WASHINGTON - At least 38 broker-dealers, investment advisory companies, and other firms have received subpoenas or document requests from state attorneys general conducting a coordinated investigation of anti-competitive practices in connection with municipal bond-related guaranteed investment contracts and derivatives, according to interviews and documents obtained by The Bond Buyer.
The multi-state antitrust investigation by the attorneys general, including Florida's Bill McCollum and Connecticut's Richard Blumenthal, was first publicly disclosed by XL Capital Ltd., the Bermuda-based insurer, in a 10-K financial statement filed with the Securities and Exchange Commission late Monday.
The company said its subsidiaries last month received a subpoena from Blumenthal and an "antitrust civil investigative demand" from McCollum "in connection with a coordinated multi-state attorneys general investigation of municipal bond-related guaranteed investment contracts."
Blumenthal announced in a brief statement yesterday that he is helping to lead the investigation, which he said is focused on allegations of bid rigging.
A spokeswoman for McCollum disclosed that Florida officials have issued an 11-page document called "Antritrust Civil Investigative Demands" to 38 firms and subsidiaries, including Merrill Lynch & Co., Bank of America Corp., JPMorgan Chase & Co., AIG SunAmerica Life Assurance Co., and GE Funding Capital Market Services Inc.
Blumenthal's office disclosed that they have sent very similar 16-page subpoenas to some of the same firms.
The requests seek documents and other information going back more than ten years to Jan. 1, 1998. Florida's request sent to Security Capital Assurance Inc, a subsidiary of XL Capital, asks that the documents be produced by July 9. The spokeswoman in McCollum's office said that some firms have begun responding to the requests.
A Blumenthal subpoena, sent to XL Asset Funding LLC, asked for responses by June 19.
Specifically, Florida asked firms for information about every GIC and municipal bond derivative they have sold during the 10-year period, including all payments made to any persons in connection with these types transactions and the profits realized from their sales.
The state also asked firms to: "Identify each instance, including each person involved in such instance, in which you requested or instructed another person to submit a sham bid, cover bid, losing bid, 'B' quote, or any other bid, price , quote, proposal or presentation related to any GICs and other municipal bond derivatives in which you knew or had reason to know that such bid, price, quote, proposal or presentation would not be accepted or would be used to feign the appearance of competition. Identify all documents related to all such identified instances."
McCollum's office asked for information about requests for proposals and bids that were made for certain products.
In addition, McCollum's office asked whether anyone in the firm or hired by the firm conducted any investigation regarding these activities as well as the identities of any state and federal regulators or enforcement officials that have contacted the firm about these activities.
The document requests cover "any investment vehicle sold to any person for use in investing or reinvesting taxable or tax-exempt bond proceeds and qualified zone academy bonds, and related transactions involving the management or transferal of the interest rate-risk associated with those bonds."
The requests also cover forward purchase or forward delivery agreements, unsecured or uncollateralized GICs, repurchase agreements or collateralized GICs, advance refunding escrows, "sway (of any type)," options, swaptions and interest rate floors or collars.
The multi-state investigation comes as the Justice Department and the SEC have been conducting parallel criminal and civil investigations of anti-competitive activities in the municipal bond-related investments and derivatives markets since 2006. Those two agencies have subpoenaed dozens of firms for information going back for a period of 6 to 14 years through the end of 2006. In addition, different groups of local governments have filed separate class actions suits against roughly 38 Wall Street and other firms involved in GICs and derivatives. Some of the cases have been consolidated in a federal court in Manhattan.
In recent months, more than a dozen current and former broker-dealers have been notified by the Justice Department that they are targets of a grand jury investigation ongoing in New York City. In addition, several firms, including most recently GE Funding Capital Market Services, have received "Wells Notices" from the SEC's enforcement staff notifying them that the staff is preparing to recommend the commission file charges against them in connection alleged bid-rigging and other illicit activities.
The multi-state attorneys general investigations appear to be "piggybacking" on the class-action suits, said Charles Anderson, former manager of tax-exempt bond field operations at the Internal Revenue Service, which was the first federal agency to notice the alleged anti-competitive activities in the municipal markets.
The list of firms contacted by McCollum's office includes the three investment advisory firms that were raided by the Federal Bureau of Investigation in November 2006: CDR Financial Products in Beverly Hills, Calif., Investment Management Advisory Inc., in Pottstown, Pa., and Sound Capital Management Inc in Eden Prairie, Minn.