“School districts, non-profits and municipalities in this case were all defrauded by Wall Street,” Attorney General Harris said. “This settlement brings a measure of restitution, justice and closure to the victims.”
The fraud was egregious, citing “allegations that JPMC made secret deals with competitors in the bidding process. This illegal conduct included bid-rigging, peeking at competitors’ bids and offering non-competitive courtesy bids” in municipal bond derivatives bidding. According to the statement, “These schemes enriched the financial institutions and brokers at the expense of cash strapped state agencies, cities, school districts and non-profits that could ill afford the steep financial consequences of this illegal conduct.
For readers not familiar with the sale of municipal bonds, the situation is one when a bond, which is another name for a loan, is purchased by a municipality (such as a school, or road project) so that the investor who buys the bond will pay a certain amount, but the municipality will pay interest back over time.
Municipal bonds are particularly attractive to investors because they are tax-free. The municipality will set up a bidding process to attract an investor that is willing to give the lowest amount of interest. Because these transactions deal with bond sales involving nonprofit corporations or government entities, there are strict federal regulations about how competitive bidding for these derivatives are done and what type of institutions can do them.
In this case, it was like having six people bid, but you don’t know that they are friends and they take turns rigging the bids by having each person, except one, bid high, so that one person looks like the winning low bidder, but he actually is giving you a higher rate than normal. The bidders for the derivative were in some way affiliated with institutions in these cases as required in the regulations.
This kind of rigging can cost governments and communities millions of dollars, which often must be paid through raised taxes.
According to Harris, “The state and federal settlements are distinct components of a coordinated global $228 million settlement that JPMorgan Chase entered into. … JPMorgan Chase also reached agreement with the U.S. Department of Justice’s Antitrust Division, the Internal Revenue Service and the Federal Reserve Board.”
This is the third settlement to be negotiated in this multistate investigation. Settlements were previously made with Bank of America and UBS AG.
California entities that were affected will split approximately $6.7 million as part of the JPMorgan Chase settlement.
In April 2008, the states began investigating allegations that certain large financial institutions, brokers, and swap advisers engaged in various schemes to rig bids and commit other deceptive, unfair, and fraudulent conduct in the municipal bond derivatives market.
The investigation, which is still ongoing, revealed collusive and deceptive conduct involving individuals at JPMorgan Chase and other financial institutions, and certain brokers with whom they had working relationships according to the attorney general’s office. These parties also submitted fraudulent certifications of compliance to government agencies, among others, in contravention of U.S. Treasury regulations.
