WASHINGTON — The Justice Department announced Wednesday that Daniel Naeh, a former CDR Financial Products Inc. employee living in Israel, pleaded guilty Tuesday for his participation in bid-rigging and fraud conspiracies related to guaranteed investment contracts and other municipal finance agreements.
It was the first guilty plea in department’s more than four-year investigation into bid-rigging and anti-competitive behavior in the muni market.
The plea also appears to follow through on a claim last year by Rebecca Meiklejohn, the lead Justice attorney, that the government has a “strong case” based on multiple witnesses who have agreed to plead guilty and testify against CDR, including former employees.
Under an agreement with federal prosecutors, Naeh pleaded guilty in U.S. District Court in Manhattan to three criminal counts of bid-rigging, conspiracy, and wire fraud. He faces prison sentences and fines of up to 10 years and $1 million for bid-rigging, five years and $250,000 for conspiracy, and 20 years and $250,000 for wire fraud. The fines for each count also could be doubled depending on the amount of ill-gotten gains or losses suffered by the victims, Justice said.
Naeh’s guilty plea comes about four months after CDR, its founder David Rubin, and two other individuals were indicted by a federal grand jury on nine criminal counts in connection with bid-rigging of municipal investment agreements and other contracts such as derivatives.
The two other individuals are Stuart Wolmark, the firm’s former chief financial officer and managing director, and Evan Andrew Zarefsky, its vice president.
CDR and the three individuals named in the October complaint have all pleaded not guilty. A trial is scheduled to begin on Feb. 7 next year.
Court filings released Wednesday reveal that from early as 1998 through November 2006, Naeh admitted that he and other co-conspirators designated in advance which providers would be the winning bidder for certain investment agreements and submitted “or caused to be submitted” to CDR intentionally losing bids.
“Kickbacks in the form of fees that were inflated or unearned were paid to CDR in exchange for assistance from Naeh and other CDR co-conspirators in controlling the bidding process and ensuring that certain co-conspirator providers won the bids they were allocated,” the Justice Department said.
On at least 10 occasions between roughly November 2001 and August 2005, CDR received kickbacks ranging in size from $4,500 to $475,000, according to a criminal complaint against Naeh that was dated Tuesday but not publicly released until Wednesday.
Though Naeh has not worked for CDR for several years, sources said Wednesday that he was practicing as a bidding agent from Israel up until a year ago, possibly on behalf of a Florida-based firm called Integrated Capital Strategies Inc. Officials from that firm, which may no longer exist, could not be reached for comment.
The Ft. Lauderdale-based firm is listed as “inactive” on the Florida Department of State’s registry of corporations, though Naeh, as well as his wife Dena, are listed as officers in filings with the state.
The complaint alleges that Naeh colluded closely with “Provider A,” which is “a group of related financial services companies” located in New York City and owned or controlled by a company headquartered there. It does not identify that firm.
Wednesday’s guilty plea also comes as Rubin, Wolmark, and Zarefsky are saying they may not have enough time to prepare their defense.
In a filing with the same court in Manhattan, Wolmark complained to a federal judge about “staggering logistical, technological, and financial burdens” of going through mountains of documents and recordings that Justice has provided in its case against him, warning it will cost as much as $20 million for “loading, hosting, and reviewing such an enormous amount” of the evidence.
Through his attorney, Ropes & Gray LLP partner Michael McGovern, Wolmark also is suggesting that previous cases have been dismissed on constitutional grounds where such a large financial burden was imposed on a group of individual defendants.
McGovern called for an immediate status conference to address “the fundamental fairness and constitutionality of this prosecution,” which he said impedes the defense’s ability to prepare for trial next February.
However, in a response filed with the court, Meiklejohn countered that such arguments are hard to accept because the government has already provided a “bill of particulars” listing about 250 specific transactions and their dates.
It has also provided a similar number of corresponding “deal buckets” that, along with witness testimony, encapsulates the evidence the government is likely to bring at trial.
The judge presiding over the matter, Victor Marrero, has scheduled a status conference for March 26.
In arguing that an earlier status conference is unneeded, Meiklejohn used the opportunity to reveal new details about the government’s case. She said the facts will demonstrate that CDR “manipulated and controlled the bidding for contracts involving the proceeds” of muni bonds, and other related contracts, to favor particular providers, cheating muni issuers that were CDR’s clients and the Internal Revenue Service.
One set of evidence or “deal bucket” relates to Utah Housing Corp., she said, which had two investment agreements, or “funds,” for which CDR handled the bidding on Aug. 7, 2001.
The evidence includes specifications, bids, and certifications tied to these agreements, plus five recorded conversations totaling about six minutes, as well as a spreadsheet that includes the identifying information for and digests of those calls.
“In each of the calls, defendant Zarefsky is speaking to a provider at about the time that bids were due,” she wrote. “In the fourth call, Zarefsky tells the provider, 'I can actually probably save you a couple of bucks here.’ He then says that the provider can lower the rates he initially quoted by 'a dime’ (10 basis points) — from 3.51% on one fund and from 5.26% to 5.15% on the second fund (actually 11 basis points).”
The letter indicates that this particular bid for Utah Housing is listed on the bill of particulars as one of the transactions affected by the conspiracy charge in count three of the indictment and is also featured in count five involving wire fraud.
Both of those charges revolve around activity CDR engaged with “Provider B,” a group of separate financial services entities controlled or part of a company headquartered in Connecticut.
As previously reported in The Bond Buyer, sources widely believe that Provider B is GE Funding CMS, also known as Trinity Funding Co., a unit of General Electric Co., which is based in Connecticut.
Meiklejohn said the testimony altogether involves 100 “interview reports” of seven current or former CDR employees and about 2,000 tape-recorded conversations obtained from third parties in which a CDR employee is one of the speakers.