Compelling pieces of evidence, including sworn statements from Bank of America, have been uncovered indicating that, during recent years, Wall Street brokerage firms conspired to cheat state and local governments and American taxpayers in the municipals markets. Municipal bonds are issued by state and local governments to raise funds for various public projects. Since the proceeds received by the governments are usually not spent all at once, they are invested in various contracts (collectively referred to as Municipal Derivatives) that provide a fixed rate of return or shift the risk of changes in interest rates. The market for Municipal Derivatives is large ($400 billion annually), concentrated among 20 major institutional sellers, and largely unregulated. Before engaging in Municipal Derivatives transactions, governments routinely engage brokers to find the best deals.
Many of these brokers have conspired with Wall Street sellers of Municipal Derivatives to overcharge their governmental clients, according to a class action lawsuit filed in federal court in the Southern District of New York. The lawsuit alleges that brokers and major sellers of Municipal Derivatives conspired to rig the market and fix prices in violation of federal anti-trust laws, and fraudulently concealed their unlawful conduct. Plaintiffs are Fairfax County, Virginia, the State of Mississippi, the City of Baltimore, and two local authorities. Defendants include, but are not limited to, Merrill Lynch & Co., Inc., Morgan Stanley, JP Morgan Chase & Co., Bear Stearns & Co., Inc., AIG Financial Products Corp., UBS AG, and Piper Jaffray & Co.
In addition, eight California municipalities, including Los Angeles, Fresno, and San Diego County, have file similar lawsuits, according to an article entitled California Probes Muni Derivatives as Deficit Mounts (Update 1) by William Selway and Martin Z. Braun published by Bloomberg on January 23, 2009.
A number of states are investigating whether they were overcharged by Wall Street and their brokers. Those states include California, Connecticut, and Florida. U. S. prosecutors and the Securities and Exchange Commission apparently have been investigating the matter for two years. In February 2007, the Justice Department agreed not to bring criminal anti-trust charges against Bank of America in exchange for its information and cooperation concerning these matters.
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