WASHINGTON — GE Funding Capital Market Services Inc. has agreed to pay more than $70 million to settle antitrust, securities fraud, tax and other charges with the Securities and Exchange Commission and other regulators and law enforcement authorities for rigging bids on at least 328 muni bond reinvestment contracts in 44 states and Puerto Rico over five years, officials said Friday.
In announcing the global settlement, SEC officials said the scheme involved proceeds from the sale of more than $24.2 billion in underlying municipal securities, generating millions of dollars in ill-gotten gains.
GEFCMS, based in Stamford, Conn., will pay about $25 million to the SEC, including disgorgement of $10.63 million in alleged ill-gotten gains, a $10.5 million penalty and $3.776 million in prejudgment interest.
The firm did not admit or deny the commission’s allegations.
Separately, the GE unit also entered into agreements with the Department of Justice, the Internal Revenue Service and 25 state attorneys general and will pay $45.35 million more in connection with those settlements, including $34.25 million to AGs from 24 states and the District of Columbia and $11.2 million to the IRS.
As part of its settlement with DOJ, the firm admitted, acknowledged and accepted responsibility for anticompetitive conduct by its former traders.
Federal regulators talked about the importance of the agreement.
“Our in-depth investigations have uncovered pervasive corrupt practices in the municipal securities reinvestment market, and we are requiring financial firms one by one to step up and pay the price for their misconduct,” Robert Khuzami, the director of the SEC’s division of enforcement, said in a statement.
The SEC’s muni enforcement chief echoed this view.
“GE Funding CMS’s fraudulent practices and misrepresentations undermined the competitive bidding process and negatively impacted the prices that municipalities paid for reinvestment products,” Elaine Greenberg, chief of the enforcement division’s muni securities and public pensions unit, said in a statement. “The firm’s misconduct deprived municipalities of a conclusive presumption that reinvestment instruments were purchased at fair-market value.”
In announcing the DOJ settlement, acting assistant attorney general Sharis Pozen said the firm’s conduct harmed municipalities and taxpayers.
“We will continue to use all the tools at our disposal to uphold our nation’s antitrust laws and ensure competition in the financial markets,” she added.
A federal judge in New Jersey must still approve the SEC’s settlement.
The commission’s complaint cites four transactions involving bid-rigging but only refers to them as A, B, C and D. The final settlement document will list the specific bond transactions at issue and the payment amounts issuers will receive, Greenberg said.
GE released a statement Friday saying it is “pleased to have resolved” the matter, which involved its “indirect subsidiary,” GEFCMS, and conduct by three former employees who worked in a business unit GE discontinued in April 2010.
“The employees’ behavior in this matter did not meet GE’s standards,” the company said.
Of the $70 million settlement, $54.9 million will be made available to municipalities and other tax-exempt issuers, GE said.
In its complaint, the SEC said the firm, between August 1999 and September 2004, engaged in fraudulent bid-rigging for guaranteed investment contracts, repurchase agreements and forward purchase agreements, through so-called last looks, set-ups and the submission of purposely non-winning bids.
Specifically, the firm illicitly won at least 203 rigged municipal reinvestment contracts, the vast majority of which involved last looks, and submitted at least 125 purposely non-winning bids, according to the SEC.
The firm also falsely certified that the bids were competitive, meaning they were untainted by undisclosed agreements, and reflected fair market value, the agency said. GEFCMS’ conduct and misrepresentations jeopardized the tax-exempt status of “certain” underlying securities and injured “numerous municipalities,” according to the SEC.
One of the transactions, cited in the SEC’s complaint as “Transaction A,” involved the proceeds of $94 million of homeownership opportunity bonds issued by the Rhode Island Housing and Mortgage Finance Corp. in March 2002.
The SEC’s complaint does not identify the deal or the parties. But enforcement documents filed in related cases show UBS served as a co-underwriter for the bonds and also was bidding agent for the temporary investment of bond proceeds into four separate funds. One of the contracts being bid for was a $50 million note account guaranteed investment contract.
A UBS representative and GEFCMS’ muni trader arranged in advance for the GE unit to win the bid for the note account GIC at reduced levels. They also arranged for UBS to provide a corresponding swap, the SEC said.
Four days before the bidding, the UBS representative and GEFCMS trader discussed the bidding process and which providers of investment products should be included or excluded from the bid list. The trader selected providers that would not really compete with it for the GIC. They also agreed that GEFCMS would enter into a swap with UBS to hedge the associated interest-rate risk, according to the commission.
Immediately before the bid, a UBS representative called GEFCMS’ trader to inquire about his best levels, the SEC said. The trader explained that he would like to win the note account GIC at 4.20% but said, “if you need me to move up a little I could do it.”
In response, the UBS bidding agent asked, “what’s a little, like a nickel or a couple?”
The trader said, “Yeah, like the more, you know, so that we can take care of the other thing,” referring to the swap. In other words, the GEFCMS trader was saying that the more money his firm made, the more money it would have to take care of UBS in pricing the swap. The UBS agent said, “Yeah, I got you.”
Two minutes later, at 11:45 a.m., UBS’ representative called the GEFCMS trader to “confirm” that the firm could reduce its winning bid by 15 basis points for the GIC. Nine minutes after GEFCMS had been awarded the GIC at 4.05%, its trader and another UBS representative joked about how well the GE Unit had done and discussed the price at which it would acquire the interest rate swap on the note account GIC from UBS. The UBS representative requested a level of 4.23% and the GEFCMS trader immediately agreed.
He also agreed to pay a bidding agent fee of $75,000, which he indicated would be reflected on the provider’s certificate.
An attorney for GEFCMS, Craig Stewart at Arnold & Porter LLP in New York, referred a request for comment to a GE spokesperson.