WASHINGTON — 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.
Relying largely on information from a confidential witness at Bank of America called CW, the lawsuits provide something of a play-by-play primer on routines among certain firms in the reinvestment and derivatives business. The winners of bids for the contracts in the sector were determined in advance, traders used verbal cues to rig bids, some firms intentionally submitted losing bids, and several firms received “last looks” that allowed them to compare competing bids and alter their own to win.
The suits also rely in part on extensive audiotapes that B of A made available to the Justice Department. The issuer attorneys did not have access to the tapes but received detailed descriptions of some of their contents from the bank’s attorneys.
In addition, one of the suits notes that Charles Anderson, the former field operations manager for the Internal Revenue Service’ tax-exempt bond office, said: “I have listened to tape recordings of bankers talking to each other saying, 'This law firm or lawyer will go along, they know what’s going on, they’ll give us an opinion.’ It might take a little time to unwind it all, but I think we’ve only seen the tip of the iceberg.”
The class action lawsuit that Baltimore and other issuers filed against dozens of firms, and five separate suits filed against many of the same firms by Los Angeles and other issuers in California, are pending before the United States District Court for the Southern District of New York in Manhattan. They allege that a significant portion of the industry was involved in bid-rigging and anti-competitive behavior that led to last week’s federal indictment of Beverly Hills, Calif.-based CDR Financial Products Inc., its founder David Rubin, and a current and a former employee at the firm.
“Defendants’ illegal conspiracy was based on a web of interlocking relationships” between providers, brokers and their employees, “who eschewed competition with one another in favor of cooperation that ensured the defendants made excessive illegal profits, and that issuers, including Los Angeles, were denied the benefits of competition,” said one of the suits filed on behalf of Los Angeles by the law firm of Cotchett, Pitre & McCarthy.
The Los Angeles suit lists 24 providers, or firms that were counterparties or that submitted bids or pricing information with regard to investment and derivatives contracts, as well as eight firms that brokered the contracts, and 10 other firms it calls “co-conspirators.”
The class action suit, filed on behalf of Baltimore and other East Coast issuers by the law firm of Hausfeld LLP, makes several similar allegations, and lists 11 providers, six brokers, and 16 co-conspirator firms.
According to both suits, traders on B of A’s muni derivatives trading desk knew ahead of time when the bank would be awarded a deal. They also understood that on some deals, a provider other than the bank would win, “but also knew that Bank of America would make it up on the deals where it was agreed that it would be the winning bidder.”
The “unlawful pre-selection practice” was so widespread that Phillip Murphy, the former managing director of B of A’s muni derivatives department, “expressed dissatisfaction if the CW did not know who would win a trade before it was bid.” The collusive practices continued after Murphy left the bank to become a principal at Winters & Co. in 2002, the Hausfeld suit said.
Hausfeld’s suit is the second incarnation of that firm’s suit, which was completely rewritten in light of the information supplied by the CW. The first version of the complaint was largely thrown out by a federal judge earlier this year. In return for cooperating with the issuer suits, B of A is exempted from having to respond to them by the same deadline as other defendants, one of the lawyers representing Los Angeles said.
In addition to CDR, the suits allege that the two other broker firms whose officers were raided by the Federal Bureau of Investigation three years ago were involved in the conspiracy even though they were not named in last week’s indictment. The other firms are Investment Management Advisory Group Inc., known as IMAGE, in Pottstown, Pa., and Sound Capital Management in Eden Prairie, Minn.
The CW, who discovered the alleged collusive conduct after he joined Bank of America’s muni derivatives trading desk in April of 1999, “learned that his was a business about doing favors, generating referrals for brokers, and getting favors in return,” according to the Hausfeld and Cotchett suits. He got his job on the recommendation of executives from IMAGE, the firm he was assigned to work with by Murphy and Douglas Campbell, a former sales team manager at B of A. He also closely worked with Martin Stallone, a managing director at IMAGE.
The CW and other members of the bank’s trading desk used various verbal cues to rig bids, the suits said. One approach used by the CW was to ask if the bank’s bid was “a good fit,” according to the Hausfeld suit. But the conspirators allegedly used several additional code phrases to communicate their desire to be pre-selected as the winner of a particular auction, including: “We really want this deal” or “We want to get in on this rate,” or “I can do better, I want this bid.”
The code word “axe” was also allegedly commonly used to refer to a contract provider’s interest in winning a deal.
Firms allegedly also put in sham bids that they knew would not win for business they did not want.
For instance, the CW ran into Michael Frasco, a managing director at Natixis Funding Corp., formerly called CDC Funding Corp., at the Plaza Hotel in New York in 2003, and allegedly said that “CDC does not rig bids, but it did submit bids that it did not expect to win,” according to the Cotchett suit.
Meanwhile, the illegal conspiracy allegedly extended to negotiated, as well as competitively bid, transactions, the suits said.
On negotiated deals, Bank of America would ask brokers for a “market-pricing letter,” a certification that the pricing on a negotiated deal reflected a fair-market price, and brokers would submit such a letter even when they knew that market prices were premised on collusive activities, according to the suits.
In one negotiated deal involving the renovation of the Olympic Club in San Francisco entered into in April 2002, IMAGE sent a market-pricing letter to Murphy for use with the issuer. In a March 11, 2002, e-mail to Dean Pinard, a former manager of B of A’s muni derivatives department, Murphy mentioned that he would be requesting such a letter and said that if IMAGE didn’t get the brokerage business on another deal involving Beacon Tradeport Community Development District, “we can find some $ elsewhere.”
“Likewise, in July of 2004, in a negotiated deal involving a trigger swap for a wastewater facility for the city of Chicago, Bank of America and JPMorgan were collusively given the opportunity to see the pricing of Lehman and adjust their own pricing accordingly, so that Lehman got 60% of the deal and JPMorgan and Bank of America each got 20%,” the Hausfeld suit stated. “The broker co-conspirator on the deal, Mesirow Financial, suggested that this arrangement could be subject to scrutiny.”
The suits show that the firms took many steps to conceal allegedly collusive activity. In one instance, when Johan Rosenberg, now president of Sound Capital, meant to send a GIC provider “a secret 'last look,’ he mistakenly tapped the 'Reply All’ key, so that the e-mail was also sent to the lawyer for the issuer,” according to both suits.
“When that attorney called up Rosenberg to inquire about what was going on, Rosenberg lied about the purpose of the e-mail,” the Hausfeld suit said.