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Connecticut Attorney General Fights For FSA Recordings

WASHINGTON - Connecticut Attorney General Richard Blumenthal is waging a court battle to get Financial Securities Assurance Inc. and its holding company to turn over 600 hours of audio recordings already released to the Securities and Exchange Commission and Justice Department that he claims contain "a rich source of evidence of potential violations" of state antitrust laws.

The case, which is pending in the Connecticut Superior Court in Hartford, reveals that the SEC and Justice have obtained audio recordings from some firms in connection with their parallel civil and criminal antitrust investigations of muni derivatives and reinvestment business, which began in 2006. Those two agencies subpoenaed dozens of firms for information going back six to 14 years.

The court action also may be watched by other states that are also probing firms for possible antitrust violations and would also like to obtain their audio recordings.

Blumenthal asked the Connecticut court late last week to order FSA to provide his office with copies of all of the audio recordings and pay a $2,000 penalty. His actions stem from a coordinated multi-state investigation of anti-competitive practices in connection with municipal bond-related guaranteed investment contracts and derivatives that he is helping to lead.

But so far, FSA has maintained that it is only obligated and willing to provide audio files related to one transaction that took place in Connecticut, according to court documents filed by Blumenthal last week.

A hearing on the dispute has been scheduled for Sept. 14, and FSA has until Sept. 7 to provide a written response to the state's claims.

Betsy Castenir, a spokeswoman for Assured Guaranty Ltd., which acquired FSA from Dexia earlier this year, declined to comment on the specifics of the legal tussle. Under the terms of the acquisition, Dexia maintains 13.9% of Assured's issued common shares and retains all risks and responsibilities for FSA's financial products business.

In a statement, Castenir said: "As previously disclosed, FSA's GIC operations, and associated litigation responsibility, have been transferred to Dexia in connection with the sale of FSA to Assured." Officials in Dexia's European headquarters could not be reached for comment.

Some financial services firms have historically recorded conversations of their employees to confirm details of financial commitments that are conveyed verbally, market sources said. It is not uncommon for some firms with small muni reinvestment operations to record all of their conversations, as FSA apparently did. But while some firms destroy their recordings after a relatively short period of time, FSA did not.

Blumenthal's dispute with FSA, which has been ongoing for about 16 months, comes more than a year after the multi-state antitrust investigation by the attorneys general, including Blumenthal and Florida's Bill McCollum, was first publicly disclosed by XL Capital Ltd., the Bermuda-based insurer, in an annual financial statement filed with the SEC.

Following that disclosure, several attorneys general said that they had subpoenaed 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. The requests seek documents and other information going back more than 11 years to Jan. 1, 1998. The requests for audio recordings from the attorneys general appear to have been made earlier this summer, and not in the initial subpoenas.

The disclosure surprised some market participants, who thought the lack of any news from the federal investigations for the past two to three years may have signaled they reached a dead end.

The Justice Department and SEC are believed to be investigating whether certain investment brokers and providers developed secret relationships with broker-dealers and steered muni business to them in return for kickbacks, monthly retainer payments, or guarantees of being able to participate in other transactions.

The federal probes began after the Internal Revenue Service in 2005 stepped up its examination of bid-rigging in connection with guaranteed investment contracts in the muni market. In some cases, it found, bidding processes were structured to allow a provider to underpay for a GIC and then overpay for other investment agreements and remarketing fees, effectively diverting arbitrage back to the GIC broker or underwriter.

Prices for GICs are important because they affect the investment contracts' prices, which thereby impact yields. When an issuer invests bond proceeds, federal law stipulates that the investments' yield cannot exceed the bonds' yield by more than .001%. Any arbitrage earned above that percentage must be rebated to the federal government.

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