The United States (US) is weathering widespread concerns over a lack of government oversight in relation to the financial sector. A swift government response to the financial crisis and moves towards regulatory reforms that include transparency and accountability measures, may have countered scepticism. Nonetheless, it remains to be seen whether proposed reforms are far-reaching enough and to what extent they will be implemented. Another reason for concern is that in the US the legislature is perceived to be the institution most affected by corruption, according to TI’s Global Corruption Barometer, a public opinion survey published in 2009.
An investigative article by Bloomberg News on one of the biggest criminal investigations in public finance may worsen that perception. The story involves accusations of wrongdoing against big banks (including JPMorgan, UBS, Lehman Brothers, Wachovia, Bank of America and Citigroup) involved in an alleged conspiracy in a massive bid-rigging scandal over the use of guaranteed investment contracts, or GICs in the municipal bond market. The GICs act like certificates of deposit for the cash raised from municipal bond offerings. Since interest rates on GICs are not published, local governments put the contracts out for competitive bidding for small advisory firms to run the auctions in order to get the highest interest rates. The indictments from October 2009 against one of the advisory firms, CDR Financial Products of Beverly Hills, allege that the process appears to have been rigged, according to the Bloomberg story. In March and February, three employees of CDR Financial Products pleaded guilty to bid-rigging, fraud conspiracies and wire fraud.
The charges against CDR claim the firm told over a dozen big banks that sell GICs, how to lowball their bids to win business from the state and local governments. The banks, in turn, paid kickbacks to CDR. Involved are 160 state agencies, local governments and non-profits that may have lost hundreds of millions of dollars. States including West Virginia were effected by the nationwide conspiracy. The US Justice Department filed a criminal antitrust case over contracts holding tens of billions of taxpayer dollars in the US District Court in Manhattan on March 24 that is now under seal.
The workings of the conspiracy — which stretched from California to Pennsylvania in the $2.8 trillion municipal bond market and included more than 200 deals involving about 160 state agencies, local governments and non- profits — can be pieced together from the Justice Department’s indictment of CDR Financial Products Inc., civil lawsuits by governments around the country, e-mails obtained by Bloomberg News and interviews with current and former bankers and public officials. Bloomberg News has this quote:
“The whole investment process was rigged across the board,” said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. “It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded.
Anderson said he referred scores of cases to the Justice Department when he was with the IRS. He estimates that bid rigging cost taxpayers billions of dollars. Anderson said prosecutors are lining up conspirators to plead guilty and name names.
“This will go on for a long time and a lot of people will be indicted.”
Stay tuned as this story develops.