– Attorney General Paula T. Dow announced
today a $34.25 million, multi-state settlement
with GE Funding Capital Market Services, Inc.
as part of an ongoing, nationwide investigation
of alleged illegal conduct in the municipal
bond derivatives industry.
As part of the settlement, GE Funding has
agreed to pay $30 million in restitution
to affected state agencies, municipalities,
school districts and not-for-profit entities
nationwide that entered into guaranteed
investment contracts with GE Funding and
two of its affiliates -- Trinity Funding
Company and Trinity Plus Funding Company
-- between 1999 and 2005.
In addition, GE Funding agreed to pay a
$1.25 million civil penalty and $3 million
for fees and costs of the investigation
to the 25 settling states.
The states’ investigation developed
evidence that certain traders at GE Funding,
in concert with certain brokers, engaged
in conduct that allowed the broker to determine
in advance that GE Funding would win a bid
for a guaranteed investment contract by
allowing GE Funding to receive a “last
look,” and arranging for other financial
institutions to submit purposely non-winning
courtesy bids. On many occasions, due to
the “last look,” GE Funding
was able to lower its bid to the issuer
and still win the transaction.
The multi-state settlement is a distinct
component of a coordinated global $70 million
settlement that GE Funding entered into
today. As a part of this global settlement,
GE Funding also reached separate agreements
with the U.S. Securities and Exchange Commission,
the U.S. Department of Justice’s Antitrust
Division and the Internal Revenue Service.
Funding is the fifth financial institution
to settle with the multi-state task force
in the ongoing municipal bond derivatives
investigation. The other four are Bank of
America, UBS AG, JP Morgan and Wachovia.
To date, the multi-state task force has
obtained settlements worth almost $350 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, including national banks and
insurance companies, 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 states’ broader investigation,
which remains ongoing, has revealed wrongful
and deceptive conduct coordinated among
individuals at a number of financial institutions,
and certain brokers with whom they had working
The wrongful conduct took the form of improper
communications among competitors, submission
of non-competitive courtesy bids, allowing
financial institutions improper access to
confidential bidding information, payment
of improper fees to brokers to steer business,
and submission of fraudulent certifications
of compliance to government agencies, among
others, in contravention of U.S. Treasury
Regardless of the means used to carry out
the various schemes, the objective was to
enrich the financial institution and/or
the broker at the expense of the issuer
- - and ultimately taxpayers - - depriving
the issuer of a competitive, transparent
marketplace. As a result of such wrongful
conduct, state, city, local, and not-for-profit
entities entered into municipal derivatives
contracts on less advantageous terms than
they otherwise would have.
In addition to New Jersey, other Attorneys
General joining the settlement include Alabama,
Colorado, Connecticut, the District of Columbia,
Florida, Idaho, Illinois, Iowa, Kansas,
Maryland, Massachusetts, Michigan, Missouri,
Montana, Nevada, New York, North Carolina,
Ohio, Oregon, Pennsylvania, South Carolina,
Tennessee, Texas, and Wisconsin.
Deputy Attorney General Joshua T. Rabinowitz,
Deputy Attorney General Toral M. Joshi,
Assistant Attorney General Brian F. McDonough,
and Assistant Attorney General Carol G.
Jacobson handled the matter on behalf of