GE Funding Capital Market Services agreed to pay $25 million in disgorgement, prejudgment interest and penalties to settle SEC charges it committed securities fraud for participating in a wide-ranging scheme involving the reinvestment of proceeds from the sale of municipal securities.  The firm, which is not a registered broker-dealer, will pay an additional $45.35 million pursuant to agreements it signed with the Department of Justice, the IRS and a coalition of 25 state attorneys general - much of that will be restititution to municipalities. Coordinated Law Enforcement Investigations. This settlement is one of several settlements that have arisen from extensive and coordinated law enforcement investigations into widespread corruption in the municipal reinvestment industry.  This past year, federal and state authorities have reached settlements with 4 other financial firms, and 18 individuals have been indicted or pled guilty, including three former GE Funding CMS traders.

“Our in-depth investigations have uncovered pervasive corrupt practices in the municipal securities reinvestment market, and we are requiring financial firms one by one to step up and pay the price for their misconduct.  More than $743 million has been recovered from financial institutions in these settlements, much of which has been returned to municipalities that have been armed.” -- Robert Khuzami, SEC Enforcement Director.

SEC Findings and Allegations. In its complaint filed in U.S. District Court for the District of New Jersey, in addition to fraudulently manipulating bids, GE Funding CMS made improper, undisclosed payments to certain bidding agents in the form of swap fees that were inflated or unearned. These payments were in exchange for the assistance of bidding agents in controlling and manipulating the competitive bidding process. From August 1999 to October 2004, GE Funding CMS illegally generated millions of dollars by fraudulently manipulating at least 328 municipal bond reinvestment transactions in 44 states and Puerto Rico. GE Funding CMS won numerous bids through a practice of “last looks” in which it obtained information regarding competitor bids and either raised a losing bid to a winning bid or reduced its winning bid to a lower amount so that it could make more profit on the transaction. In connection with other bids, GE Funding CMS deliberately submitted non-winning bids to facilitate bids set up in advance by certain bidding agents for other providers to win. GE Funding CMS’s fraudulent conduct also 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. Other Financial Institutions Entering into Similar Settlements. Other financial institutions charged prior to today’s settlement with GE Funding CMS:

• Wachovia Bank N.A. – $148 million settlement with SEC and other federal and state authorities.  [12/8/11]
• J.P. Morgan Securities LLC – $228 million settlement with SEC and other federal and state authorities.  [7/7/11]
• UBS Financial Services Inc. – $160 million settlement with SEC and other federal and state authorities.  [5/4/11]
• Banc of America Securities LLC – $137 million settlement with SEC and other federal and state authorities.   [12/7/10]

SEC Staff Credits. Investigations by Deputy Chief Mark Zehner, Ass't Municipal Securities Counsel Denise Colliers - both members of Municipal Securities and Public Pensions Unit in the Philadelphia. For further details, go to:   [SEC  Press Release 11-276 , 12/23/11] and   [SEC COMPLAINT v. GEFCMS].