Tennessee Attorney General Bob Cooper and 26 other state attorneys general announced a $34.25 million agreement with GE Funding Capital Market Services, Inc. ("GEFCMS") as part of an ongoing nationwide investigation of alleged anticompetitive and fraudulent conduct in the municipal bond derivatives industry.
As part of the multistate agreement, GEFCMS has agreed to pay $30 million in restitution to affected state agencies, municipalities, school districts and not-for-profit entities nationwide that entered into municipal derivative contracts with GEFCMS between 1999 and 2005. In addition, GEFCMS agreed to pay a $1.25 million civil penalty and $3 million in fees and costs of the investigation to the participating states. Tennessee entities will receive approximately $742,776. Eligible Tennessee entities include the Memphis Shelby County Airport Authority, Metropolitan Health and Educational Facilities Board and the Knox County Health Education & Housing Facilities Board.
Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed. They may also be used to avoid fluctuating interest rates. In April 2008, the multistate working group began investigating allegations that some large financial institutions, including national banks and insurance companies, and brokers, engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market.
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 arrange 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.
"This is an ongoing effort," Attorney General Cooper said. "We will continue working to ensure there are no financial entities benefiting at the expense of taxpayers through anticompetitive activity. We appreciate the cooperation GEFCMS has demonstrated in this ongoing matter."
The multistate task force agreement is part of a coordinated global $70 million agreement that GEFCMS entered into today. The financial institution 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.