Wall Street Firms Want a “Free Pass” for Ripping Off State and Municipal Governments


Wachovia Bank, JPMorgan and other major financial institutions have filed their second motion to dismiss a complaint brought against them by more than a dozen state and local governments alleging price-fixing and bid-rigging of municipal derivatives markets. This according to a recent article by Erin Fuchs in Law360 entitled “Banks Shoot To Kill Municipal Bond Antitrust MDL.” The MDL action, captioned In re: Municipal Derivatives Antitrust Litigation, case number 1:08-md-01950, is pending in the U. S. District Court for the Southern District of New York.

While U. S. District Judge Victor Marrero dismissed the first amended complaint in April, stating that the allegations were insufficient to state a claim for relief, and defendants now seek to dismiss the second amended complaint, there seems to be ample evidence of price-fixing and bid-rigging of municipal derivatives by at least some of the named defendants. Indeed, the U. S. Securities and Exchange Commission staff made it clear that they believe that they have ample evidence of price-fixing and bid-rigging of municipal derivatives by JP Morgan, Bear Stearns Cos., Bank of America NA and UBS. In May 2009, JP Morgan disclosed that it had received a Wells Notice, notifying it that SEC Staff members intend to recommend that the SEC bring an enforcement action against JP Morgan for price-fixing and bid-rigging in the municipal derivatives industry. Others that have received such Wells Notices include Bear Stearns Cos., Bank of America NA and UBS, according to the article.

Moreover, sworn statements from Bank of America, have reportedly 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. In February 2007, the Justice Department reportedly agreed not to bring criminal anti-trust charges against Bank of America in exchange for its information and cooperation concerning these matters.

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 the MDL complaint. The MDL complaint 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. 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.

It will be interesting to see whether Judge Marrero allows the plaintiffs to discover and present the evidence that the SEC apparently has uncovered.

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