WASHINGTON - The Securities and Exchange Commission has notified at least three firms that its staff is planning to bring securities fraud charges against them in connection with its 14-month investigation into alleged bid rigging of guaranteed investment contracts and interest-rate swaps in the municipal market, sources said Friday.
And more firms are expected to receive such notices in the coming weeks, they said.
Bank of America Corp. and Financial Security Assurance Holdings Ltd., whose parent is Dexia SA, confirmed or announced in regulatory filings that they have received so-called Wells notices from the SEC, which say that the staff is planning to recommend enforcement or administrative proceedings. The notices typically require the recipient to respond in writing within 30 to 60 days, according to one of the firms.
In addition, sources said that UBS Securities LLC received a notice and that JPMorgan expects to, though spokesmen for the two companies declined to comment.
Though Bank of America would not release a copy of its notice, spokeswoman Shirley Norton said the bank had received one that focused on its bidding tied to "various financial instruments associated with municipal securities."
FSA's notice, described in a Feb. 4 8-K filing with the SEC, was more specific, referring to that firm's bidding associated with GICs.
In a statement, FSA spokeswoman Betsy Castenir said: "Of course we are cooperating fully in the inquiry. This is a procedural development in a civil investigation that began 14 months ago and does not necessarily indicate an adverse outcome."
Meanwhile, two of the three firms whose offices federal officials raided in late 2006 and are thought to be at the center of the alleged bid rigging either declined to say if they had received notices from the SEC or could not be reached for comment.
"The firm is not confirming any communication with any regulator," said a spokesman for CDR Financial Products Inc. "But you might want to call any of the more than 100 entities that have received notification from the SEC."
Investment Management Advisory Group Inc. officials could not be reached for comment.
A lawyer representing Sound Capital Management Inc. said that firm had not received a Wells Notice from the SEC.
News of the SEC's notices came to light as SEC chairman Christopher Cox warned Friday that cracking down on fraud in the municipal market is a top priority for the commission this year and that Mark Zehner, the SEC's Philadelphia-based regional municipal securities counsel, is in charge of a muni fraud task force.
"The reason for this priority is simple: the size of the municipal market is enormous, with $2.5 trillion of securities outstanding," Cox said in a sweeping speech at the Practising Law Institute's annual SEC Speaks Conference that highlighted dozens of SEC initiatives. "That's roughly the GDP of China. And more than two-thirds of that amount is held, directly or indirectly, by individual investors."
The SEC's civil probe comes amid a parallel Justice Department criminal investigation that has been ongoing since at least November 2006. The SEC is looking at whether firms disclosed that bidding practices for GICs and other investment products were competitive when they were not; made or received hidden fees, payments, or kickbacks; or failed to disclose other key information to issuers or investors, sources have said.
Meanwhile, the Justice Department's antitrust division, which is working with the Internal Revenue Service's criminal investigation division and the Federal Bureau of Investigation on the criminal probe, is focusing on anti-competitive behavior such as collusion between firms to get business, rig bids, and fix prices with regard to transactions that date back through 1992, sources have also said.
Sources familiar with both federal investigations said subpoenas sent in 2006 to at least two dozen firms ranged from requesting documents to requiring officials to appear before a federal grand jury.
Though several sources predicted that the investigations would dominate the securities side of the market last year, there was little said on the matter publicly after Bank of America announced in February 2007 that it had entered into an amnesty agreement with Justice protecting it from criminal prosecution. In exchange for amnesty, BOA said it would provide information and cooperate fully with Justice officials. The bank's amnesty agreement with Justice does not carry over to the SEC's probe.
Lynn Hume contributed to this story.
