The Justice Department, the Securities and Exchange Commission and the Internal Revenue Service have been focusing on how firms are selected to manage cash raised by municipalities until that money is used for projects, such as repairing highway, for the past 16 months.
At least four companies -- including banks UBS AG, Bank of America Corp., bond insurer Financial Security Assurance Holdings Ltd. and product developer CDR Financial Products Inc. – in the last few weeks have disclosed that they received so-called Wells notices from the SEC. A Wells notice indicates that the agency is considering filing civil charges and gives the recipient an opportunity to say why charges shouldn't be filed. FSA said it was facing civil fraud charges.
Several individuals also were sent Wells notices, a person familiar with the investigation said, and more notices to firms and people might be sent.
The Justice Department's antitrust division has sent target letters to almost 30 individuals, according to people familiar with the matter. A target letter indicates the department will seek an indictment or file criminal charges. Wachovia Corp. disclosed Thursday that two bank employees, now on administrative leave, were told they are targets of the investigation.
Authorities are investigating whether investment firms colluded to rig the bidding for the right to invest the municipal money, people familiar with the matter said.
Among the areas of interest is whether parties submitted phony bids to let one bank win a contract in exchange for another bank getting a contract later. In addition, authorities are looking into whether the financial firms paid kickbacks to other firms to win business. Federal tax laws and rules require such contracts to have at least three bids to make them competitive.
As a result of the alleged wrongdoing, municipalities may have paid higher fees than they might have under competitive bidding.
Charges relating to the inquiry, one of the largest in the $2.4 trillion municipal market, might still be months away. All of the individuals and firms receiving notices might not be charged. The companies involved either didn't return calls seeking comment or referred to their previous public comments that they were cooperating with authorities.
The municipal market has long been opaque and ripe for abuse. These days, it also is under pressure from tightening credit markets. The investigation isn't connected to the other problems in the auction-rate securities market or those affecting mortgage-related products.