Goldman, Bear Stearns Bankers Targeted in Muni Criminal Probe
By Martin Z. Braun and William Selway
Feb. 29 (Bloomberg) -- Goldman Sachs Group Inc. and Bear Stearns Cos. bankers are under investigation in the U.S. Justice Department's criminal probe of the municipal derivatives business, regulatory documents show.
Bear Stearns's Stephen Salvadore and former JPMorgan Chase & Co. banker James Hertz are targets of the antitrust investigation of Wall Street's sales of derivatives and investment contracts to state and local governments, Financial Industry Regulatory Authority records show. Goldman's Shlomi Raz also disclosed to Finra that he is being investigated, without saying whether he is a target.
U.S. prosecutors and the Securities and Exchange Commission have been searching for more than a year for evidence of rigged bidding and other misconduct by banks that sell investments and derivatives, such as interest-rate swaps, tied to municipal bonds. This week Wachovia Corp. and Piper Jaffray Cos. also disclosed in SEC filings that employees were targeted.
Bank of America Corp. and Dexia SA's Financial Security Assurance Holdings Ltd. said in regulatory filings that they may be sued by the Securities and Exchange Commission in connection with the investigation. Bank of America, the world's largest bank, said last February that it agreed to cooperate with the Justice Department in exchange for leniency.
Lawyers in the municipal bond industry have said the criminal probe is the biggest in the history of the almost 200- year-old market, where states, cities and towns have $2.6 trillion of debt outstanding. The Federal Bureau of Investigation also raided three brokers that advise local governments and ran the bidding as part of the probe, which may involve transactions as far back as 1992.
Bidding Practices
Derivatives, financial contracts whose value is based on other securities or indexes, are used by local governments to guard against swings in borrowing costs or to lock in current interest rates for bond sales they might not make for years. Investigators are also looking into the bidding practices for another type of agreement, known as a guaranteed investment contract, where governments place money raised from bond sales until it is needed for projects.
Bear Stearns spokesman Russell Sherman, Goldman spokesman Michael DuVally and JPMorgan spokesman Brian Marchiony declined to comment.
Hertz was fired by JPMorgan in December, according to records with Finra, the financial industry regulator.
``Mr. Hertz has been advised that he is a target of a grand jury investigation regarding municipal securities business,'' his record states. A telephone call to Hertz wasn't immediately returned.
Antitrust Violations
Goldman's Raz, who worked at JPMorgan until 2003, also disclosed the investigation to Finra, without specifically saying whether he is a target.
Bear Stearns's Salvadore also received a letter notifying him that he is a target of an investigation ``concerning antitrust and other violations involving contracts related to municipal bonds,'' his record states.
``Mr. Salvadore responds that he has at all times acted lawfully and believes that he has not done anything that justifies issuance of the Department of Justice letter,'' his record states.
To contact the reporter on this story: Martin Z. Braun in New York at bewilliams@bloomberg.net ; William Selway in San Francisco at wselway@bloomberg.net .
Last Updated: February 29, 2008 16:02 EST
