents over the course of their deep investigation of this bid-rigging scheme. A 2009 Bond Buyer article alleged that a wide swath of muniland may have been involved:

Court documents filed in class action and other lawsuits by issuers’ lawyers who were briefed by attorneys at Bank of America — the one firm that is cooperating with the Justice Department’s antitrust probe in return for indemnity from criminal charges — present a disturbing picture of alleged widespread collusion between dozens of firms involved with municipal investment contracts and derivatives.

In 2009 it was revealed that there could be “dozens of firms” involved, but so far only five have admitted participating and agreed to pay fines. From Bloomberg:

Bank of America Corp., JPMorgan Chase & Co., UBS AG,  Wells Fargo & Co. and General Electric Co. previously acknowledged that former employees engaged in illegal activity. The companies have paid $743 million in restitution and penalties.

So far, the Justice Department has filed charges against 18 former executives of financial-services firms. With Rubin, 10 have pleaded guilty.

Considering how widespread this scheme was alleged to be, it’s surprising that more former executives haven’t pled guilty or been convicted. Sadly this bit of fraud is just another indication of corrupt, industry-wide practices. Yield-burning was a global resolution that the SEC made in 2000 with 10 brokerage firms that were overcharging municipalities for government securities. The auction rate securities (ARS) SEC settlements in 2006 and 2008 also implicated the largest brokers in misrepresenting securities to their clients. And muni derivatives are a story that hopefully regulators have not forgotten about as municipalities’ suffering from improper derivatives has been substantial.

The table below plots the 2011 municipal underwriting rankings alongside data on which ones participated in which schemes. Our biggest dealers continue year after year to be involved in frauds and schemes and are muniland’s serial offenders. It’s time for heavier fines and longer prison sentences. These practices must stop.

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