WASHINGTON — The Justice Department Tuesday indicted three former financial services executives — Dominick P. Carollo, Steven E. Goldberg and Peter S. Grimm — on a total of 12 criminal counts for allegedly participating in wire fraud schemes and conspiracies in connection with the bidding for investment contracts for municipal bond proceeds over a seven-year period.
The indictment, which was filed in the U.S. District Court for the Southern District of New York in Manhattan and is the latest development in the Justice Department’s massive antitrust investigation of the municipal bond market, does not name the firms for which the three worked. It only calls the firms “Provider B” and describes them as “a group of separate financial services companies located in New York, N.Y.” that were “owned or controlled by a company headquartered in Fairfield, Conn.”
However, sources said the firm is General Electric Co. and documents show that its companies included FGIC Capital Market Services, Inc., GE Funding Capital Market Services Inc., Trinity Funding, LLC and Trinity Plus Funding, LLC.
Carollo managed and supervised the day-to-day activities and personnel involved in the sales of investment agreements and other municipal finance contracts, according to the indictment. Goldberg was a liability manager who was authorized to submit bids for investment agrees on behalf of his firm. And Grimm was a liability manager and vice president who also had authority to submit bids for agreements.
According to the indictment, all three men, from as early as 1999 until sometime in 2006, “willfully” and “knowingly” conspired with each other and other individuals and firms to devise a scheme to defraud municipal issuers and the federal government in connection with the bidding for investment agreements and other municipal finance contracts.
Muni bond issuers typically try to select providers of investment agreements through bona fide competitive bidding procedures that are designed to comply with federal tax laws and rules so that their bonds remain tax-exempt. They often hire independent third party brokers to act as their agents in conducting the competitive bidding process.
The indictment charges Carollo, Goldberg and Grimm with conspiring with CDR Financial Products, an investment broker, to manipulate the bidding process so that it was not really competitive and so that their firms, or other specified firms, would win the awards of muni investment agreements. The three men obtained information from CDR about prices, price levels, rates, and conditions related to the bids of other investment agreement providers. They obtained so called “last looks” at other bids, a practice prohibited under Treasury rules, according to the indictment. And they intentionally submitted losing bids so that other specified firms would win the right to provide the investment agreements to issuers.
The three men agreed to either pay kickbacks, or to arrange to have kickbacks paid, to CDR in the form of inflated fees in exchange for help with manipulating the bidding process, according to the indictment.
As a result, Carollo, Goldberg and Grimm, along with their “co-conspirators” misrepresented to municipal issuers and bond counsel that the bidding process was genuinely competitive and in compliance with Treasury regulations, according to the indictment. Municipal issuers awarded contracts to providers of investment agreements that otherwise might not have been awarded.
The actions of these three men and their co-conspirators undermined the ability of the Internal Revenue Service to determine whether the issuers had correctly accounted for the money that was owed to the Treasury, the indictment said.
“The elaborate schemes outlined in the indictment boil down to efforts by these defendants to subvert the competitive bidding process for investment agreements,” said Federal Bureau of Investigation Director-In-Charge George Venizelos. “In the process they defrauded public entities — and therefore the public — and put bondholders at risk.”
Goldberg is charged with eight counts of conspiracy and two counts of wire fraud. Grimm is charged with five counts of conspiracy and one count of wire fraud.
Carollo is charged with four counts of conspiracy and one count of wire fraud.
The alleged fraud conspiracies each carry a maximum penalty per count of five years in prison and a $250,000 fine. The wire fraud charges each carry a maximum penalty per count of 20 years in prison and a $1 million 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 amount is greater than the statutory maximum fine, according to the Justice Department.
The indictment comes after four individuals have pleaded guilty to criminal counts this year and agreed to cooperate with prosecutors. The individuals are Mark Zaino, who formerly worked on the muni derivatives and guaranteed contract desk at UBS AG, as well as three former CDR employees — Douglas Alan Goldberg, who was a senior vice president, Mathew Adam Rothman, who was a vice president, and Daniel Naeh, who lived in Israel.
In addition, the Justice Department, on Oct. 29, 2009, filed charges against CDR and current or former employees: the firm’s founder, David Rubin; Stewart Wolmark, also know as Zevi Wolmark, former chief financial officer and a managing director; and Evan Andrew Zarefsky, a vice president of the firm. A trial is scheduled to begin in that case on Sept. 12, 2011.