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July 9, 2011

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions

JPMorgan Chase & Co. will pay $211 million to settle charges that its JP Morgan Securities LLC Division rigged dozens of bidding competitions for reinvesting the proceeds from municipal bond transactions to win business from local and state governments. The settlement is for complaints that the US Securities and Exchange Commission, the Justice Department, the Internal Revenue Service, 25 state attorneys general, and bank regulators had filed against the investment bank. JPMorgan has also agreed to give back approximately $129.7 million to the municipalities that were harm.

JP Morgan Securities is accused of making at least 93 secret deals with companies that take care of the bidding processes in 31 states. The arrangement let the investment bank see competitors’ offers.

According to regulators, between 1997 and 2005, members of JPMorgan’s municipal derivatives desk made misrepresentations and omissions in the secret deals, which impacted the prices the governments ended up paying while jeopardizing the tax-exempt position of billions of dollars worth of securities in the billions. This alleged misconduct also undermined JP Morgan’s competitors, who, along with the financial firm, are supposed to offer cities and states the opportunity to bid for competitive interest rates when they invest their tax-exempt proceeds from municipal bonds in municipal reinvestment products. JPMorgan is accused of also sometimes turning in nonwinning bids on purpose to meet tax requirements.

While The New York Time reports that by agreeing to settle JPMorgan Chase is not denying or admitting to wrongdoing, Yahoo reports that the financial firm has admitted to the illegal conduct and agreed to cooperate with the Justice Department’s probe as long as it wasn’t prosecuted. JPMorgan, however, did blame the illegal activity on ex-employees at a division that is no longer in operation.

To settle, JPMorgan will pay $51.2 million to the SEC, $35 million to the Office of the Comptroller of the Currency, $50 million to the IRS, and $75 million to a number of state attorneys general. It also reached a settlement with the Federal Reserve Bank of New York.

Related Web Resources:
JPMorgan Settles Bond Bid-Rigging Case for $211 Million, NY Times, July 7, 2011

JPMorgan pays $211M to settle bid-rigging charges, Yahoo, July 7, 2011

More Blog Posts:
JP Morgan Chase Agrees to Pay $861M to Lehman Brothers Trustee, Stockbroker Fraud Blog, June 28, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, May 16, 2011

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Posted In: Financial Firms , J P Morgan - Chase , Municipal Bonds

May 29, 2011

Muni Debt Reform: SEC to Proceed with Field Hearing in Alabama

According to House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala.), the Securities and Exchange Commission will proceed with a field hearing in Birmingham, Alabama. The hearing is to let the SEC more fully comprehend Jefferson County, Alabama’s experience as it comes up with policies to enhance disclosure and transparency in municipal finance markets.

Currently, Birmingham, which is the largest city in Jefferson County, is still trying to avoid filing a $4 billion sewer bonds bankruptcy stemming from county officials’ alleged corruption and fraud. The SEC hopes that the hearing will help it in the development of policies to improve disclosure and transparency in municipal finance markets.

Already, the SEC and the Justice Department have filed fraud charges against Jefferson County officials, including ex-mayor Larry Langford, who was convicted in 2009 for taking kickbacks involving the refinancing of county bonds that were for the funding of the reconstruction of the aged sewer system. Charged with alleged involvement in the pay-to-play scam are ex-J.P. Morgan Chase (JPM) managing directors Charles LeCroy and Douglas MacFaddin. JP Morgan Chase has already settled the SEC’s securities charges over the financial fraud, which allowed the financial firm to obtain the rights to some of the sewer bond offerings. It paid Jefferson County $50 million and dropped a $647 million termination fee claim.

Bachus has said that he doesn’t believe that any taxpayer, locality, or ratepayer should have to undergo the same experience as the sewer financing fiasco and the impact it has had. If Jefferson County were to file for bankruptcy, it would be the largest municipal bankruptcy in history.

Related Web Resources:
Congressman Bachus: SEC to Hold Field Hearing on Municipal Debt Reform , Bachus House

Bond Debacle Sinks Jefferson County, Bloomberg Businessweek, November 8, 2009

More Blog Posts:
UBS Financial Reaches $160M Settlement with the SEC and Justice Department Over Securities Fraud, Antitrust, and Other Charges Related to Municipal Bond Market, Institutional Investors Securities Blog, May 16, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses, Stockbroker Fraud Blog, April 13, 2011

SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011

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Posted In: Municipal Bonds , SEC

April 13, 2011

Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses

In what is being called the largest award that a major Wall Street broker-dealer has been ordered to pay individual investors, the Financial Industry Regulatory Authority has ordered Citigroup to pay $54.1 million to investors Suzanne Barlyn and Randall Smith over investment losses they sustained on high risk municipal bond funds that lost 77% of their value during the financial crisis.

Richard Zinman, formerly of Citi’s Smith Barney unit, was the broker for Murdock, a venture capital investor, and Hosier, a retired patent lawyer. Zinman left Citi soon after the funds blew up. During the arbitration hearing, he testified on behalf of the two men, saying that Citi did not tell its brokers how risky and volatile the funds in fact were. Zinman now works for Credit Suisse Group.

Citigroup has been under fire for awhile now over its municipal bond funds. Geared towards wealthier clients, investments were a minimum of $500,000. The bond funds were supposed to deliver returns a few percentage points above that of municipal bonds by borrowing up to $7 for every $1 invested. The proceeds were placed in mortgage debt and municipal bonds. Unfortunately, the municipal bond funds' value dropped when the mortgage market started to fail. After Citi brokers complained, however, the financial firm offered share buybacks that lowered investor losses to approximately 61%.

As part of this case, Citi must pay $17 million in punitive damages, $3 million in legal fees, and $21,600 for the hearing free expense, which is normally divided between the parties involved. Prior to this award, the largest one Citi was ordered to pay against a bond-fund claimant was $6.4 million.

Related Web Resource:
Citigroup Loses Muni Case, The Wall Street Journal, April 13, 2011

Muni bonds hit by more selling on default fears, Los Angeles Times, January 12, 2011

More Blog Posts:
SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investor Securities Blog, September 29, 2010

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Posted In: Citigroup , FINRA , Financial Firms , Municipal Bonds

February 9, 2011

SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States

The Securities and Exchange Commission is expecting to accelerate its regulatory and enforcement activity over the $2.8 trillion municipal bond market. The SEC will be holding hearings in a number of US states, including Texas, to go over Muni bond market issues.

Among the issues likely to receive attention from the SEC:
• “Conduit” financing, which involves bonds sold by municipal entities for third parties, including private companies and colleges.
• The need for practical, applicable guidance for state and local officials that is more specific than the prohibitions provided under Section 17(a) of the 1933 Securities Act and Section 10(b) of the 1934 Securities Exchange Act.

Although municipal securities issuers are exempt from SEC registration, reporting, and disclosure requirements—per the 1934 Act's Tower Amendment—they still have to abide by the commission’s antifraud provisions. The SEC has also sent compliance messages to issuers, improved disclosures, and discouraged bid-rigging, pay-to-play and other bad conduct.

Among its recent enforcement efforts, the SEC is investigating bond issuances in Rhode Island. It is also is looking into disclosures over Illinois’ funding of pension plans.

SEC Commissioner Elisse Walter will lead the hearings in Texas, Florida, Illinois, and Alabama this year. Staff will then put together a report that will include recommendations for legislative and regulatory changes and “best practices.”

Related Web Resources:
Second SEC Municipal Market Hearing Continues to Raise Disclosure, Tower Amendment Issues, NCSHA, December 15, 2010

SEC Sets Field Hearings on State of Municipal Securities Markets, SEC, September 7, 2010

Related Blog Posts:
Yet Another Securities Case Against a Financial Firm Alleged to Have Aided Enron in its Scams is Dismissed Without Liability in Texas!, Stockbroker Fraud Blog, January 29, 2011

Texas Securities Act Control Person Claims against Merrill Lynch Pierce Fenner & Smith Inc. is Revived by Appeals Court, Stockbroker Fraud Blog, January 20, 2011

R. Allen Stanford’s Criminal Trial Over $7 Billion Ponzi Scam Delayed So He Can Detoxify from Medication Addiction, Stockbroker Fraud Blog, January 11, 2011

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Posted In: Municipal Bonds , Texas Securities Fraud

January 22, 2011

Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah

According to the US Securities and Exchange Commission, while working at Aquila Investment Management LLC, ex-portfolio managers Thomas Albright and Kimball Young allegedly defrauded the Tax Free Fund for Utah (TFFU)—a mutual fund that was heavily invested in municipal bonds. Now, the two men have settled the securities fraud charges for over $700,000. However, by agreeing to settle, Young and Albright are not admitting to or denying the allegations.

The SEC claims that without notifying the TFFU’s board of trustees or Aquila management, the two men started making municipal bond issuers pay “credit monitoring fees” on specific private placement and non-rated bond offerings. The fees, which were as high as 1% of each bond's par value, were charged to supposedly compensate Albright and Young for additional, ongoing work that they say was required because the bonds were unrated. The SEC says that credit monitoring was actually part of the two men's built-in job responsibilities and that although deal documents made it appears as if the fees (totaling $520,626 from 2003 to April 2009) had to be paid and would go to TFFU, they actually end up in a company that Young controlled and that Albright owned equal shares in.

The SEC says that after management at Aquila found out in 2009 that Young and Albright were charging these unnecessary fees, the financial firm suspended the two men right away and reported them to the agency. The agency says the two men violated their basic responsibilities as investment advisers of mutual funds when they failed to act in the fund’s best interests.

Related Web Resources:
The SEC Order Against Young (PDF)

The SEC Order Against Albright (PDF)

Tax Free Fund for Utah

Municipal Bonds, Stockbroker Fraud Blog

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Posted In: Municipal Bonds , Mutual Funds , SEC Enforcement , Securities Fraud

November 3, 2010

San Diego Officials Settle SEC Municipal Bond Charges for $80,000

Four ex- San Diego officials will pay $80,000 in fines to resolve municipal bond charges by the US Securities and Exchange Commission for allegedly misleading investors. Never before has the SEC obtained financial penalties against a city’s officials for municipal securities fraud. By agreeing to settle, ex-San Diego City Manager Michael Uberuaga, ex-Deputy City Manager for Finance Patricia Frazier, ex-Auditor and Comptroller Edward Ryan, and ex-City Treasurer Mary Vattimo are not denying or admitting to the charges. There are still charges pending against San Diego’s ex-Assistant Auditor and Comptroller Teresa Webster.

The SEC filed its securities fraud charges against the former city officials in 2008. The officials are accused of knowing that the city of San Diego had purposely underfunded its pension obligations to increase benefits will deferring costs. The SEC also contends that the ex- officials understood that without cuts to city services, employee benefits, or new revenues, it would be difficult to fund future retirement obligations. Yet the former officials allegedly did not let investors know about the serious funding problems and made false and misleading statements in 2002 and 2003.

Regulators contend that when San Diego sold over $260 million in bonds, city officials did not disclose that the pension deficit was expected to hit $2 billion in 2009. According to Rosalind Tyson, the director of the SEC’s Los Angeles Regional Office, municipal officials are obligated to make sure that investors get accurate and full information about the financial condition of an issuer.

Related Web Resources:
Ex-San Diego Officials Agree to Pay Fines to End SEC Pension Fraud Case, Bloomberg, October 27, 2010

Former San Diego Officials to Pay Penalties in SEC Municipal Bond Fraud Case, Asset International October 29, 2010

More Municipal Bond Blog Posts, Stockbrokerfraudblog.com

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Posted In: Municipal Bonds , Municipal Securities Offerings , Securities Fraud

April 10, 2010

Stockbroker Fraud?: Extent of Main Street Natural Gas Bonds’ Tie to Lehman Brothers May Not Have Been Disclosed to Investors

Investors of Main Street Natural Gas Bonds are claiming that not only did brokers fail to disclose the risks associated with investing in them, but they also failed to inform their clients that the bonds could be affected by the financial health of Lehman Brothers. Wall Street firms had marketed and sold Main Street Natural Gas Bonds as conservative, safe municipal bonds when, in fact, they were Lehman Brothers-backed complex derivative securities. As a result, when the investment bank filed for bankruptcy in 2008 the bonds’ trading value dropped.

If you were an investor who lost money because you invested in Main Street Natural Gas Bonds that you were told were safe, conservative investments, please contact our stockbroker fraud lawyers immediately to request your free case evaluation. You may have grounds for a securities fraud claim.

Main Street Natural Gas
Set up by the Municipal Gas Authority of Georgia in 2006, Main Street Natural Gas, a non-profit corporation, was supposed to borrow money to purchase natural-gas derivatives—contracts that bet on natural gas’s future price. According to USA Today, the objective was to secure low cost, long-term, natural-gas supply for 73 municipal-owned securities.

In April 2008, Main Street gave $700 million in borrowed money to Lehman investment bank. In exchange, Lehman promised it would deliver 160 billion cubic feet of natural gas at a price that was lower than market value for the next three decades.

When Lehman Brothers filed for bankruptcy in September 2008, it had delivered under 1% of the gas that was promised. The $700 million, instead of being used to purchase natural gas, ended up in a pool to pay back the investment banks’ creditors. Now, investors are the ones that are having to pay the price with their investment losses.

Related Web Resources:
A bad investment ripples through Main Street, USA Today, October 22, 2008

The Main Street Natural Gas Bond Debacle, istockanalyst.com, January 17, 2010

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Posted In: Financial Advisers , Lehman Brothers , Municipal Bonds