WASHINGTON — A federal judge in Manhattan has ruled that a group of 11 California localities, including Los Angeles, may go forward with their civil cases against Goldman, Sachs & Co., Citigroup, and several other high-profile firms because they may have participated in an alleged conspiracy to rig bids for municipal investment contracts and derivatives.
At the same time, however, Judge Victor Marrero of the U.S. District Court for the Southern District Court of New York dismissed other firms named in the suits, including AIG Financial Products Corp. and a group of related firms referred to as “GE Trinity.” Marrero said that either there is not yet any plausible evidence to link these firms to the alleged conspiracy or the firms’ bids for guaranteed investment contracts fell outside a range cited by a former Internal Revenue Service official as a means of detecting sham or collusive bidding for the contracts.
Nanci Nishimura of Cotchett, Pitre & McCarthy, which brought the suits on behalf of the California localities, applauded the ruling, noting that Marrero refused to dismiss the suits against some of the largest firms in the market. She said the ruling also permits the plaintiffs to add back some of the defendants to the suit if the discovery process uncovers evidence to support that.
The ruling, she said, is “really significant” because “everyone is on notice now that there was plausible evidence of a bid-rigging conspiracy.”
“All of the major financial institutions and major brokers are involved and some, quite significantly,” she said.
Spokesmen for Goldman and Citigroup declined to comment for this article.
Marrero’s ruling came a day after the court issued a separate ruling allowing another, smaller group of four California issuers to go forward with their suits against a much narrower group of defendants. The plaintiffs in those cases are Oakland, Fresno, the Fresno County Financing Authority, and Alameda County.
It came more than a month after Marrero refused to dismiss another suit that was brought by several East Coast states and localities, including Hinds County, Miss., and Baltimore, against 16 firms.
The three groups of civil cases have been consolidated in and are being coordinated by the federal court in New York, where the Justice Department has filed criminal charges against CDR Financial Products, its founder, and a current and former employee. Three former CDR officials also have pleaded guilty to criminal counts and agreed to cooperate in the department’s case against the firm. Marrero is presiding over the civil and criminal cases.
In dismissing some of the defendants involving the 11 California issuers, Marrero said he was only adopting a range that the plaintiff issuers said Mark Scott, the former director of the IRS’ tax-exempt bond office, used to provide a “rough guideline” for detecting sham bids that are intentionally meant to lose the bidding for investment contracts.
“When a bid is 100 to 150 basis points below the market and there is no justification for that being so low, one of the assumptions you can draw is that there are courtesy bids being provided,” Scott reportedly said.
Scott, who now runs his own law firm, declined to comment yesterday.
Based on Scott’s guidelines, Marrero said that he could not accept as proof of the alleged conspiracy a bid from Transamerica Life Insurance Co. in a March 2002 Los Angeles guaranteed investment contract auction.
The bid was 51 basis points below a winning bid by MBIA Inc.
Similarly, Marrero said he could not accept that GE Trinity likely colluded with XL Capital, the former parent company of Syncora Guarantee Inc., for a July 16, 2003, Riverside GIC, even though XL’s bid was 73 basis points lower that GE Trinity’s.
Removing GE Trinity from the list of defendants is significant because it is said to be a target in the Justice Department’s criminal antitrust investigation.
Sources believe that Trinity is one of the unnamed GIC providers in the October grand jury indictment of CDR, and note that GE, its parent company, has disclosed that its subsidiaries received subpoenas and one had received a Wells Notice from the Securities and Exchange Commission, warning that staff was considering filing civil charges against it.
The plaintiffs tied to Wednesday’s ruling include: Los Angeles, Riverside, Stockton, Contra Costa County, San Diego County, San Mateo County, Tulare County, Los Angeles World Airports, the Stockton Redevelopment Agency, the Sacramento Municipal Utility District, and the Sacramento Suburban Water District.
Marrero agreed to dismiss from the cases AIG Financial Products Corp., Transamerica, Syncora, XL Asset Funding Co., GE Funding Capital Market Services Inc., Trinity Funding Co., Trinity Plus Funding Co., XL Life Insurance & Annuity Co., XL Capital Ltd., XL Life and Annuity Holding Co., and General Electric Capital Corp.
In addition to Goldman, Citi, and UBS, Marrero also rejected attempts to dismiss as defendants from the suits JPMorgan Chase & Co., Morgan Stanley, Wells Fargo & Co., National Westminster Bank PLC, MBIA, Rabobank Group, Societe Generale SA, CDR Financial Products, Bear, Stearns & Co., Piper Jaffray & Co., Winters & Co. Advisors LLC, Wachovia Bank NA, PFM Group, Dexia SA, Bayerische Landesbank Girozentrale, Natixis SA, Investment Management Advisory Group Inc., First Southwest Co., George K. Baum & Co., Financial Security Assurance Inc., and Sound Capital Management Inc.
A spokesperson for UBS had no comment. First Southwest and others could not be reached for comment.