Marketplace Scratch Pad

Wall Street strikes again

Scott Jagow Mar 26, 2010

You might want to sit down for this one. The US Justice Department is alleging that more than a dozen Wall Street firms were involved in a conspiracy to pay below-market interest rates to cities and states on certain investments. In other words, they colluded to shortchange the taxpayers.

The companies named in court documents filed this week include Bank of America, Bear Stearns, GE, Lehman Brothers and a former unit of Citigroup. More from Bloomberg:

The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.

None of the companies have been charged with anything… yet:

The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice.

Cities and states are also pursuing the Wall Street firms in civil court.

May justice be done.

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