WASHINGTON — A federal court in New Jersey has approved a $24.9 million settlement between GE Funding Capital Market Services Inc. and the Securities and Exchange Commission over bid-rigging of municipal bond-related contracts, as well as the amounts of restitution to be distributed to each of the more than 325 state and local issuers that were defrauded.
Judge William Martini of the U.S. District Court for the District of New Jersey
GEFCMS neither admitted nor denied the commission’s allegations and a spokesman declined to comment Tuesday on the final order.
The firm, based in Stamford, Conn., agreed to pay the SEC $10.63 million in disgorgement, a $10.5 million civil penalty, and $3.776 million in prejudgment interest.
Proceeds from the settlement, stemming from more than 300 transactions executed between August 1999 and September 2004 in connection with more than $24.2 billion in underlying muni bonds, are to be distributed to municipalities and conduit borrowers within 60 days of the final order.
The California School Cash Reserve Program Authority will receive the largest restitution payment, $1.16 million, in connection with $1.1 billion of California School Board Association Finance Corp. tax and revenue anticipation note pool bonds sold in 2001.
The smallest restitution, $1,838, is earmarked for an entity called ARCS Funding LLC, from “Fannie Mae Loan Program Cross Creek” bonds, involving a contract that was bid in September 2000.
A 33-page list of transactions attached to the final judgment shows the more than 325 deals to which the SEC referred in its complaint, which was filed last month.
One transaction, cited in the SEC’s complaint as “Transaction C,” involved a $79,985,000 one-year investment agreement for the New Jersey Housing and Mortgage Finance Agency.
On Sept. 23, 2003, the SEC alleged, a bidding agent identified as “Bidding Agent C” bid the agreement and arranged for GEFCMS to win by supplying it with information about other bids.
On the morning of the bid, Bidding Agent C’s representative called the GEFCMS muni trader to help the firm form its winning bid. Other prospective providers had submitted bids to Bidding Agent C before the phone call.
During the call, GEFCMS said, “so they’re coming in around 130 or so?” Bidding agent C said, “yes, 130 with a tie-breaker on the end of it.” GEFCMS then asked if it would be “OK” if he came in at 131, and Bidding Agent C said, “take 1.362 and knock 5 off.”
In response, GEFCMS said he could “live with” 1.312, and Bidding Agent C said, “fax me the bid form.” About 30 minutes later, Bidding Agent C called to confirm GEFCMS had won the bid at 1.312.
In its provider certificate, GEFCMS falsely certified that its bid was determined without regard to any formal or informal arrangement with the issuer or any other person, the SEC said. A spokesperson with the issuer declined to comment.
In another transaction, cited in the complaint as “Transaction D,” a bidding agent identified as “Bidding Agent D” sought bids for three funds in connection with the temporary investment of proceeds from $110 million of electric revenue bonds issued by Riverside, Calif., in May 2004.
Bidding Agent D allowed GEFCMS to lower its winning bid for the $93 million construction fund GIC twice in a single conversation, according to the SEC. Just before 10:00 a.m. on the morning of the bid, GEFCMS’ muni trader told Bidding Agent D’s representative that he would “really love to take” the construction bid and he was going to be “really aggressive.”
About 37 minutes later, GEFCMS told the bidding agent he was willing to go up to 33 1/2 and asked if that were “too aggressive.” Bidding Agent D asked if he could call back.
At 11:04 a.m., when Bidding Agent D called back to obtain the bid, the GEFCMS trader said again he would go up to 33 1/2 and asked again if that there too aggressive. Bidding Agent D told him to hold on, and GEFCMS asked if 30 1/2 were OK. In response, Bidding Agent D said, “a tiny bit more” and the GEFCMS trader dropped his bid to 29. GEFCMS confirmed the bid was BMA, meaning the Bond Market Association Index, plus 29. Thirty five minutes later, Bidding Agent D awarded GEFCMS the bid at BMA plus 29 basis points. His cover was BMA plus 26 basis points.
In its certificate, GEFCMS improperly certified that its bid was determined without regard to any formal or informal arrangement with the borrower or any other person, and that it did not review other submitted bids, according to the SEC.
Another transaction cited in the complaint, and identified as “Transaction A,” stemmed from $94 million of homeowership opportunity bonds sold by the Rhode Island Housing and Mortgage Finance Corp. in March 2002.
In that deal, UBS Paine Webber Inc., now UBS Financial Services, Inc., served as co-senior underwriter and as bidding agent for temporary investment of the proceeds of the securities into four separate funds.
The SEC’s complaint identifies the bidding agent only as “Bidding Agent A,” but documents filed in previous bid-rigging settlements have identified “Bidding Agent A” as a UBS representative.
One of the four funds being bid, a $50 million note account, created an opportunity for GEFCMS to enter into an interest rate swap with UBS, according to the SEC’s complaint.
The UBS bidding agent and GEFCMS’s muni trader arranged in advance for GEFCMS to win the bid for the $50 million note account guaranteed-investment contract at reduced levels, and for UBS to provide the corresponding swap.
In the omnibus provider certificate, GEFCMS falsely certified that its bid was determined without regard to any formal or informal agreement with the issuer or any other person, according to the SEC’s complaint. Spokespersons for UBS and the issuer did not respond to requests for comment.
