WASHINGTON — In the realm of muni enforcement, the new year will start with the most high-profile federal criminal trial since the mid-1990s, stemming from the Justice Department’s extensive probe of bid-rigging.
The trial, currently scheduled for jury selection on Jan. 3 and opening statements on Jan. 9 in the U.S. District Court for the Southern District of New York in Manhattan, marks the culmination of efforts by the Justice Department, ongoing since 2005, to police bid-rigging misconduct dating back two decades or more.
On Wednesday, CDR Financial Products founder David Rubin, a key defendant, failed to get a three-judge panel of the U.S. Court of Appeals for the Second Circuit to overturn a lower court ruling denying a postponement of the trial because his wife is dying of cancer.
The trial is slated to take about two and a half months, concluding on March 16.
The DOJ has filed criminal charges against 18 mostly former executives and employees of financial services companies and one corporation.
Nine individuals have pleaded guilty, including Mark Zaino, a former senior analyst who rose to head the muni desk at UBS AG and is expected to testify for the prosecution, the DOJ said in court papers.
A grand jury indicted Beverly Hills-based CDR in October 2009, as well as its founder, Rubin, former chief financial officer Zevi Wolmark, and vice president Evan Andrew Zarefsky. The firm and the defendants have denied any wrongdoing.
Three former CDR employees have pleaded guilty and are expected to testify as prosecution witnesses, according to the DOJ’s court documents. They are Matthew Adam Rotham and Douglas Alan Goldberg, former vice presidents, and Daniel Naeh, who acted as a bidding agent on muni deals.
“I think a lot of people in the market are wondering how many other shoes will drop,” said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange.
In particular, bid-rigging settlements in 2010 and 2011 netted more than $740 million in penalties and restitution from Banc of America Securities LLC, now Bank of America Merrill Lynch, UBS Financial Services Inc., JPMorgan Chase & Co., Wachovia Bank NA, now Wells Fargo Bank NA., and GE Funding Capital Market Services Inc. But regulatory settlement documents typically did not identify the underlying deals and players, other than by generic names such as “transaction A” or “bidding agent A.”
Some of the players could be gleaned from documents and interviews. However, the criminal trial could reveal more of them and provide more details about their conduct.
“That’s a lot of testimony,” Shapiro said. “And they’re going to name names.”
In court papers filed earlier this year, the DOJ disclosed some of the deals and witnesses central to its case.
Specifically, in a Jan. 28, 2011, letter to U.S. District Judge Victor Marrero, the DOJ said it had identified more than 200 transactions underlying the conduct in the indictment, and that it expected its “key witnesses” to testify about approximately 65 to 70 deals. The letter was signed by Rebecca Meiklejohn, the lead attorney on the case from the DOJ’s antitrust division in New York.
At a pretrial conference in December, the DOJ clarified that it intended to focus on roughly 30 transactions at trial, with detailed testimony and documentary evidence, according to court documents.
An additional group of roughly 30 transactions could be the subject of brief and categorical testimony, according to court documents.
Some of the transactions at issue are dated between November 1999 and August 2001 and occurred in connection with bonds issued by the Memphis Health Educational and Housing Facility Board, the Tulsa Industrial Authority, the California Health Facilities Financing Authority, the Oklahoma County Finance Authority, the San Diego Area Housing and Finance Authority, the Clarksville, Tenn., Public Building Authority, and the Missouri Health and Educational Facilities Authority. The DOJ identified these deals in a court filing.
In a preliminary witness list, the DOJ told the court that it intended to call several issuer officials as prosecution witnesses, including: Cleon Butterfield or Grant Whitaker of the Utah Housing Corp.; Thomas Carey, chief financial officer of the Maine State Housing Authority; Katy Mallory of the West Virginia Water Development Authority; and Michael Stanard, the Missouri Health and Educational Facilities Authority’s executive director.
A DOJ spokesperson, Alisa Finelli, declined to comment.
Asked how many transactions might figure in the government’s case, a CDR attorney, Richard Beckler, who is a partner at Bracewell & Giuliani in Washington, said: “It’s hard to pin the number down.”