SAN FRANCISCO - California Attorney General Jerry Brown is investigating allegations of bid-rigging in sales of derivatives and guaranteed investment contracts to municipalities.
Christine Gasparac, a spokeswoman for Brown, confirmed a report that the state has joined Connecticut Attorney General Richard Blumenthal and Florida Attorney General Bill McCollum in launching antitrust investigations. She would not provide any details or name the targets of the inquiry.
"I applaud the state attorneys general for getting involved," said Christopher "Kit" Taylor, former chairman of the Municipal Securities Rulemaking Board, who is now a private consultant. "There tends to be a bit of a regulatory vacuum in D.C.," which local officials help to fill, he said.
Municipal bond issuers buy guaranteed investment contracts, or GICs, from financial companies as a place to park the proceeds of bond sales until they spend the money. The local government collects a guaranteed rate of return, while the financial firm reinvests the money at market rates in hopes of profiting from the rate differential. Internal Revenue Service rules require competitive bidding for the products.
Since November 2006, the U.S. Justice Department's antitrust division, the IRS, and the Securities and Exchange Commission have been investigating allegations that brokers and insurers conspired to pay local governments artificially low rates on GICs.
In February 2007, Bank of America agreed to cooperate with the Justice Department's municipal derivatives probe in exchange for immunity from criminal prosecution. The company also agreed to pay a $14.7 million settlement to the IRS in conjunction with its GICs.
The MSRB earlier this month urged President Obama and Congress to consider imposing federal regulation on financial advisers and GIC brokers. The board did not ask for regulation of derivatives such as interest rate swaps.
Governments such as Los Angeles, Oakland, Fairfax County, Va., and Mississippi have joined class action lawsuits against dozens of financial firms - including JPMorgan Chase & Co., Financial Security Assurance Holdings, AIG Financial Products, Morgan Stanley, and Bank of America - seeking compensation for the alleged conspiracy. The suits were consolidated in the U.S. District Court for the Southern District of New York last year.
The GIC and derivatives probes are part of a broader investigation into the municipal securities market by Brown and the other state attorneys general. They are also investigating accusations that credit rating agencies and bond insurers conspired to maintain a system of dual credit ratings to force municipal issuers to buy unnecessary bond insurance.
Taylor said aggressive state investigations - such as New York's investigation of initial public offerings during the dot-com boom and Massachusetts' investigation of auction-rate securities - have led to some of the most important securities enforcement actions of recent years.
Brown's participation in the GIC and derivatives investigations was first reported by Bloomberg News on Friday.
