WASHINGTON — Bank of America Securities LLC, now Bank of America Merrill Lynch, agreed to pay more than $137 million, as well as to take remedial steps, in unprecedented enforcement actions announced Tuesday
The Securities and Exchange Commission, Internal Revenue Service, Office of the Comptroller of the Currency, Federal Reserve, and attorneys general all collaborated with the Justice Department in parallel civil and criminal cases and federal officials made clear Tuesday that their collaboration is ongoing. Probes of widespread wrongdoing in the muni market will likely result in many further enforcement actions against other investment banks, brokers, and providers of investment agreements and individuals, the regulators said.
"Stay tuned," both Christine Varney, an assistant attorney general for antitrust, and Elaine Greenberg, the head of the SEC's muni and public pension unit, said separately, Varney in a press briefing and Greenberg in an interview.
"You'll see a lot more activity in the coming months," Varney added.
The actions against Bank of America, which end federal and state probes of the bank in this matter, but not investigations of its former officials, are key because it was the first bank to step forward and report evidence of improper bidding practices in the muni market to the Justice Department more than four years ago.
As a result it was granted amnesty from criminal charges by the Justice Department in 2007 in return for full cooperation in the antitrust probe. An unidentified confidential witness from the bank has been providing vast amounts of information to federal and state regulators, as well as to lawyers that have filed class action and other lawsuits on behalf of issuers. The Justice Department filed charges against, or reached plea agreements with, more than a dozen firms and individuals in connection with its criminal probe. Tuesday's settlement is the first civil action against anyone involved in this matter.
Bank of America, which neither admitted nor denied the charges, said in a release Tuesday that it "is pleased to put this matter behind it, and has already voluntarily undertaken numerous remediation efforts. Bank of America continues to cooperate with all agencies on their inquiries into practices by various companies participating in the municipal derivatives markets during this time period."
Much of the $137 million from the settlements will go to municipal issuers that, according to Varney, will probably give up their right to sue the bank by accepting the money. The lion's share, $67 million, is to go the 20 attorneys general to settle state law violations, and most of that will be distributed to muni issuers defrauded by the bank, sources said, although it was unclear how many issuers.
Another $36 million in ill-gotten gains will be disgorged to the Securities and Exchange Commission to settle securities fraud charges. It will be distributed to 88 issuers for which the bank illegitimately "won" bids to provide guaranteed investment contracts, repurchase agreements, and forward purchase agreements among other contracts. The amount was based on the profits received by the bank in the sale of the contracts, Greenberg said.
Another $25 million will go to the Internal Revenue Service to settle tax law violations. An IRS spokesman refused to comment. But sources said that while Bank of America paid $14.7 million to the IRS in 2007 to settle a Section 6700 probe and allegations of tax law violations over guaranteed investment contracts and blind pools, that matter was unrelated to the current probes.
The Office of the Comptroller of the Currency, which regulates the bank, is to receive more than $9.2 million to settle banking charges related to 38 collateralized certificates of deposit the bank provided muni issuers.
Both the OCC and the Federal Reserve Board, which regulates the bank holding company, are requiring Bank of America to take remedial steps to prevent such conduct from reoccurring.
The OCC is requiring the bank, within 60 days, to develop detailed written policies and procedures designed to detect and prevent potential collusion, bid-rigging, price fixing or other activity and to ensure the accuracy of its books and records with regard to investment contracts. The policies and procedures include specifying responsibilities of individuals involved in these contracts, indentifying the brokers involved, describing their services and their fees, identifying bid prices and the reasons for them, keeping records, testing compliance with applicable rules and laws and putting in place training and internal auditing programs. The bank also will have to provide annual reports to senior management and regulators detailing its supervisory system, identifying any weaknesses in it and summarizing the results of testing and any needed improvements.
The Fed is requiring the bank holding company's board of directors, within 90 days, to submit a written plan to strengthen the board's oversight of the bank's compliance risk management program and, within 120 days, to strengthen the program as it relates to competitively bid transactions. The bank's board of directors also must submit progress reports to the Fed within 30 days after the end of each calendar year.
Those requirements could at some point be extended to other banks, Varney said.
In a related action, the SEC barred Douglas Lee Campbell, 45, a former senior vice president and marketer in the firm's municipal reinvestment and risk management group, from association with any broker, dealer or investment adviser, based on his guilty plea on Sept. 9 to three criminal counts, two of conspiracy and one of wire fraud in connection with the scheme. Campbell is barred indefinitely but regulators could reconsider the bar if he reapplies for a license, SEC officials said.
Campbell worked at the bank's offices in Charlotte, N.C. and New York City from June 1998 through August 2002, and worked at Piper Jaffray Fixed Income Derivatives in Minneapolis after that. He is currently not employed by any bank or broker-dealer.
The enforcement actions revolve around Bank of America's role as a provider of investment contracts for muni bond proceeds. Federal regulators claim bank officials made a sham of the competitive bidding process by either steering the contracts to the bank or intentionally submitting courtesy and purposefully non-winning bids upon request so that other firms would get the business.
Bank officials often paid bidding agents that favored the bank fees disclosed as brokerage fees. The bank also paid firms in the investment contract and derivatives business, even though they had not done any business for the bank, according to documents filed with regulators.
Bank of America Securities falsified documents claiming the bidding process was competitive when it was not and prevented muni issuers from receiving the best bids possible for the investment contracts, according to regulators. It also falsified bond-related documents sent to the IRS that claimed the bidding process fell within a three competitive bid safe harbor to avoid scrutiny about whether the investments were sold at fair market value, potentially jeopardizing the tax-exempt status of the bonds.
And the bank is just one of many market players believed to have engaged in such behavior.
"They were not the lead or organizer of the activity," deputy assistant attorney general Scott Hammond told reporters.
"It was widespread. It was wide ranging. It was very, very troubling behavior by these market participants, including registered broker-dealers," the SEC's Greenberg said.
The conduct is particularly upsetting, she and other regulators said, because it represents a second generation of yield-burning. The first generation of the practice occurred in the 1990s and resulted in a global settlement between the SEC, the IRS, and some issuers with 17 broker-dealer firms. The firms agreed to pay more than $138.3 million to resolve federal allegations that they overcharged muni issuers for open market Treasuries for refunding escrows, with the markups lowering, or burning down, the investment yield so that it was below the bond yield and did not generate illegal arbitrage profits for the issuers.
After the yield-burning settlement, the IRS wrote rules providing issuers with a "safe harbor" that assured the prices of their investment contracts would be treated as having fair market value if strict bidding rules were followed, including that at least three competitive providers bid for the contracts. They needed to show the investments were purchased at fair market value to show they had not earned illegal arbitrage profits from the investments of their bond proceeds.
"What we found is that market participants found ways to evade those requirements," said Greenberg. "The measures that were put in place as a result of the yield-burning scandal of the 1990s were the exact provisions being violated by these market participants so it's sort of a second generation of the yield burning scandal."
The probes first became public after the Federal Bureau of Investigation and other federal agents raided three brokers of investments agreements — CDR Financial Products in Beverly Hills, Calif., Investment Management Advisory Group, Inc., in Pottstown, Pa., and Sound Capital Management in Eden Prairie, Minn. — in November 2006. Since then the Justice Deparment has filed charges against, or reached plea agreements with, more than a dozen individuals and firms, based on testimony and tapes of numerous phone conversations.
