WASHINGTON — The Justice Department has filed a new indictment against CDR Financial Products and three current and former officials that expands on some of the original October 2009 charges against them to include so-called honest services fraud — a criminal statute that survived a Supreme Court challenge earlier this year and is often used to prosecute wrongdoing by public officials.
The indictment was re-filed late Tuesday, the same day that federal regulators announced a $137 million settlement with Bank of America Merrill Lynch over its participation in a scheme to rig bids for municipal reinvestment contracts from 1997 to 2004 while signaling that additional settlements with other market participants are imminent.
Christopher "Kit" Taylor, the former executive director of the Municipal Securities Rulemaking Board, predicted that other firms will face harsher, more costly settlements because they were not as quick to cooperate with federal law enforcement officials that have been investigating anticompetitive behavior in the muni market since early 2005.
The settlement for Bank of America — the first bank to report bid-rigging to the Justice Department so that it received amnesty for criminal charges — involved disgorgement of ill-gotten gains and restitution to issuers and regulators rather than penalties for misconduct, he pointed out.
Federal regulators "make it brutally clear that Bank of America got what they got because of their leniency agreement," Taylor said. "I don't even want to speculate how heavy things are going to come down on those who didn't come clean earlier, but I expect it to be significant."
Jim Coffman, a former Securities and Exchange Commission enforcement attorney who retired in 2007, said he would not be surprised if the Justice Department, SEC and other federal regulators announced a global settlement with firms ensnared in the probe into guaranteed investment contracts and derivatives, similar to a more than $138 million global yield-burning settlement the SEC reached a decade ago.
Firms agreed to settle federal allegations that they overcharged muni issuers for open-market Treasuries for refunding escrows, with the markups lowering, or burning down, the investment yield so that it was below the bond yield and did not generate illegal arbitrage profits for the issuers.
A global settlement would efficiently allow all of the bid-rigging cases to wrap up, and effectively conserve limited resources at the SEC that may become even more limited with the Republican takeover of the House, Coffman said.
"This is the kind of case you'd want to do that with, if you can take down the worst of the conduct, make sure that those who engaged in misconduct are no longer in the industry and can deprive them of whatever reward they took from what they did," he said.
Elaborating on the new CDR indictment Tuesday, Rebecca Meiklejohn, Justice's lead antitrust attorney on the case, told a federal judge in Manhattan that the changes are "minimal" and would have little impact as the case moves toward a scheduled trial next September.
Though she indicated during a Nov. 12 pretrial conference that the new indictment was coming and might contain additional tax-fraud charges, she told the judge that it does not.
But attorneys representing CDR and the three defendants — founder David Rubin, former chief financial officer Zevi Wolmark and former vice president Evan Zarefsky — said the new indictment will almost certainly disrupt the schedule for that case.
"It requires this incredible amount of work to defend against this new theory," said one defense attorney who asked not to be named.
Judge Victor Marrero, of the United States District Court for the District of Southern New York who is presiding over the case, has asked the defendants to respond to the new indictment by Wednesday.
Enacted in 1989, the honest-services statute makes it a felony for a public or private employee to use the mail or wires to deprive his employer of its "intangible right" to the employee's "honest services."
In a June ruling, a majority of Supreme Court justices refused to strike down the statute as impermissibly vague — as former Enron Corp. chief executive officer Jeffrey Skilling had asked it to do — but pared the statute to its "core," which involves bribery and kickback schemes. The court ultimately vacated an honest-services wire fraud charge used against Skilling because he was not accused of making bribes or taking kickbacks. The CDR case involves alleged kickbacks.
The charge has been used in multiple muni-related cases, many of which have involved pay-to-play practices and bribes or kickbacks.
Former Philadelphia Treasurer Corey Kemp, for example, was fined $10,000, ordered to pay $334,000 in restitution, and sentenced to 10 years in prison in 2005 for honest services fraud, attempted extortion, and other charges in connection with steering bond business and city contracts to firms for gifts, loans, and illegal payments.
Two former executives at Commerce Bancorp, Glenn Holck and Stephen Umbrell, were also fined and sent to prison for conspiracy to commit honest services fraud by helping to arrange loans for Kemp, his church, and his brother-in-law in exchange for city bond business.
