Bank of America to pay $137 million in state fraud cases

These executives head some of the nation's largest and most closely watched financial institutions.
By Zachary A. Goldfarb
Tuesday, December 7, 2010; 10:16 PM

Bank of America will pay $137.3 million to settle allegations that it defrauded schools, hospitals and dozens of other state and local government organizations, federal officials said Tuesday. The settlement stems from a long-running investigation into misconduct in the municipal bond business that raises money for localities to pay for public services.

Bank of America is accused of depriving local organizations of millions of dollars by engaging in illegal behavior when investing the proceeds of municipal bond sales.

The bank is paying $107.8 million to these organizations in restitution, $25 million to the Internal Revenue Service for abuses related to the tax-free status of municipal bonds and $4.5 million to state attorneys general for costs related to their investigations.

The government showed Bank of America leniency in the settlement because the bank first disclosed the illegal conduct that launched the investigation. As a result, the bank must pay restitution but does not have to pay an additional financial penalty.

A number of bankers and other professionals from a variety of financial firms have pleaded guilty in the probe, which centered on companies conspiring to win municipal securities business in violation of statutes requiring fair competition. The investigation was conducted by the Justice Department and the Securities and Exchange Commission, among other agencies.

"Bank of America's disclosure of wrongdoing and cooperation has led to an aggressive, ongoing investigation by the Department of Justice into anticompetitive activity in the municipal bond derivatives industry," said Christine Varney, the department's antitrust chief. "The Division's investigation of this matter continues, and the prosecution of anticompetitive conduct in the financial markets remains our highest priority."

In a statement, Bank of America said it was pleased to put the matter behind it. "Bank of America is one of a number of financial institutions that are under investigation, but Bank of America was the first and only company to self-report, and it was our company that the Justice Department has cited as being particularly helpful in its investigation."

The banking giant is accused of taking part in a conspiracy in which it and other banks paid kickbacks to win the business of municipalities seeking to invest the proceeds of bond sales before the money is ready to be spent.

The municipalities hired companies to help them find attractive investments. Under federal rules, these companies are required to use a bidding process allowing banks and investment firms to offer competing proposals for how to invest the municipalities' money.

The companies are accused of directing the business to particular banks that paid them kickbacks. Bank of America was one such bank, according to federal officials.

"This ongoing investigation has helped to expose widespread corruption in the municipal reinvestment industry," said SEC enforcement director Robert Khuzami. "The conduct was egregious: In return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper."

The alleged misconduct dated from the late 1990s to the early 2000s. It affected municipal bond sales related to health-care facilities in Minnesota and utilities in Guam to universities in California.

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