Two Plead Guilty in CDR Case

WASHINGTON — Putting an end to the one of the most high-profile criminal trials in the muni market since the mid-1990s, two former employees of CDR Financial Products Inc. each pleaded guilty Monday afternoon to three criminal counts in connection with bid-rigging of investment and derivatives contracts for muni bond proceeds.

Zevi Wolmark, 56, CDR’s former chief financial officer and managing director, and Evan Andrew Zarefsky, 37, a former vice president, entered the pleas in the U.S. District Court for the Southern District of New York in Manhattan, before Judge Victor Marrero.

Each agreed to cooperate in exchange for possible leniency at sentencing on June 8.

Zarefsky and Wolmark each pleaded guilty to counts of bid-rigging, wire fraud, and fraud conspiracy. Both face maximum penalties of 35 years in prison and $1.5 million in criminal fines. Zarefsky’s attorney, Daniel Zelenko, a partner at Crowell & Moring LLP in New York, said: “Today, Mr. Zarefsky accepted full responsibility for his actions.”

Wolmark’s attorney, Michael McGovern, a partner at Ropes & Gray LLP in New York, did not respond to several requests for comment.

Justice Department attorneys left the courtroom without taking any questions.

The guilty pleas came less than two weeks after David Rubin, founder of Beverly Hills-based CDR, pleaded guilty before Marrero on Dec. 30 on behalf of himself and the firm, to three criminal counts of bid-rigging, fraud conspiracy and wire fraud. Rubin’s three counts also carry maximum penalties of $1.5 million in criminal fines and 35 years in prison.

His 10-page plea agreement, which was publicly released on Friday, reveals he told the Justice Department he wished to provide information about “potential violations of law” by himself “and others.”

In exchange, the department can evaluate whether to ask the judge for leniency at sentencing, based on Rubin’s assistance, according to the agreement. Rubin’s sentencing is set for April 27.

During the one-hour hearing Monday, Marrero asked both defendants if they understood they faced possible prison terms of 35 years. Zarefsky and Wolmark, who stood throughout the proceeding, said they did.

They each also read broad statements, admitting their conduct.

In response to a question from Marrero, Zarefsky said he knew his conduct was wrong “and came to understand that it was unlawful.” After conferring with Zelenko, Zarefsky added that he knew it was unlawful at the time.

Monday’s pleas mark a major step in an extensive probe, ongoing since 2005, of bid-rigging in the muni market. Overall, the Justice Department has filed criminal charges against 18 mostly former executives and employees of financial services firms.

Before Monday, 10 of them, including Rubin, had pleaded guilty, including Mark Zaino, a former senior analyst who rose to head the muni desk at UBS AG.

A grand jury indicted CDR, Rubin, Wolmark, and Zarefsky in October 2009. The indictment charged them with participating in an antitrust conspiracy, from as early as 1998 until at least November 2006, to allocate and rig bids for investment contracts and other municipal finance contracts.

Specifically, the indictment said they gave a marketer, identified as Marketer A, information about the prices of bids from other providers, asked the marketer to submit intentionally losing bids, received undisclosed kickbacks ranging in size from $4,500 to $475,000, and falsely certified that the bidding process was competitive.

Separately, the indictment alleged Wolmark spoke to Marketer A in October 2003, 90 minutes before bids were due, about arrangements for a provider, also not identified, to pay CDR kickbacks in the form of hedge fees and to enter into one or more swaps with financial institutions, which are only identified as “A” and “B.”

The indictment also alleged that Zarefsky, in October 2003, gave Marketer A information, 30 minutes after bids were due, about the bid prices submitted by other providers. He suggested as well that Marketer A change the prices he was otherwise prepared to submit, including lowering the interest rates on one of the agreements to a specific number.

The guilty pleas came after a series of maneuvers to delay the trial or narrow the government’s case.

Before pleading guilty, Rubin had sought unsuccessfully to postpone the trial because his wife is dying of cancer, according to court papers.

Also in late December, the defendants lost a bid to narrow the scope of the government’s case against them by excluding certain evidence they claimed the government had improperly obtained during its wide-ranging investigation.

They alleged certain confidential informants, during recorded conversations with various third parties, inquired into and elicited information that was potentially protected by attorney-client privilege, according to court documents.

But a three-judge panel, including Marrero, denied their request on Dec. 30, saying they had not met their burden to show “specific evidence of taint” affecting a substantial portion of the prosecution’s case.

While jury selection started on Jan. 3, the trial, which had been slated to last two months, was not expected to begin until Jan. 9. Then last week, opening statements were postponed by one week, until Jan. 17, prompting some market participants to wonder if Zarefsky and Wolmark would also seek to enter guilty pleas after Rubin’s action.

CDR was the bidding agent for many of the contracts under scrutiny in parallel criminal and civil antitrust and securities fraud probes that have been underway since 2005.

In particular, bid-rigging settlements of criminal and civil charges in 2010 and 2011 netted more than $740 million in penalties and restitution from Banc of America Securities LLC, now Bank of America Merrill Lynch, UBS Financial Services Inc., JPMorgan Chase & Co., Wachovia Bank NA, now Wells Fargo Bank NA, and GE Funding Capital Market Services Inc.

Federal marshals raided CDR’s offices in November 2006, as well as the offices of Investment Management Advisory Group Inc. in Pottstown, Pa., and Sound Capital Management in Eden Prairie, Minn.

The Justice Department was expected to focus on CDR first and then pursue other firms.

A separate trial of three former GE bankers, Dominick Carollo, Peter Grimm and Steven Goldberg, is scheduled to begin on April 9.

An attorney for Carollo, Walter Richard Krzastek, of McElroy, Deutsch, Mulvaney & Carpenter LLP in Morristown, N.J., declined to comment on the CDR pleas.

But a market participant expressed doubt that others would proceed to trial.

“This creates a very heavy expectation that future results will be similar in getting admissions of guilt,” said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange, N.J.

Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.