newjerseynewsroom.com

Stems from scheme to defraud towns, non-profits

The New Jersey municipal bond buyers can expect to share upward of $2 million from a $58.7 million 26-state settlement with Wachovia Bank and its successor, Wells Fargo, Attorney General Paula T. Dow announced Thursday.

The settlement stems from an ongoing national investigation of alleged anti-competitive and fraudulent conduct in the municipal bond derivatives industry.

Under the settlement, Wachovia will pay municipal bond issuers in New Jersey upwards of $2 million in restitution, according to preliminary estimates.

Nationwide, Wachovia has agreed to pay a total of $54.5 million in restitution to affected state agencies, municipalities, school districts and not-for-profit entities that entered into municipal derivative contracts with Wachovia between 1998 and 2004 and are eligible to participate in the settlement.

In addition, Wachovia has agreed to pay a $1.25 million civil penalty and $3 million for fees and costs of the investigation to the states.

The settlement is part of a coordinated global $148 million settlement that Wachovia entered into Thursday. Wachovia also reached agreement with the U.S. Department of Justice's Antitrust Division, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Internal Revenue Service.

Wachovia is the fourth financial institution to settle with the states in the ongoing municipal bond derivatives investigation. The others are Bank of America, UBS AG and JP Morgan. To date, the states have obtained settlements worth more than $300 million.

Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed, or to hedge interest-rate risk. In April 2008, the states began investigating allegations that certain large financial institutions, including national banks and insurance companies, and certain brokers and swap advisors, engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market.

The investigation, which remains ongoing, revealed collusive and deceptive conduct involving individuals at Wachovia and other financial institutions, and certain brokers with whom they had working relationships. The wrongful conduct took the form of bid-rigging, submission of non-competitive courtesy bids and submission of fraudulent certifications of compliance to government agencies, among others, in contravention of U.S. Treasury regulations.

Regardless of the means used to carry out the various schemes, the objective was to enrich the financial institution and/or the broker at the expense of the issuer — and ultimately taxpayers — depriving the issuer of a competitive, transparent marketplace. As a result of such wrongful conduct, state, city, local, and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they otherwise would have.

In addition to New Jersey, the other states involved in the settlement are: Alabama, California, Colorado, Connecticut, District of Columbia, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Tennessee and Wisconsin.

Deputy Attorney Generals Joshua T. Rabinowitz, and Toral M. Joshi, Assistant Attorneys General Brian F. McDonough, and Carol Jacobson represented New Jersey.

—TOM HESTER SR., NEWJERSEYNEWSROOM.COM