A federal grand jury Thursday indicted CDR Financial Products, Inc., its founder David Rubin, as well as a current and former firm official, on nine criminal counts in connection with bid-rigging tied to municipal investment agreements and other contracts such as derivatives.
They also were charged with wire fraud schemes and obstructing the Internal Revenue Service.
The officials were Stewart Wolmark, also know as Zevi Wolmark, former chief financial officer and a managing director of CDR, and Evan Andrew Zarefsky, a vice president of the firm.
"The Government just doesn't understand the municipal bond industry and these charges show that. Mr. Zarefsky did absolutely nothing wrong. He is not guilty and is confident of winning in court," according to a statement issued by Crowell & Moring, who is representing Zarefsky.
Allan Ripp, a spokesman for CDR, said Thursday that the firm has not seen the indictment, but that “all indications are these are the same sort of charges that have been reviewed and discussed in class action lawsuits that were largely dismissed. When the court and the judges take a similar look they will find that there’s no merit to the allegations and that CDR was absolutely not a conspirator in an antitrust scheme.”
The indictment alleges that CDR received undisclosed kickbacks, concealed as fees, that ranged in size from $4,500 to $475,000 on at least 10 occasions between November 2001 and August 2005.
If convicted, the officials could face a total of over 70 years in prison and fines upwards of $3 million. CDR also could be fined several hundred million dollars.
The indictment does not name other firms referred to co-conspirators, but refers to them as providers A and B, financial institutions A and B and marketers A, B-1 and B-2. While it cites several transactions, it does not identify the bonds or issuers, but instead refers to a state water development authority, a municipal port facility and a state housing agency.
The port facility may refer to the Allegheny County Port Authority in Pennsylvania, which in the spring, responded to a Justice Department subpoena and provided information relating to its agreements with CDR.
The charges are the first to be filed in the Justice Department’s ongoing antitrust investigation of the municipal bond industry that is at least three years old. The investigation, which became public with federal raids on at least three guaranteed investment contract providers in November 2006, is being conducted by the JusticeDepartment antitrust division’s New York field office, the Federal Bureau of Investigation and Internal Revenue Service criminal investigation division. Justice is also coordinating its investigation with the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.
“The Justice Department is committed to protecting the competitive process and will hold accountable individuals and companies who participate in illegal and anticompetitive conduct,” Christine A. Varney, assistant attorney general in charge of the department’s antitrust division, said in a statement.
According to the indictment, CDR was a broker of investment contracts and designated in advance of bid submissions which firms would win investment agreements or other contracts. The firm also allegedly played a role in getting firms to submit bids designed to be losing bids, discussed and agreed on prices providers would bid, falsified certifications that the bidding was competitive, and accepted kickbacks disguised as fees that were not disclosed to issuers as kickbacks.
On numerous occasions, the indictment claims, a senior underwriter on an upcoming bond issue would recommend that an issuer hire CDR as its GIC broker.
In exchange, CDR and its officials ensured that the same dealer won one or more of the investment agreements associated with the upcoming bond deal by recommending terms for the investment agreement that favored that provider, selecting other providers to bid that would submit intentionally losing bids, and, after receiving information from the “winning” provider regarding the price or price levels it intended to bid, telling the other providers what prices or price levels to bid.
“As a result, the intended winning provider increased its profits from the investment agreement(s) by paying interest to the municipality for the duration of the investment agreement(s) at a rate that was artificially low,” the indictment said.
“This case is fundamentally about collusion, the illegal rigging of a purportedly competitive bidding process,” said Joseph M. Demarest Jr., assistant director-in-charge of the FBI in New York. “The result was lower rates of return on the investment of bond proceeds for the state and local governments that hired CDR. In a climate of economic austerity, the conduct of the defendants and co-conspirators seems particularly predatory.”
Charles Anderson, former manager of tax-exempt bond field operations for the IRS, who retired from the agency in January 2007 and is now a tax controversy consultant, said, “I’m not surprised at anything in the indictment and I would anticipate a lot more indictments down the road.”
CDR has completed more than 4,000 transactions totaling $100 billion in more than 22 years in business, according to information on the firm’s Web site. The firm’s site says it has served as a financial derivatives consultant on hundreds of transactions. It also offers swap monitoring services and states that since 2000 it has served as a bidding agent/investment consultant on more than 1,000 transaction totaling $25 billion.
