WASHINGTON The big question in the enforcement arena for 2013 is whether the Justice Department will indict more firms and individuals for bid-rigging of bond-related investment and derivatives contracts.
Federal prosecutors have mostly wrapped up criminal cases against 19 of 20 individuals, and five firms, charged with carrying out bid-rigging schemes.
Market participants wonder if the Justice Department will now turn its attention to other firms and individuals that were that were targeted during massive, multi-year criminal and civil investigations conducted by the department, the Securities and Exchange Commission, the Federal Bureau of
Investigation, the Internal Revenue Service, banking regulators and state attorneys general.
"There is a lot of mystery to this process in the eyes of the industry," said Peter Shapiro, managing director of Swap Financial Group LLC in South Orange, N.J.
"Have these individuals and firms worked out a cooperative agreement, or are the wheels of justice grinding exceedingly slowly?" he asked. "[Or] have there been decisions to pursue certain cases and not others, for reasons we don't know?"
Anthony Sabino, a white-collar defense lawyer at Mineola, N.Y.-based Sabino & Sabino PC., said additional indictments in 2013 wouldn't be surprising.
"Investigations always lead to further investigations," said Sabino, who also teaches law courses at St. John's University's Peter J. Tobin College of Business. "You cannot assume any of this is over."
Sabino has no inside knowledge of the cases, but said prosecutors are likely to pursue all leads given the public's negative attitude towards financial crimes in the wake of the recent recession.
"The general undercurrent is, we still have a great number of economic woes and tremendous distrust of the markets," he said.
The investigations made headlines in November 2006 when FBI agents raided the offices of the three major brokers of investment contracts: CDR Financial Products Inc., in Beverly Hills, Calif., Investment Management Advisory Group Inc., or IMAGE, in Pottstown, Pa., and Sound Capital Management in Eden Prairie, Minn.
The Justice Department and SEC also sent subpoenas to as many as 20 to 25 other firms, including other brokers and providers of guaranteed investment contracts (GICs) such as General Electric & Co. and AIG.
Since then, prosecutors indicted one of the biggest brokers, CDR, and 20 individuals on charges of wire fraud and conspiracy.
The firm and 13 individuals have already pleaded guilty and agreed to cooperate with the government. Among them were six former CDR staffers, including founder David Rubin.
Another six were found guilty in two trials this year at the U.S. Court for the Southern District of New York in Manhattan.
As of the end of 2012, only one individual that was indicted had not pleaded guilty or been tried for the charges: former Bank of America executive Phillip Dennis Murphy.
Prosecutors alleged that Murphy and others carried out an elaborate scheme to rig bids for GICs.
They said GIC brokers gave providers "last looks" at bids and told providers how high they would need to bid in order to win. Providers took turns winning bids, submitted intentionally losing bids and paid kickbacks to brokers, they said.
The schemes, which took place from roughly the late 1990s to mid-2000s, defrauded issuers such as cities, towns and counties, and the IRS, depriving them of millions of dollars, according to the Justice Department and other agencies.
Cases Revolved Around CDR
The cases largely revolved around CDR, and the individuals indicted worked at less than 10 firms, which raises questions about whether additional indictments may be coming, say some sources who declined to be identified due to the sensitive nature of the cases.
Initially, those familiar with the cases predicted the Justice Department would go after IMAGE and Sound Capital once it wrapped up its cases involving CDR. Market participants now wonder if the department will pursue cases against these other firms and individuals. A Justice Department spokesman said the investigation is ongoing, but declined further comment.
Former Sound Capital head Johan Rosenberg, who now runs Blue Rose Capital Advisors in Minneapolis, Minn., declined to comment.
Telephone messages left for IMAGE executives David Eckhart and Martin Stallone were not returned.
Sources noted that U.S. attorneys presented evidence, including tapes of recorded telephone conversations, during recent trials and in court documents that made clear others were involved.
"It sounds blatant from the evidence we have seen, but we don't know if there is exculpatory evidence on the other side," said Shapiro, adding that everyone must be presumed innocent until proven guilty. "It's certainly enough to raise a large eyebrow."
Shapiro said such evidence would "appear to implicate individuals who have yet to be charged."
Other sources agreed, but declined to comment publicly.
The most recent trial ended in August, when a jury reached guilty verdicts against former UBS bankers Peter Ghavami, Michael Welty and Gary Heinz. Prosecutors said the men acted as both GIC brokers and providers, manipulating bidding on at least a dozen agreements to increase the number and profitability of the agreements awarded to UBS. They also submitted intentionally losing bids and arranged for UBS to receive kickbacks in exchange for manipulating bidding.
They are slated to be sentenced March 19.
In May, a jury reached guilty verdicts against Steven Goldberg, Peter Grimm and Dominick Carollo, former executives at GE Funding Capital Market Services Inc. Prosecutors said the men collaborated with brokers including CDR, IMAGE and UBS.
Evidence against them included testimony from cooperating witness Douglas Goldberg, a former CDR executive who said CDR gave "last looks" on bids to many firms, including GE, Financial Security Assurance Capital Management Services LLC, Bank of America, Société Générale, Lehman Brothers Inc., and JPMorgan and its Bear Stearns unit, according to media reports.
Steven Goldberg was fined $90,000 and sentenced to four years in prison. Carollo and Grimm were each fined $50,000 and sentenced to three years in prison. They are appealing the sentences.
U.S. attorneys also have requested that they pay a total of $6.9 million in restitution to muni issuers.
A number of other cooperating witnesses testified in the trials, including former CDR staffers Daniel "Dani" Moshe Naeh, Stewart "Zevi" Wolmark, Evan Zarefsky and Matthew Rothman, as well as Mark Zaino, a UBS banker, and Doug Campbell from Bank of America.
Others who pleaded guilty include CDR founder David Rubin, Brian Zwerner from Banc of America Securities LLC, JPMorgan bankers James Hertz and Alexander Wright, Martin Kanefsky, former chief executive of Kane Capital Strategies Inc., and Adrian Scott-Jones who worked at Tradition Inc., and Eurobrokers.
Sentencing hearings for many of them have been rescheduled multiple times.
As of Dec. 21, sentencing dates were Jan. 3 for Scott-Jones, March 15 for Campbell and Hertz, March 22 for Rubin, April 3 for Kanefsky and July 19 for Zwerner.
Sentencing dates for the others have not been set.
Court papers say the government has some 600,000 tapes, including recordings of executives at host of firms, including Sound Capital, IMAGE, Deutsche Bank Securities Inc., Bear Stearns, which was acquired by JPMorgan, and others.
The fact that the 13 cooperating witnesses have not yet been sentenced or that sentencing has been delayed leads some sources to think they are continuing to give prosecutors useful information that could lead to more indictments.
"That's par for the course. Sentencing is usually delayed for the reason that the government is pursuing other individuals," said Sabino. "You have no idea where this information is going to lead to."
Many of the large financial firms targeted by government investigators have already agreed to pay millions of dollars to settle related civil lawsuits.
In 2010 and 2011, five big banks or financial services companies settled charges with state agencies, state attorneys general and federal agencies, including the Justice Department, the SEC, the IRS, other bank regulators, according to the SEC.
GE Funding Capital Market Services Inc., settled for $70 million in December 2011. Wachovia, now Wells Fargo & Co., settled for $148 million in November 2011. JPMorgan Chase & Co., settled for $228 million in July 2001. UBS Financial Services Inc., settled for more than $160 million in May 2011. Banc of America Securities, now Bank of America Merrill Lynch, settled for $137 million in December 2010. That settlement did not involve the Justice Department because the bank received indemnity from criminal charges after offering to cooperate with the investigation.
Class action suits filed by issuers against many of the firms are still pending.
One was recently settled. On Dec. 14, a federal judge approved a settlement that calls for JPMorgan to pay $42.6 million and Wells Fargo to pay $35 million to a group of muni issuers including Baltimore, the University of Mississippi Medical Center, the University of Southern Mississippi, the University of Mississippi, the Mississippi Department of Transportation, the Central Bucks School District in Doylestown, Pa., and the Bucks County, Pa., Water and Sewer Authority.