The SEC rounds up muniland’s bad guys

By Cate Long
December 20, 2012

The SEC – the top law enforcer for muniland – has been riding the range. With 17 municipal securities enforcement actions in 2012, the SEC cops have come up with a nice collection of scalps.

The Bond Buyer held a webinar Wednesday on municipal disclosure with John Cross, who heads the SEC’s Office of Municipal Securities, Jay Goldstone, who heads the Municipal Securities Rulemaking Board and various municipal attorneys. It was an excellent summary of muniland disclosure laws, but what I found most interesting was John Cross’ discussion of the top SEC enforcement actions in muniland for 2012. Rounding up the bad guys. Here are the top four enforcement actions according to Cross:

1) The General Electric and Wells Fargo bid-rigging cases: In the case of General Electric, the U.S. Justice Department prosecuted criminal charges. Reuters reports:

Three former bankers at a unit of General Electric Co. were each sentenced on Thursday to several years in prison for conspiring to rig bids to invest municipal bond proceeds.

The men were convicted in May as part of a broad investigation by the U.S. Justice Department of the $3.7 trillion U.S. municipal bond market. The probe has focused on rooting out schemes to fix prices and rig bids on bond transactions, and has ensnared some of the world’s largest banks.

Wells Fargo actually settled with the SEC in December, 2011. AP explains:

Wells Fargo will pay $148.2 million to settle federal and state charges that it rigged dozens of bidding competitions to win business from cities and counties[...]

[...]The Securities and Exchange Commission said Wachovia [which Wells Fargo & Co. acquired in 2008] generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond transactions in 25 states and Puerto Rico.

2) The Goldman Sachs pay to play case in which an employee spent his office hours campaigning for the public official who awarded the state’s bond underwriting contracts. I always wondered how no one seemed to notice that the Goldman employee spent almost two years engaged in campaigning. Where was the supervision? Or did the firm tacitly agree to this practice? The SEC sketches it out:

According to the SEC’s order against Goldman Sachs, Neil M.M. Morrison was a vice president in the firm’s Boston office and solicited underwriting business from the Massachusetts treasurer’s office beginning in July, 2008. Morrison also was substantially engaged in working on Cahill’s political campaigns from November, 2008 to October, 2010. Morrison at times conducted campaign activities from the Goldman Sachs office during work hours and using the firm’s phones and e-mail.

Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions. Nevertheless, Goldman Sachs subsequently participated in 30 prohibited underwritings with Massachusetts issuers and earned more than $7.5 million in underwriting fees.

3) Another muniland pay to play issue was related to public pension funds in Detroit. The SEC nabbed the mayor and others for accepting bribes for business:

The Securities and Exchange Commission today charged former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley, and the investment adviser to the city’s public pension funds involved in a secret exchange of lavish gifts to peddle influence over the funds’ investment process.

4) The case of a sugar substitute factory in Moberly, Missouri where the principal may have committed fraud and siphoned off funds for personal use. From the SEC complaint:

This matter involves a scheme to defraud and misrepresentations and omissions by Bruce Cole, the former chairman and CEO of Mamtek International (“MI”), a Hong Kong corporation, and its U.S. subsidiary, Mamtek U.S. (“Mamtek”), in connection with a $39 million municipal bond offering backed by the City of Moberly, Missouri (“Moberly”) in July 2010.

The bond offering was intended to finance a sucralose processing plant in Moberly that Mamtek would construct and operate.  Cole executed his fraud by directing unsuspecting Mamtek employees to take actions that diverted over $900,000 in bond proceeds for his personal use and by misleading city officials and bondholders about the use of those proceeds.

Much credit should go to the SEC for ramping up their muniland enforcement capabilities to respond to the variety of fraud issues this year. I have a feeling that the SEC has a pipeline full of these types of cases. In 2013 we will likely see more fraudsters brought down.

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