CHICAGO — Former Illinois Gov. Rod Blagojevich and five associates were indicted yesterday on federal corruption charges alleging their drive for financial gain influenced state legislation, jobs, and contracts — including the selection of Bear, Stearns & Co. to be the lead underwriter on the state’s $10 billion pension bond sale in 2003.

Federal authorities accuse Blagojevich, 52, of presiding over a government in which he sought financial benefits such as money, campaign contributions, and employment for himself and others in exchange for official actions, Patrick J. Fitzgerald, U.S. attorney for the Northern District of Illinois, said in announcing the sweeping federal grand jury indictment.

Blagojevich is charged with 16 felony counts including racketeering conspiracy, wire fraud, extortion conspiracy, attempted extortion, and making false statements to federal agents. The ex-governor’s brother, Robert Blagojevich, his former chief of staff John Harris, another ex-chief of staff, Alonzo Monk, his top fundraiser and adviser Christopher Kelly, and Republican businessman William F. Cellini Sr. also face various counts all for allegedly engaging in a sweeping scheme to deprive the people of Illinois of honest government.

The 19-count, 75-page indictment includes the pay-to-play allegations initially lodged against Blagojevich in a criminal complaint filed on Dec. 9th when federal authorities arrested the governor and Harris, including the charge that Blagojevich sought to personally profit from his power to name President Obama’s Senate replacement. The indictment marks a dramatic expansion of the charges Blagojevich faced in the complaint of conspiracy to commit mail and wire fraud and solicitation of bribery.

The indictment reveals new allegations, however, including the charge that many of the defendants sought kickbacks related to the pension bond issue. The indictment charges that Blagojevich, Monk, Kelly and another Blagojevich fundraiser and adviser, Antoin “Tony” Rezko, agreed to use the governor’s powers for financial gains that would be divided up and distributed after he left public office. Rezko is not named as a defendant. He was convicted last year on influence-peddling related charges.

To that end, the group, along with unnamed co-schemers, directed “lucrative state business relating to the refinancing of billions of dollars in state of Illinois pension obligation bonds to a company whose lobbyist agreed to provide hundreds of thousands of dollars to Rezko out of the fee the lobbyist was to collect, and Rezko in turn agreed to split the money with Blagojevich, Monk and Kelly,” according to the indictment.

Bear, Stearns & Co. was chosen as the senior book-running manager on the taxable general obligation issue that sold in June 2003, pocketing $8 million in fees for its work on the transaction. The former underwriter that has since been absorbed by JPMorgan Chase paid $809,000 to its lobbyist, Robert Kjellander, and his firm Springfield Consulting Group LLC under its contract that called for the consultant to be paid 10% of the firm’s net fees on the deal. Kjellander has never said exactly what work he did to help Bear win the deal. Bear Stearns and Kjellander are not identified in the indictment.

When the size of the fee was disclosed by Bear Stearns in a regulatory filing in November 2003, it sparked outrage among state lawmakers who later adopted a ban on such contingency fees. The Bond Buyer in an October 2003 story reported how local bankers were directed by Rezko and Kelly to hire certain lobbyists and consulting firms as they vied for a much-sought after role in the deal.

Former state budget director John Filan, who is now head of the Illinois Finance Authority and a key fiscal adviser to new Gov. Pat Quinn, has said he chose the underwriting team based on his own review and the recommendations of his staff and counsel. The selection of Bear Stearns raised many eyebrows among market participants at the time because the firm was not among the top underwriters of taxable debt.

Information on the new allegations involving the pension bonds may have come from Rezko, who has been cooperating with federal authorities, and from former Bear Stearns public finance banker P. Nicholas Hurtgen, who was the lead local banker on the transaction. Hurtgen in February pleaded guilty to aiding in the shakedown of a Chicago-area hospital that was seeking state regulatory approval for a new hospital, and he is cooperating with federal prosecutors.

Blagojevich, who faces a maximum 325 years in prison, said in a statement: “I’m saddened and hurt but I am not surprised by the indictment. I am innocent. I now will fight in the courts to clear my name. I would ask the good people of Illinois to wait for the trial and afford me the presumption of innocence that they would give to all their friends and neighbors.”

The indictment alleges that the corruption began in 2002 as Blagojevich was running for office on the platform of “no more business as usual.” Kelly, who served as chairman of the campaign fund from early 2004 until August 2005, is alleged to have held substantial sway over various governmental functions in the indictment, along with Rezko generating substantial campaign contributions for Blagojevich.

Cellini is a prominent Republican businessman with long-standing relationships with pension fund board members. Monk is a lobbyist and long-time friend of the former governor who managed his 2002 and 2006 campaigns and served as his first chief of staff. Robert Blagojevich became chairman of the campaign fund last August. Harris, who was chief of staff beginning in late 2005 until December, is charged with a single count of wire fraud. He is cooperating with the government.

The indictment does not charge the ex-governor’s wife, Patti Blagojevich, with any crimes, but it alleges that she received a real estate commission from Rezko for more than $14,000, and that he hired her at his real estate business at a monthly salary of $12,000 that was supplemented by another commission of $40,000. In another new allegation, the then-governor is also said to have held up a state grant to a publicly supported school until a campaign fundraiser was held for him by an unnamed congressman who supported the school.

Schemes included in the indictment that were originally revealed in the criminal complaint include Rezko’s arrangement for $50,000 in contributions from businessman Ali Ata, who the governor then appointed to head up the newly established Illinois Finance Authority in 2004.

The governor and his aides also allegedly withheld state funds from Children’s Memorial Hospital in an attempt to extort a campaign contribution. The governor also sought to extort campaign contributions from two horse track businesses before he signed legislation that favored the industry, according to the indictment.

Several of the defendants are also charged with threatening to withhold state financing assistance for the Tribune Co. Blagojevich wanted the Tribune to fire a critical editorial writer in exchange for financing assistance through the Illinois Finance Authority on its sale of Wrigley Field, home of the Tribune-owned Chicago Cubs.

The indictment also includes older allegations involving various defendants’ attempts to extort kickbacks from investment firms seeking to manage state pension fund investments and state regulatory action. Many had previously surfaced in past court documents and proceedings involving other defendants in the government’s probe.

The indictment has been anticipated since the Dec. 9 arrest of Blagojevich and Harris. Blagojevich’s refusal to resign his post after the arrest led to his impeachment by the state House and subsequent conviction and removal from office by the Senate in late January, putting the reins of state government into the hands of then-Lieut. Gov. Pat Quinn.

Blagojevich is on vacation at a Disney resort in Florida, according to press reports. Arraignment dates have not yet been set. Fitzgerald’s office faced a Tuesday deadline for the indictment, needed because defendants cannot be tried on charges solely based on a criminal complaint.

Though additional individuals could face charges as the government’s probe continues, the indictment yesterday marked the culmination of an investigation begun in 2003 into Illinois government corruption known as Operation Board Games. It was launched as the federal government was building a racketeering case against Blagojevich’s predecessor, George Ryan, who was convicted in 2006.

As prosecutors narrowed in on Blagojevich, their investigation took a dramatic turn in October when his former aide and lobbyist John Wyman provided them with evidence that allowed them to win court approval to wiretap the governor’s home phone and campaign office.

As the Federal Bureau of Investigation listened in on conversations, agents uncovered Blagojevich’s alleged scheme to personally profit from his ability to name Obama’s replacement as the junior senator from Illinois and other newer pay-to-play schemes. Fitzgerald then moved quickly to announce the criminal complaint and Blagojevich’s arrest. The indictment includes excerpts of the court-authorized wiretaps.

Even with the indictment looming, Blagojevich went ahead and named former Illinois Attorney General Roland Burris to replace Obama. Burris was seated by the Senate but has come under criticism for withholding information from the impeachment committee about his contacts with Blagojevich aides over the Senate appointment.

The Blagojevich scandal has taken its toll on Illinois’ finances. As the state prepared to sell $1.4 billion of notes just days after the governor’s arrest, Fitch Ratings downgraded the state to AA-minus from AA, citing in part concerns that the scandal could hurt the state’s ability to resolve a budget deficit. Standard & Poor’s put the credit on negative watch and Moody’s Investors Service stripped the state of its top short-term credit marks, souring broker-dealers on the competitive transaction so there were few bidders. S&P has since downgraded Illinois to AA-minus from A. Moody’s rates the state Aa3.

State lawmakers and Quinn have also blamed Blagojevich’s fiscal policies for contributing to the state’s structural budget problems. The budget deficit in the current fiscal 2009 budget and proposed fiscal 2010 budget has steadily risen, with the latest estimate at $12.4 billion, up from $11.5 billion.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.