The SEC Thursday charged Wachovia Bank N.A. with secretly arranging with bidding agents to improperly win business from municipalities and guaranteeing itself profits in the reinvestment of municipal bond proceeds. SEC Bid Rigging Allegations. Wachovia allegedly generated millions in illicit gains during an 8-year period by fraudulently rigging at least 58 muni bond reinvestment transactions in 25 states and Puerto Rico.

• Some bids were won through “last looks” practices, in which it obtained competing bids before entering its own.
• Bids were won through “set-ups” in which the bidding agent deliberately obtained non-winning bids from other providers in order to rig the field in Wachovia’s favor.
• Wachovia returned the favors by deliberately submitting non-winning bids to enable other firms to win through "set-ups."

Wachovia and others will arrange financial instruments for municipal issuers to temporarily invest the muni bond proceeds - i.e., park the cash proceeds of their offerings - until such time when the funds are needed for the intended purposes.  Popular investment vehicles for this purpose are:  (i) guaranteed investment contracts (GICs), (ii) repurchase agreements (repos), and (iii) forward purchase agreements (FPAs). To protect the tax-exempt status of the transactions, such proceeds of tax-exempt municipal securities generally must be invested at fair market value - which most often is established through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality. Wachovia allegedly engaged in fraudulent bidding of GICs, repos, and FPAs from at least 1997 to 2005.   In doing so, Wachovia and others undermined the competitive bidding process, and negatively affected the prices that municipalities paid for reinvestment products.  Wachovia deprived certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, and 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.

“Wachovia [and others then] hid [their] fraudulent practices from municipalities by affirmatively assuring them that they had not engaged in any manipulative conduct.  This settlement will result in significant payments to municipalities harmed by Wachovia’s unlawful actions.” - - Elaine Greenberg, Chief of SEC Municipal Securities and Public Pensions Unit.

SEC Sanctions. Wachovia agreed to settle all charges in the case by paying $148 million in restitution and other penalties.  $46mn will be paid to the SEC - $25mn penalty, $14mn disgorgement, $7mn prejudgment interest - which will be returned to affected municipalities or conduit borrowers.  The other $102mn will be paid to the Justice Department, Office of the Comptroller of the Currency, IRS, and 26 state attorneys general  - and related to long-standing parallel investigations into widespread corruption in the municipal securities reinvestment industry in which 18 individuals have been criminally charged by the Justice Department’s Antitrust Division. Industry-Wide Settlements. Financial institutions have now paid a total of $673 million in settlements resulting from the ongoing investigations into corruption in the municipal reinvestment industry.  Others charged prior to Wachovia are:

• JPMorgan Securities LLC. $228 million settlement with SEC et al (7/7/11).
• UBS Financial Services Inc. $160 million settlement with SEC et al  (5/4/11).
• Banc of America Securities LLC. $137 million settlement with SEC et al  (12/7/10).

In a related action to the BofA matter, the SEC today charged the firm’s former VP and marketer Dean Pinard for his role in various improper bidding practices.  Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Banc of America’s parent corporation.  Pinard, who cooperated with the investigation, agreed to pay more than $40K to settle the SEC’s case.  He also agreed to be barred from the industry. The SEC’s investigation continues. SEC Phila. Reg'l Office Contacts. Call (215) 597-3100 with questions for:  (i) Elaine Greenberg, Chief, Muni Securities and Public Pensions Unit;  Associate Regional Director;  (ii) Mark Zehner, Deputy Chief, Municipal Securities and Public Pensions Unit;  or   (iii) Mary Hansen, Assistant Regional Director. For further details, go to:   [SEC PR 11-257, 12/8/11]   and/or   [Litigation Release 22183]   or   [SEC Complaint].