WASHINGTON — Martin Kanefsky is the second broker of muni investment agreements that the Justice Department has taken action against, after CDR Financial Products, which the government indicted in October on nine criminal counts over alleged bid-rigging of muni investment and derivatives contracts.
Kanefsky, the former owner and chief executive officer of Kane Capital Strategies Inc., a now-defunct Great Neck, N.Y.-based firm that helped municipal issuers secure guaranteed investment contracts for their bond proceeds, pleaded guilty on Thursday to participating in two separate fraud conspiracies and wire fraud.
He also agreed to cooperate with Justice’s ongoing antitrust probe of the muni market.
Documents filed by Justice officials did not identify Kanefsky’s firm, instead referring to it as Broker A. But sources said Broker A is Kane Capital Strategies. The documents also did not identify his co-conspirators, referring to them only as “Provider A … a group of related financial services companies located in New York, New York” and “Marketer A, who was a representative of Provider A from 2001 until at least 2006.”
But court documents, some of which are supposed to be under seal, show that Provider A is Financial Security Assurance Asset Management Services LLC or FSA Capital Management Services LLC, and that Marketer A is Steven Goldberg, who worked at FSA Holdings Ltd. and who federal prosecutors indicted late last month on several criminal counts in a related action.
GIC brokers are supposed to conduct competitive bidding processes for GIC providers for muni issuer clients. But the Justice Department claims Kanefsky gave Provider A, or FSA, information about the prices, price levels, or conditions in competitors’ bids, a practice known as a “last look,” which is explicitly prohibited by U.S. Treasury regulations.
He also solicited and received intentionally losing bids for GICs and other municipal finance contracts.
As a result of this manipulation of the bidding process, Provider A, or FSA, won contracts at artificially determined price levels, which deprived muni issuers of money and property, Justice said.
Kanefsky also misrepresented to muni issuers or their bond counsel that the bidding process was in compliance with Treasury rules, leading the issuers to file false reports with the Internal Revenue Service that jeopardized the tax-exempt status of their bonds.
Kanefsky engaged in one fraud conspiracy from as early as October 2001 until at least November 2006, and in a second from as early as August 1999 until at least November 2006, the Justice officials said.
According to court documents, on or about April 7, 2005, Goldberg asked Kanefsky if the rate he was prepared to bid on behalf of FSA was too high. Kanefsky stated that if the bid was too high, he would “shave a little.”
Later the same day, Kanefsky told Goldberg to submit a bid that was lower than the one he had previously stated. Goldberg lowered his bid and was awarded the investment contract, for a state financing authority.
The court documents said that on or about Feb. 21, 2002, Kanefsky told a marketer for another firm, identified only as Provider B, that it could lower the rates it had bid for an investment contract with a state housing finance agency.
Provider B was ultimately awarded the contract and continues to make schedule interest payments at an artificially suppressed rate, the department said. Court documents show that Provider B is one of several General Electric Co. affiliates, including FGIC Capital Market Services Inc., GE Funding Capital Market Services Inc., Trinity Funding LLC, and Trinity Plus Funding LLC.
As for the wire fraud count, Justice said that on or about June 30, 2006, through a wire transfer from New York to Minnesota, FSA made an interest payment of about $38,770.39 to a state finance authority in Minnesota that was “artificially determined and suppressed” because Kanefsky got FSA to bid lower than it had offered to bid.
Each of the fraud conspiracies for which Kanefsky is charged carries a maximum penalty of five years in prison and a $250,000 fine. The wire fraud charge carries a maximum penalty of 20 years in prison and a $250,000 fine.
The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.
Kanefsky’s lawyer, Peter A. Chavkin, with Mintz Levin Cohn Ferris Glovsky and Popeo PC, declined to comment.
A spokesperson for FSA could not be reached for comment.
Kanefsky’s guilty plea is the fifth to arise from the ongoing investigation into the municipal bond industry, which is being conducted by the Justice Department’s antitrust division’s New York field office, the Federal Bureau of Investigation, and IRS Criminal Investigation.
The department is 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.
Three former employees of CDR Financial Products, also known as Rubin/Chambers, Dunhill Insurance Services Inc., have pleaded guilty to bid-rigging and fraud conspiracies in relation to the ongoing investigation.
Mark Zaino, a former employee of UBS AG, also pleaded guilty to similar charges.
In addition to Goldberg, Dominick Carollo and Peter Grimm were indicted on July 27, 2010, for participating in fraud schemes and conspiracies related to the bidding for investment agreements.
Beverly Hills, Calif.-based CDR, two of its employees, and one former employee were charged in October 2009 for participating in bid-rigging and fraud conspiracies and related crimes. The CDR trial is scheduled to begin on Sept. 12, 2011.