SAN FRANCISCO - Attorney General Kamala D. Harris today announced a national settlement with Wachovia Bank N.A. (Wachovia) and Wells Fargo Bank, N.A., as its successor as part of an ongoing nationwide investigation over allegations of anticompetitive and fraudulent conduct in the municipal bond derivatives industry.
“This settlement continues efforts to bring a measure of restitution to school districts, non-profits and municipalities that were all defrauded by Wall Street,” Attorney General Harris said. “Our office will continue to pursue justice on their behalf.”
The settlement was based on allegations that Wachovia made secret deals with competitors handling the bidding process. This illegal conduct included bid-rigging, discussing bids with competitors and offering non-competitive courtesy bids. These schemes enriched the financial institutions and brokers at the expense of cash strapped state agencies, cities, school districts and non-profits that could ill afford the steep financial consequences of this illegal conduct.
As part of the multistate settlement with 26 other attorneys general, Wachovia has agreed to pay $54.5 million in restitution to affected state agencies, municipalities, school districts and not-for-profit entities nationwide that entered into municipal derivative contracts with Wachovia between 1998 and 2004. California entities are set to receive approximately $4.5 million for restitution under this settlement. In addition, Wachovia agreed to pay a $1.25 million civil penalty and $3 million for fees and costs of the investigation to the settling states.
Wachovia also reached agreement with the U.S. Department of Justice’s Antitrust Division, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Internal Revenue Service. Wachovia is the fourth financial institution to settle with a multistate task force in the ongoing municipal bond derivatives investigation following Bank of America, UBS AG and JP Morgan. To date, the state working group has obtained settlements worth almost $310 million.
Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed, or to hedge interest-rate risk.
In April 2008, the states began investigating allegations that certain large financial institutions and certain brokers and swap advisors, engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market.
The investigation, which is still ongoing, revealed collusive and deceptive conduct involving individuals at Wachovia and other financial institutions, and certain brokers with whom they had working relationships. The wrongful conduct took the form of bid-rigging, submission of non-competitive courtesy bids and submission of fraudulent certifications of compliance to government agencies, among others, in contravention of U.S. Treasury regulations.