The U.S. Department of Justice, the Federal Bureau of Investigation, and the Internal Revenue Service’s criminal division are conducting a grand jury investigation of alleged bid-rigging involving guaranteed investment contracts in the municipal bond market, officials said yesterday.
The FBI raided the offices of at least two GIC brokers, CDR Financial Products in Beverly Hills, Calif., and Investment Management Advisory Group Inc. in Pottstown, Pa., early Wednesday morning, and later in the day Financial Security Assurance Holdings Ltd. announced it had received a subpoena from the Justice Department’s antitrust division.
FBI officials confirmed that searches had taken place at CDR and IMAGE’s offices, but declined to provide any details of the raids, which had been made in accordance with sealed search warrants. Telephone calls to the two firms were either unanswered or not returned.
“The antitrust division is investigating the possibility of anti-competitive practices in the municipal bond industry,” Justice spokeswoman Kathleen Blomquist said yesterday. She declined to provide additional details. Knowledgeable sources said industry practitioners and government employees, including IRS agents, have been called before a federal grand jury, but the FBI, Justice Department, and officials in several U.S. attorney offices declined to comment.
Sources say the Securities and Exchange Commission, which may have uncovered the abuses and informed the three agencies about them, has a related investigation underway. Commission officials said they could neither confirm nor deny the existence of any such investigation.
The IRS’ tax-exempt bond office may have also discovered problems with certain firms when it investigated a group of so-called telephone book/TEFRA deals several years ago, one source said.
CDR and IMAGE surfaced in a municipal corruption and pay-to-play case involving Philadelphia officials more than two years ago. Former city Treasurer Corey Kemp and others were indicted and ultimately convicted in a massive case brought by U.S. attorneys. Although the indictments did not identify CDR and IMAGE by name, they referred to them as having made gifts to Kemp and the late bond attorney Ronald A. White in return for being considered by the city to do investment management and advisory work.
The SEC then opened a wider investigation of municipal investment advisory firms, which appeared to grow quiet for some time, one source said, noting that the agency probably then referred its findings to the Justice Department.
The IRS has also been looking into bid-rigging and other problems with GICs and the investment of bond proceeds for several years. It has focused on the roles of CDR and Société Générale, a French bank, in over 20 “lease-to-own” deals, as well as the firm’s involvement in California school advance refundings and put option cases from several issuers around the country. The agency is typically prohibited from sharing confidential investigation findings with other agencies, but a specific exception for criminal cases allows it to refer information to the Justice Department.
According to sources, U.S. attorneys would likely be pursuing the firms for price fixing under the Sherman Antitrust Act..
FSA said in a press release yesterday afternoon that it was “not aware of any specific allegations concerning its own practices” and that it would fully cooperate with the Justice Department in the investigation.
