Wachovia Charged with Fraudulent Bid Rigging in Municipal Bond Proceeds

Jack Humphrey, Regulatory journalist
December 15, 2011 /

The Securities and Exchange Commission has charged Wachovia Bank N.A. with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.

The SEC’s investigation, which is continuing, has been conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers, who are members of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office.

The SEC alleges that Wachovia generated millions of dollars in illicit gains during an eight-year period when it fraudulently rigged at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico.

Wachovia won some bids through a practice known as “last looks” in which it obtained information from the bidding agents about competing bids. It also won bids through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor. Wachovia facilitated some bids rigged for others to win by deliberately submitting non-winning bids.

Wachovia agreed to settle the charges by paying $46 million to the SEC that will be returned to affected municipalities or conduit borrowers. Wachovia also entered into agreements with the Justice Department, Office of the Comptroller of the Currency, Internal Revenue Service, and 26 state attorneys general that include the payment of an additional $102 million. The settlements arise out of long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division.

Wachovia Bank is now Wells Fargo Bank following a merger in March 2010.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, Wachovia engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005. Wachovia’s fraudulent practices and misrepresentations not only undermined the competitive bidding process, but negatively affected the prices that municipalities paid for reinvestment products.

Wachovia allegedly deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry. Others charged prior to Wachovia are
J.P. Morgan Securities LLC – $228 million settlement with SEC and other federal and state authorities on July 7, 2011; UBS Financial Services Inc. – $160 million settlement with SEC and other federal and state authorities on May 4, 2011; Banc of America Securities LLC – $137 million settlement with SEC and other federal and state authorities on Dec. 7, 2010.

In a related action to the Banc of America matter, the SEC charged the firm’s former vice president and marketer Dean Pinard for his role in various improper bidding practices. Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation.

Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment adviser, municipal securities dealer, or municipal advisor.

 

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