Municipal Securities

Class Action Plaintiffs Dispute Bank of America’s $137M Settlement with State Attorney Generals Over Municipal Derivatives

Published on: December 31, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The plaintiffs in a class action case against Bank of America Corp. (BAC) are asking a court to intervene in the securities settlement reached between the investment bank and 20 state attorneys generals over the alleged manipulation of municipal derivatives bids. As part of the global settlement, BofA agreed to pay approximately $137 million: $9.2 million to the Office of the Comptroller of Currency, $36.1 million to the Securities and Exchange Commission, $25 million in restitution to the Internal Revenue Service, and $66.9 million to the states. The plaintiffs claim that the settlement purports to settle the charges of their case without consulting with or notifying the class counsel.

Fairfax County, Va., the state of Mississippi, and other plaintiffs filed the securities class action against 37 banks. They claimed that the alleged bidding manipulation practices involving municipal derivatives had been occurring as far back as 1992.

Now, the plaintiffs want permission to file a motion to request an enjoinment of the BoA global settlement. Meantime, BoA is arguing that the plaintiffs’ motion is “baseless” and they want the court to not allow it. The investment bank says that it disagrees that the states’ settlement resolves the class claims. BoA also contends that it kept Judge Weinstein and the interim class counsel abreast of settlement negotiations with the state.

Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits

Published on: December 16, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Bank of America has agreed to pay $137 million to settle charges that it was involved in a financial scheme that allowed it to pay cities, states, and school districts low interest rates on their investments. The financial firm allegedly conspired with rivals to share municipalities’ investment business without having to pay market rates. As a result, government bodies in “virtually every state, district, and territory” in this country were paid artificially suppressed yields or rates on municipal bond offerings’ invested proceeds.

Bank of America has agreed to pay $36 million to the Securities and Exchange Commission and $101 million to federal and state agencies. The Los Angeles Times is reporting that $67 million will go to 20 US states. BofA will also make payments to the Office of the Comptroller of the Currency and the Internal Revenue Service. The SEC contends that from 1998 to 2002 the investment bank broke the law in 88 separate deals.

In its Formal Agreement with the Office of the Comptroller of the Currency, Bank of America agreed to strengthen its procedures, policies, and internal controls over competitive bidding in the department where the alleged illegal conduct took place, as well as take action to make sure that sufficient procedures, policies, and controls exist related to competitive bidding on an enterprise wide basis. The OCC is accusing the investment bank of taking part in a bid-ridding scheme involving the sale and marketing of financial products to non-profit organizations, including municipalities.

Per their Formal Agreement, the bank must pay profits and prejudgment interest from 38 collateralized certificate of deposit transactions to the non-profits that suffered financial harm in the scam. Total payment is $9,217,218.

Related Web Resources:

Bank of America to Pay $137 Million in Muni Cases, Bloomberg, December 7, 2010

OCC, Bank of America Enter Agreement Requiring Payment of Profits Plus Interest to Municipalities Harmed by Bid-Rigging on Financial Products, Office of the Comptroller of the Currency, December 7, 2010

Failure of Municipal Swaps Cost Taxpayers $4 Billion

Published on: November 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg.com, taxpayers have had to pay over $4 billion because of insurance companies and banks’ failed promise to nonprofits and governments that financial engineering would bring down interests on bonds sold for public projects. Since 2008, hundreds of borrowers throughout the US have had to pay Wall Street to end their agreements. Citigroup, JP Morgan Chase & Company, Morgan Stanley , and Bank of America are a few of the other firms that have received payments from borrowers.

For example, California’s water resources department paid $305 million to Morgan Stanley-led banks to unwind interest-rate bets that backfired, while the Bay Area Toll Authority gave bond insurer Ambac Financial Group Inc. $105 million to terminate $1.1 in billion interest-rate agreements. In August, The state of North Carolina shelled out $59.8 million.

Interest-Rate Swap
In this type of transaction, two parties exchange payment based on a principal amount that has been agreed upon. Most municipal market swaps require borrowers to put out long-term securities with interest rates that change every month or week. The borrowers are to exchange payments, resulting in a fixed-rate paid to an insurer or bank, while a variable rate in return is received.

The swaps drew a lot of interest because nonprofits and governments could pay lower rate than if they had sold conventional fixed-rate securities. According to the Financial Crisis Inquiry Commission senior researcher Randall Dodd, prior to the credit crisis, there were up to $500 billion of the deals done were in the $2.7 trillion municipal bond market.

Unfortunately, the credit market did collapse and Wall Street’s payments dropped and could no longer cover the municipalities’ debt costs. Still, under the agreements, borrowers had to keep selling adjustable-rate securities.

Bloomberg reports that there aren’t many taxpayers that are familiar with how much it cost to untangle municipal swaps. (Payment disclosures to Wall Street are usually noted somewhere in the documents given to investors by borrowers when the bonds are sold.) In many instances, investment firms that receive payments aren’t clearly identified and government officials usually don’t draw notice to payments made to terminate contracts.

Related Web Resources:
Wall Street Takes $4 Billion From Taxpayers as Swaps Roil Public Financing, Bloomberg, November 10, 2010

Municipal Securities, Stockbroker Fraud Blog

Municipal Securities Investors Need More Information About Bond Purchases, Says SEC

Published on: October 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to US Securities and Exchange Commissioner Elisse Walter, municipal securities market investors with securities fraud cases are entitled to clear information about the bonds they are purchasing. Walters spoke at an SEC-sponsored hearing last month. Other panelists also echoed the need for accuracy, transparency, and timeliness of disclosure for bond buyers so that they are given the proper information at the right time.

Walter said that about 51,000 local and state entities issue bonds for maintaining and constructing infrastructure projects. She also noted that even though retail investors hold 36% of outstanding municipal securities directly and another 34% own them indirectly through close-end funds, mutual funds, and retail-sized trade accounts for up to 81% of trading, volume, the municipal securities market is missing a number of the protections that exist in other sectors of the US capital markets. Walter said that municipal securities investors have the right to these same protections, as well as the right to information that doesn’t have material omissions or is materially misleading. She classified the treatment of municipal securities investors as “second class.”

Walter said that even though municipal securities are reputedly safe, they can and have been known to default. Between 1999 and 2009, out of $3.4 trillion dollars issued, issuers defaulted on more than $24 billion in municipal bonds. Last year alone, 194 municipal bonds that had an overall dollar amount of nearly $7 billion in bonds defaulted.

The hearing is the first of several that gives participants the forum to examine the $2.8 trillion municipal securities markets. Topics include financial reporting and accounting, investor protection and education, market liquidity and stability, municipalities as conduit borrowers, the Municipal Securities Rulemaking Board, professionals and market intermediaries, offering participants, 529 plans, and Build America Bonds. The commission is going to issue a staff report that will include recommendations for industry “best practices,” regulatory changes, and legislative changes.

Related Web Resources:
SEC’s Walter takes aim at ‘second-class treatment’ of muni investors, Investment News, September 21, 2010

Speech by SEC Commissioner: Statement at SEC Field Hearing on the State of the Municipal Securities Market, SEC, September 21, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC

Published on: September 30, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The state of New Jersey has settled Securities and Exchange Commission charges involving the alleged fraudulent marketing of municipal bonds. This is the first time that the SEC has filed charges against a US state for allegedly violating federal securities law.

The charges, brought by the SEC’s Municipal Securities and Public Pensions Unit, involved $26 billion in approximately 79 bond offerings that were offered between August 2001 and April 2007. The SEC accused New Jersey of concealing from bond investors the fact that the state didn’t have the money to fulfill its obligations under two of its largest pension plans for state employees and teachers. New Jersey also allegedly using accounting tricks to avoid increasing taxes to fund a 2001 benefits increase for both plans and hid this information from investors. As a result, the SEC contends that losses totaling approximately $2.4 billion were covered up.

The SEC says that New Jersey did not have written procedures on how to review bond documents and failed to train employees about its disclosure obligations. A training program regarding disclosures is now in place.

By agreeing to settle, New Jersey is not admitting to or denying the charges. It has, however, agreed to cease and desist from future violations. The SEC did not order a monetary fine or penalty as part of the settlement.

SEC Charges State of New Jersey for Fraudulent Municipal Bond Offerings, SEC.gov, AUgust 18, 2010

Municipal Securities Rulemaking Board Can Expand Public Information on Municipal Variable Rate Demand Obligations and Auction Rate Securities, Says SEC

Published on: September 8, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The US Securities and Exchange Commission has approved the Municipal Securities Rulemaking Board’s proposal to expand publicly available information about auction rate securities and municipal variable rate demand obligations. The SEC also approved letting the MSRB require that municipal securities dealers provide more information about these securities while allowing them to make this data available through its Electronic Municipal Market Access website. The disclosures will hopefully enhance transparency for investors that want to assess key information regarding the degree of dealer support, auction liquidity, and variable rate securities resales.

Once the approval is implemented, which could take nine months, the MSRB will gather liquidity facility documents for variable rate demand obligations from municipal securities dealers. Documents may include stand-by purchase agreements, letters of credit, and identifying information related to the provider of the liquidity facility that was available at the time of the interest rate. Dealers will have to report ARS bidding data and documents defining auction procedures and interest rate setting mechanisms to the MSRB. All documents and information from the dealers will be made accessible through the EMMA Web site. EMMA currently offers free public access to interest rate information for ARS and VRDOs.

MSRB regulates banks and securities firms that trade, underwrite, and sell municipal securities. It also gathers and gives out market information and is committed to ensuring the key municipal market data is available and free to the public. This data allows retail investors to evaluate the risks and benefits. MSRB is a self-regulatory organization subject to Securities and Exchange Commission oversight.

Related Web Resources:
MSRB Receives SEC Approval to Create Additional Transparency for Variable Rate Securities, MSRB, August 26, 2010

Municipal Securities Rulemaking Board

Electronic Municipal Market Access

Stockbroker-fraud.com