Peter Ghavami, former co-head of UBS AG's municipal-derivatives group, and two former co-workers were accused by prosecutors of lying and stealing from U.S. cities and towns by conspiring to rig bids for investing proceeds of municipal bond sales.
Ghavami and former colleagues Gary Heinz and Michael Welty went on trial yesterday in federal court, charged in a six-count indictment with "long-running conspiracies and schemes to defraud" municipal-bond issuers and U.S. tax authorities by fixing the prices on the investing agreements. Banks already have paid more than $700 million to settle U.S. claims.
"We are here because cities and towns across America were cheated out of public money," Kalina Tulley, a Justice Department lawyer, told jurors in the government's opening statement. "The evidence will show that these defendants lied and cheated and that these cities and towns were defrauded."
The trial, before U.S. District Judge Kimba Wood in Manhattan, stems from a nationwide probe of bid-rigging involving banks and brokers including CDR Financial Products Inc. The defendants deny any wrongdoing.
Prosecutors expect to prove "the knowing and active participation" of UBS, JPMorgan Chase & Co., Bank of America Corp. and General Electric Co. in the fraud alleged against the three former UBS executives, according to a July 6 court filing.
Bank of America, JPMorgan Chase, UBS, Wells Fargo & Co. and GE Funding Capital Market Services, a former unit, have paid more than $700 million to settle claims by the government. Beverly Hills, California-based CDR and 13 individuals have pleaded guilty to criminal charges.
"There were plenty of sound, legitimate, honest business reasons that you would put a bid in on a deal even if you weren't dying to win it," Marc Mukasey, a lawyer for Heinz, told jurors. Issuers often submitted losing bids to "stay on the brokers' radar," he said.
Competitors talked to gain market information or to bluff other bidders, according to Mukasey.
Tulley told jurors they will hear recordings of telephone conversations among the defendants and their alleged co- conspirators and the testimony of people who have pleaded guilty in the price-fixing probe. She said the evidence will show how the conspirators worked together to manipulate rates on the investment contracts.
The first prosecution witness will be Mark Zaino, according to prosecutors. Zaino, a former CDR employee who later worked alongside the defendants at UBS, was a key witness in the conviction of three former GE bankers in May. He pleaded guilty in 2010 and hasn't yet been sentenced. Zaino is cooperating with the government in the hopes of receiving a lighter sentence.
Lawyers for all three defendants attacked Zaino in their opening statements.
Preston Burton, a lawyer for Welty, called Zaino a snake who "slithered to the surface after the 2006 raid" by agents of the Federal Bureau of Investigation on CDR's Beverly Hills offices.
Another trial witness identified by prosecutors yesterday is former JPMorgan Chase banker Alexander Wright, who pleaded guilty July 18 to charges that he conspired with Heinz to fix the bidding on a transaction involving an unnamed hospital in New Jersey.
The three former GE bankers, Dominick Carollo, Steven Goldberg and Peter Grimm, were found guilty by a federal jury in Manhattan of conspiracy to commit fraud by manipulating auctions for municipal-bond investment contracts. The government claimed that from August 1999 to November 2006, the men gave kickbacks to brokers hired by local governments to solicit bids, seeking to win auctions and increase their profit.
Carollo, Goldberg and Grimm have asked the trial judge to throw out the verdict.
Christiaan Brakman, a UBS spokesman, Russell Wilkerson, a spokesman for GE Capital, and Bank of America spokesman William Halldin declined to comment on the trial. Joseph Evangelisti, a JPMorgan Chase, spokesman didn't return a call seeking comment.
As many as 200 recordings related to 38 deals will be put into evidence, prosecutors told Wood in a July 9 filing.
The government claims bidders on investment contracts were often given "last looks" at other bids, intentionally submitted losing bids and steered investment contracts in exchange for kickbacks or favorable treatment on future auctions.
In the Carollo case, Zaino testified that he and others at UBS helped Grimm, a former banker at a GE subsidiary, win bids in exchange for kickbacks. UBS gave Grimm information on what other banks had bid on five deals, allowing him to lower the rate he was prepared to bid and still win, he said. Following the bid, the GE subsidiary would enter into a swap with UBS which served to disguise kickbacks, he testified.
UBS booked profit of more than $1.5 million on three swaps, Zaino said.
"He and others at UBS helped Grimm not only win, but win at profitable rates because Grimm paid," said Kevin Hart, an antitrust prosecutor, in his closing statement in the Carollo trial.
The government also played a tape at the Carollo trial in which Michael Welty, one of the UBS defendants going to trial today, acted as a broker for a $100 million deal for a Denver- based hospital system in January 2002.
Grimm told Welty he could bid at 2.46 percent or higher, according to a tape played at the May trial. Five minutes later, Welty called Grimm back and told him to bid 2.38 percent. Grimm won the deal and UBS made $75,000.
The amount of evidence collected in the case is massive, Charles Stillman, a lawyer for Ghavami, said previously in court. The U.S. has provided more than 600,000 audiotapes and hundreds of millions of documents, he said.
Both sides estimate the trial may last about four weeks.
The case is U.S. v. Ghavami, 10-cr-1217, U.S. District Court, Southern District of New York (Manhattan).
