Investment of Proceeds of Municipal Securities – SEC Censures Bank of America Securities for Rigging Bids

  • Date: December 15, 2010
  • Source: Admin
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Under IRS regulations, the proceeds of tax-exempt municipal securities must be invested at fair market value.  Hence, a competitive bidding process is undertaken, so the bidding agents can identify the right investment vehicle for the issuer.

In the instant case, the Securities and Exchange Commission (SEC) investigations revealed that the bidding process was marred by undisclosed consultations, agreements, or payments. Thus a fair marketing value of the reinvestment instruments could not be established.  These malpractices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, which totaled billions of dollars in principal alone.

According to SEC, certain bidding agents diverted the business from municipalities to BAS through various malpractices. Thus, the agents gave BAS information on competing bids (last looks), and deliberately obtained off-market "courtesy" bids or purposefully non-winning bids so BAS could win the transaction (set-ups). Eventually, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).

BAS returned the favor by diverting business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. The latter were rewarded with undisclosed gratuitous payments and kickbacks. Former officers of BAS participated in, and condoned, these bidding malpractices.

BAS has been ordered by SEC  to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act of 1934, and to pay disgorgement plus prejudgment interest totaling USD 36,096,442 directly to the affected entities.




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