Baum, CDR in Bid Rigged Deals

JUL 14, 2011 7:16pm ET
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WASHINGTON — George K. Baum & Co. and CDR Financial Products, Inc. were bidding agents for muni reinvestment transactions involving J.P. Morgan Securities where bid-rigging occurred, according to court and bond documents as well as transaction participants.

The reinvestment transactions were cited as examples of fraudulent bidding practices in court documents filed by the Securities and Exchange Commission in connection with a $228 million global settlement that J.P. Morgan Securities and JPMorgan Chase & Co. reached with the Securities and Exchange Commission and other regulators earlier this month.

One of the examples in the SEC’s complaint against JPMS was the bidding of a repurchase agreement that was tied to $65 million of general obligation school bonds issued by the Johnson County, Kan., Unified School District No. 512  in May 2005. The SEC complaint did not identify the issuer or any of the participants to the transactions except J.P. Morgan Securities.

However, the official statement shows Baum was financial adviser for the bonds, which were sold to finance the construction and rehabilitation of several schools. A transaction participant said the firm also was bidding agent for a repurchase agreement for the investment of school project funds that was bid at about the same time the bonds were issued.

George K. Baum officials would not return calls for comment.

According to the SEC, the bidding agent, Baum, allowed JPMS to reduce a winning bid so that it would win with a wider profit. The bids were supposed to be submitted by 1:00 p.m. on May 26, 2005, and awarded that same day to the provider that submitted the highest interest rate,.

Soon after 1:00 pm, a JPMS marketer telephoned a Baum employee to submit a bid of 3.761%. The employee signaled to the marketer that the bid was high and suggested that he check his numbers, according to the SEC.

About seven minutes later, the JPMS marketer lowered his bid to 3.751%. Within 10 minutes of that call, the bid was awarded to JPMS. But the Baum employee told the marketer the cover bid was 3.646%. The marketer was concerned that the other bid was so much lower. But the Baum employee reminded the marketer that she had previously signaled to him that he was leaving money on the table.

The SEC charged that, despite the fact that the JPMS marketer received “improper information” from the bidding agent, the agent certified that a good-faith solicitation for bids was conducted, all potential providers of the repo had an equal opportunity to bid, and none of them were given the opportunity to review other bids before submitting one. JPMS certified that the bidding agent had “not provided [it] any information which induced [it] to bid a lower rate.”

The SEC complaint also described fraudulent bidding for investment agreements related to two conduit bond deals that issuers in California did for conduit borrowers. It did not identify the issuers or parties to the deals, other than JPMS. But court documents show CDR was the bidding agent.

Those documents include the recent final judgment by a federal judge approving the SEC’s settlement with JPMS, and a sealed court document filed by U.S. attorneys after CDR, formerly Chambers, Dunhill & Rubin, was indicted in October 2009 on several criminal counts for bid-rigging. The sealed document was accidently made public by a broker-dealer firm in early 2010.

A CDR official declined to comment.

One investment agreement was related to $55 million of bonds sold in July 2000 by the California Statewide Communities Development Authority for the Los Angeles Orthopedic Hospital Foundation and Orthopedic Hospital to finance the construction of a various facilities.

According to the SEC, a JPMS banker was able to convince the issuer to choose a certain bidding agent, CDR, which had agreed to restrict the list of prospective bidders and provided a banker with a series of “last looks” at others bids for the temporary investment of bond proceeds. As a result, JPMS won “tainted bids” for investment products related to the debt-service reserve fund, a project fund, a capitalized interest fund, and a working capital fund, the SEC said.

In October 2000, after the banker left J.P. Moran Securities, CDR paid him $19,600 for ensuring it would be selected as bidding agent in that investment transaction as well as another one, where bid-rigging also occurred, according to the commission.

Despite the bid rigging, both JPMS and the bidding agent certified that the bidding process had been competitive and conducted in good faith, the SEC said.

The other investment agreement was related to $145 million of revenue bonds issued in October 2001 by the California Infrastructure and Economic Development Bank for the J. David Gladstone Institutes to finance a state-of-the-art biomedical research facility. Banc of America Securities, now Bank of America Merrill Lynch, underwrote the bonds.

According to the SEC, the underwriter engaged in a “fraudulent set-up” to ensure a commercial bank would win the bid for an investment product in which some of the bond proceeds were to be invested.

To facilitate the rigging of the transaction, the bidding agent, CDR, got JPMS to provide a purposely non-winning, low-ball bid for the investment agreement. Just before bids were due, a JPMS marketer asked a CDR employee “where the market is?” The CDR employee provided information about the other likely bids. The JPMS marketer said the firm would bid 5%. The CDR employee objected, saying the bid is “really low” and they both agreed on a bid of between 5.40% and 5.50%. The winning bids were 5.61% and 5.74%.

In response, the JPMS marketer says she can “go anywhere just as long as I don’t get hit” and win the bid. Despite the back and forth, JPMS represented that its bid was made without regard to any other information and that it “was not submitted solely as a courtesy to the issuer or any other person for the purpose of satisfying the applicable Treasury regulations.”

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