SAN FRANCISCO — The Sacramento Municipal Utility District has joined the ranks of public agencies filing civil lawsuits alleging a bid-rigging conspiracy in the municipal derivatives market.
The district, which serves more than 589,000 customers in California’s state capital region, filed suit last week in U.S. District Court in Sacramento, naming 47 financial firms that allegedly conspired to rig the bidding process for derivatives, depressing the utility’s earnings.
SMUD is represented by Burlingame, Calif., law firm Cotchett, Pitre & McCarthy, which represents four other California governments that have filed civil suits alleging bid-rigging.
They have been consolidated into a larger case being handled at the U.S. District Court for the Southern District of New York that involves at least 19 state and local government plaintiffs.
The suits allege that a significant portion of the industry was involved in bid-rigging and anti-competitive behavior.
They support their allegations with material made available as the result of a long-running federal antitrust investigation of the municipal bond industry, which led to criminal indictments on Oct. 29 against Beverly Hills, Calif.-based CDR Financial Products Inc., its founder David Rubin, and a current and a former employee at the firm. They have entered pleas of not guilty.
The U.S. Justice Department entered into an amnesty agreement with Bank of America in 2007, in which the firm agreed to cooperate with the department’s antitrust probe in return for indemnity from criminal charges.
The civil lawsuits rely in part on extensive audiotapes that Bank of America made available to Justice.
Though issuer attorneys did not have direct access to the tapes, they received detailed descriptions of some of their contents from the bank’s attorneys.
The SMUD complaint uses much of the same language as complaints filed by Cotchett Pitre clients Los Angeles and Stockton.
The complaint lists the district’s municipal derivative transactions, which involved interest rate swaps related to $718.9 million of bonds issued by the district.
The district alleges that the big institutions agreed in advance who would “win” the bidding for SMUD’s business, while other defendants either did not bid or submitted bogus “courtesy bids” to foster the illusion of competition.
“As a result of the industry-wide and inter-transactional quality of the defendants’ illegal conspiracy, all of the municipal derivative transactions entered into by SMUD during the period of the conspiracy, including but not limited to those transactions described below, were affected by the conspiracy and SMUD was injured thereby,” the complaint states.
In other words, according to the district’s chief counsel, Arlen Orchard, while there is no direct evidence of collusion on a SMUD transaction, the widespread nature of the conspiracy means its deals were affected.
“There appears to be widespread collusion among financial institutions to split up the market through bid rigging,” he said. “Those actions ended up harming SMUD and really all agencies that participated in the municipal derivative market.”
The case is likely to be folded into the larger civil litigation on derivatives, he said.
“We’re obviously just one of many pursing these causes of action,” he said. “Even if they don’t collapse them into one case, they will do a lot of coordination with regards to discovery. That’ll be up to the courts.”
Cotchett Pitre is handling the case on a contingency basis, he said.
The suit doesn’t specify damages or what compensation SMUD is seeking.
The case, 09-cv-03133, is filed as Sacramento Municipal Utility District v. Bank of America NA et al.