GE Settles Muni-Bond Bid Rigging Probe

December 26, 2011, 6:39 PM EST By Martin Z. Braun

(Updates with number of transactions in 11th paragraph.)

Dec. 23 (Bloomberg) -- General Electric Co. agreed to pay $70.4 million to settle a criminal probe and civil claims for conspiring to rig bids on U.S. municipal-bond deals, overcharging state and local governments on investments.

GE Funding Capital Market Services, a former unit, is the fifth company to settle in a more than five-year federal investigation. The deal will resolve probes by the Justice Department, the Securities and Exchange Commission and the Internal Revenue Service as well as attorneys general in 25 states, the Justice Department said today in a statement.

“GE Funding’s former traders entered into illegal agreements to manipulate the bidding process on municipal investment contracts,” said Sharis A. Pozen, acting assistant attorney general in charge of the Justice Department’s antitrust division. “This anticompetitive conduct harmed municipalities as well as taxpayers.”

The settlement will bring to $743 million the amount that banks have paid to end the case, some of which is being returned to localities that were overcharged, the SEC said in a news release. Bank of America Corp., JPMorgan Chase & Co., UBS AG and Wells Fargo & Co. previously settled similar cases.

1999 to 2004

GE’s settlement stems from an investigation that centered on three now-former employees at a unit the finance division discontinued in April 2010, the Fairfield, Connecticut-based company said in a statement today. The conduct took place between 1999 and 2004, GE said.

The settlement won’t have a “material impact” on earnings, according to GE, the world’s biggest maker of jet engines and power-generation equipment. It takes about $100 million in profit to yield 1 cent in per-share earnings at GE, whose operations span energy, aviation, health care, transportation and financial services.

The Justice Department said it agreed not to prosecute GE Funding because it admitted its illegal conduct, cooperated with the investigation and took steps to address anticompetitive conduct. The department also cited GE Funding’s commitment to make restitution.

‘Widespread Corruption’

The federal investigation has exposed “widespread corruption” in a segment of the municipal market that deals with the investment of proceeds from bond issues, the SEC said. States and local governments purchase investment contracts, allowing them to earn a return until the cash is needed for public-works projects.

The contracts were supposed to be awarded to banks that offered the highest return at competitive auctions arranged by financial advisers.

So far, the Justice Department said it has brought criminal charges against 18 former executives of financial-services firms, nine of whom have pleaded guilty. The department said it is continuing to investigate.

The SEC said GE Funding generated millions of dollars by rigging at least 328 transactions in 44 states and Puerto Rico. The firm won deals by getting information about competitors’ bids from brokers that handled the auctions. It either raised a losing bid to a winning bid or reduced its winning bid to a lower amount so that it could make more money on a transaction, the SEC said.

GE Funding also deliberately submitted losing bids allowing other pre-selected firms to win auctions, the SEC said.

In July 2010, three former GE Funding bankers, Dominick Carollo, Steven Goldberg and Peter Grimm, were charged with fraud and conspiracy. They have pleaded not guilty.

The bankers allegedly paid kickbacks to brokers in exchange for their help in controlling and manipulating the bidding process. The kickbacks were then disguised as fees on derivative transactions.

One of the brokers, CDR Financial Products Inc., its founder and two former executives are scheduled to go on trial next month in federal court in Manhattan.

--With assistance from Rachel Layne in Boston and William Selway in Washington. Editors: Stacie Servetah, Mark Schoifet

To contact the reporters on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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