The SEC's ongoing investigation into improper practices in the municipal bond market nabbed another broker-dealer - Banc of America Securities, LLC ("BofA") - which, with its affiliates, agreed to pay $137 million in disgorgement, interest, and a "misconduct penalty."  BofA was charged with committing securities fraud for its part in an effort to rig bids in connection with the investment of proceeds of municipal securities. 

"This ongoing investigation has helped to expose wide-spread corruption in the municipal reinvestment industry."  "The conduct was egregious - in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper."  -- Robert Khuzami, Enforcement Director.

** Interesting Note:  The SEC release states that BofA's settlement does not include the imposition of a civil penalty.  The rationale:  consideration was given to the cooperation of and remedial actions undertaken by BofA in connection with the SEC's investigation, as well as investigations conducted by other law enforcement agencies.  Among other things, BofA self-reported the bidding practices to the Antitrust Division of the Department of Justice.

    How It Works:  Muni Bond Proceeds are Temporarily Invested.   Proceeds from municipal bond offerings are, for the most part, not spent immediately on the intended purposes.  And so, the municipalities will temporarily invest the unused proceeds in reinvestment products - until such time as the money is needed and used for a particular program or project.  The IRS requires that the proceeds of tax-exempt municipal securities must generally be invested at fair market value ("FMV").  The most common way of establishing FMV is through a competitive bidding process, whereby bidding agents search for the appropriate investment vehicle for a municipality.

    Where BofA Allegedly Went Wrong.   The bidding process, in which BofA participated, allegedly was not competitive because it was tainted by undisclosed consultations, agreements, or payments and, therefore, couldn't be used to establish the FMV of the reinvestment instruments.  These improper bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, the principal amounts of which totaled billions of dollars. 

Specific SEC Allegations:

• certain bidding agents steered business from municipalities to BofA through a variety of mechanisms - e.g.  agents gave BofA information on competing bids (last looks), and deliberately obtained off-market "courtesy" bids or purposefully non-winning bids so that BAS could win the transaction (set-ups).  As a result, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).

• BofA reciprocated by steering business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. BofA also provided undisclosed gratuities and kickbacks. Former officers of BAS participated in, and condoned, these improper bidding practices.

Case Against Douglas Lee Campbell.  In a related action, the SEC barred Douglas Lee Campbell, a former officer of BofA, from the industry, based upon his guilty plea to a criminal information on 9/9/10, charging him with 2 counts of conspiracy and 1 count of wire fraud.  The criminal information charged, among other things, that Campbell engaged in fraudulent misconduct in connection with the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds.  The Commission is not imposing a civil penalty against Campbell based on his cooperation in the Commission's investigation.

For further details, click onto: 

• [SEC Release 10-239, 12/7]  
• [SEC Order Against Banc of America Securities LLC, 12/7]  
• [SEC Order Against Douglas Lee Campbell, 12/7]