Bond derivatives firms defrauded governments and non-profits
DES MOINES – State attorneys general from nearly two dozen states, including Iowa, announced multimillion dollar settlements today with two investment firms that states allege rigged bids in connection with certain financial products sold to government and non-profit entities across the country.
New York-based Natixis Funding Corp. will pay $29,950,000, and Paris, France-based Societe Generale will pay $26,750,000 to resolve allegations of fraudulent and anticompetitive conduct in municipal bond derivative transactions. The settlement involves 21 states plus the District of Columbia, and a private class settlement.
Municipal derivatives are financial products used by tax-exempt municipal bond issuers (such as states, cities, counties, or other governmental agencies such as school districts), or by tax-exempt, non-profit private organizations.
The products enable issuers to invest money received from bond offerings while they wait to spend it or enter into contracts to hedge interest rate risk. Municipal derivatives generally allow a municipal bond issuer to generate a higher return from bond proceeds than bonds placed in a conventional savings account.
In 2008, state attorneys general began investigating the municipal bond derivatives market. The probe, states allege, revealed anticompetitive and fraudulent conduct involving individuals at a number of large financial institutions, among them Natixis and Societe Generale, and certain brokers with whom they had worked.
Rather than establishing forthright and fair contract terms for the municipal derivative sales, certain Natixis and Societe Generale employees and their counterparts at other institutions rigged bids, submitted noncompetitive courtesy bids and fraudulent certificates of arms-length bidding to government agencies.
The misconduct led local and state governments, as well as nonprofits, to enter into municipal derivatives contracts on less advantageous terms than they would have otherwise.
Under the settlements, the firms will pay $53,865,000 into a settlement fund according to the terms of a class settlement agreement and largely applied to restitution for municipalities, counties, government agencies, school districts and nonprofits that entered into municipal derivatives contracts with either company.
The firms deny wrongdoing.
The settlements are the sixth and seventh settlements resulting from a multistate investigation led by the attorneys general of New York and Connecticut, in part in parallel with the U.S. Department of Justice and other federal regulatory agencies.
Information concerning the claims process for entities affected by these settlements will be made available later this year by counsel in a case filed in the U.S. District of the Southern District of New York, captioned “In Re: Municipal Derivatives Antitrust Litigation” (MDL no. 1950).