CITY OF VICTORVILLE AND OTHERS CHARGED WITH DEFRAUDING MUNICIPAL BOND INVESTORS

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges City of Victorvile, Underwriter, and Others with Defrauding Municipal Bond Investors

Washington, D.C., April 29, 2013 — The Securities and Exchange Commission today charged that the City of Victorville, Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios (KND), the underwriter of the Airport Authority’s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.

Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND Vice President Janees L. Williams were responsible for false and misleading statements made in the Airport Authority’s 2008 bond offering, the SEC alleged. It also charged that KND, working through a related party, misused more than $2.7 million of bond proceeds to keep itself afloat.

"Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the antifraud provisions of the federal securities laws," said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. "Public officials have the same obligation as corporate officials to tell the truth to their investors."

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, said, "Investors are entitled to full disclosure of material financial arrangements entered into by related parties. Underwriters who secretly line their own pockets by taking unauthorized fees will be held accountable."

The SEC alleges the Airport Authority, which is controlled by the City of Victorville, undertook a variety of redevelopment projects, including the construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, by April 2008, the Airport Authority was forced to refinance part of the debt incurred to construct the hangars, and other projects, by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount. The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.

In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority. According to the SEC’s complaint, the scheme began when Kinsell learned of allegations that the contractor building the hangars had likely diverted bond proceeds for his own personal use. When the contractor was removed, Kinsell stepped in to oversee the hangar project through another company he owned, KND Affiliates, LLC, even though Kinsell had no construction experience.

The SEC alleges that the Airport Authority loaned KND Affiliates more than $60 million in bond proceeds for the hangar project and agreed that as compensation for the project, KND Affiliates would receive a construction management fee of two percent of the remaining cost of construction. However, Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to "manage" the hangars. The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates’ books and records.

The SEC’s complaint alleges that the Airport Authority, Kinsell, KND, and KND Affiliates violated the antifraud provisions of U.S. securities laws and that KND violated 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rules G-17, G-27 and G-32(a)(iii)(A)(2). The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations. The SEC is seeking the return of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.

The SEC’s investigation was conducted by Robert H. Conrrad and Theresa M. Melson in the Municipal Securities and Public Pensions Unit, and Lorraine B. Echavarria, Todd S. Brilliant, and Dora M. Zaldivar of the Los Angeles Regional Office. Sam S. Puathasnanon will lead the SEC’s litigation.

FORMER FINANCIAL SERVICES BROKER SENTENCED TO SERVE

FROM: U.S. JUSTICE DELPARTMENT
WASHINGTON — A former financial services broker was sentenced today in U.S. District Court for the Southern District of New York, for his participation in conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.

Adrian Scott-Jones, of Morriston, Fla. , a former broker for Tradition N.A. , was sentenced by District Court Judge Harold Baer Jr. for his role in the conspiracies. Scott-Jones was sentenced to serve 18 months in prison and to pay a $12,500 criminal fine.

"From soliciting intentionally losing bids for investment agreements to paying out kickbacks to manipulate the competitive bidding process, the conspirators went to great lengths to defraud municipalities across the country," said Scott D. Hammond, Deputy Assistant Attorney General for the Antitrust Division's criminal enforcement program. "Today's sentence sends a clear message that the division will continue to hold executives accountable for their anticompetitive conduct. "

On Sept. 8, 2010, Scott-Jones pleaded guilty to participating in multiple conspiracies with executives of General Electric Co. (GE) affiliates, from as early as 1999 until 2006. According to the charges, GE and other financial institutions and insurance companies (providers), offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States. The public entities hired brokers like Scott-Jones and Tradition to conduct bidding for contracts to invest money from a variety of sources, primarily the proceeds of municipal bonds issued to raise money for, among other things, public projects. Scott-Jones also participated in a conspiracy with representatives of a second provider located in New York City.

According to court documents, in each conspiracy, Scott-Jones gave co-conspirators information about the prices, price levels or conditions in competitors' bids, a practice known as a "last look," which is explicitly prohibited by U.S. Treasury regulations. Scott-Jones also solicited and received intentionally losing bids for certain investment agreements and other municipal finance contracts. As a result of Scott-Jones’ role in corrupting the bidding process for investment agreements, he and his co-conspirators deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds used by municipalities for various public works projects, such as water pollution abatement projects and low-cost housing. The department said that the conspiracies cost municipalities around the country millions of dollars.

"Today's sentencing reaffirms the ongoing success of our efforts to weed out corruption in the municipal bond market," said George Venizelos, Acting Director in Charge of the FBI in New York. "The FBI will continue to work closely with our partners from the Antitrust Division to protect the integrity of the competitive bidding process in public finance. "

"Individuals who manipulate the competitive bidding system to benefit themselves will be held accountable for their criminal activity," said Richard Weber, Chief, Internal Revenue Service Criminal Investigation (IRS-CI). "Quite simply, Mr. Scott-Jones profited at the expense of the towns and cities that needed the money for important public works projects. IRS Criminal Investigation is committed to working with our law enforcement partners to uncover this kind of corruption and secure justice for American taxpayers. "

A total of 20 individuals have been charged as a result of the department's ongoing municipal bonds investigation, 19 of whom have been convicted at trial or pleaded guilty; one is currently awaiting trial. Additionally, one company has pleaded guilty.

The sentences announced today resulted from an ongoing investigation conducted by the Antitrust Division's New York Office, the FBI and IRS-CI. The division is coordinating its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

Today's convictions are part of efforts underway by President Obama's Financial Fraud Enforcement Task Force (FFETF), which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys' offices and state and local partners, it's the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.

FORMER EXECUTIVES GO TO PRISON FOR INVOLVEMENT IN INVESTMENT BOND CONSPIRACY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Thursday, October 18, 2012

Three Former Financial Services Executives Sentenced to Serve Time in Prison for Roles in Conspiracies Involving Investment Contracts for the Proceeds of Municipal Bonds

WASHINGTON – Three former financial services executives were sentenced today in U.S. District Court for the Southern District of New York, for their participation in conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced. The three former executives were convicted after a three week trial on May 11, 2012.

Dominick P. Carollo, Steven E. Goldberg and Peter S. Grimm, all former executives of General Electric Co. (GE) affiliates, were sentenced by District Court Judge Harold Baer Jr. for their roles in the conspiracies. Carollo was sentenced to serve 36 months in prison and to pay a $50,000 criminal fine. Goldberg was sentenced to serve 48 months in prison and to pay a $90,000 criminal fine. Grimm was sentenced to serve 36 months in prison and to pay a $50,000 criminal fine.

"By manipulating the competitive bidding process, the conspirators cheated cities and towns out of money for important public works projects," said Scott D. Hammond, Deputy Assistant Attorney General for the Antitrust Division’s criminal enforcement program. "The division and its law enforcement partners remain committed to rooting out such corruption."

According to evidence presented at trial, while employed at GE affiliates, Carollo, Goldberg and Grimm participated in separate fraud conspiracies with various financial institutions and insurance companies and their representatives from as early as 1999 until 2006. These institutions and companies, or "providers," offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Goldberg also participated in the conspiracies while employed at Financial Security Assurance Capital Management Services LLC.

At trial, the Department of Justice asserted that Carollo, Goldberg, Grimm and their co-conspirators corrupted the bidding process for dozens of investment agreements to increase the number and profitability of investment agreements awarded to the provider companies where they were employed. Carollo, Goldberg and Grimm deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities for various public works projects, such as for building or repairing schools, hospitals and roads. Evidence at trial established that they cost municipalities around the country millions of dollars.

"Today’s sentencing of Carollo, Goldberg and Grimm for their involvement manipulating a competitive bidding process of public contracts is the final step in a case that demonstrates the FBI’s commitment to investigate and prosecute those who illegally influence the financial markets for their own profit," said Mary E. Galligan, Acting Assistant Special Agent Charge of the FBI in New York. "The co-conspirators scheme over many years deprived municipalities across the country of competitive interest rates on bonds, a yield that most cities would say they greatly need. The FBI will continue to work with our law enforcement partners to enforce the laws that protect our financial markets."

"The sentences handed down today send a clear message that crime motivated by outright greed will land you in jail," said Richard Weber, Chief, Internal Revenue Service – Criminal Investigation (IRS-CI). "Quite simply, the defendants stole money from taxpayers and conspired to manipulate the competitive bidding system to benefit themselves instead of the towns and cities that needed this money for important public works projects. IRS Criminal Investigation is committed to working with our law enforcement partners to uncover this kind of corruption and secure justice for American taxpayers."

Carollo was found guilty on two counts of conspiracy to commit wire fraud and defraud the United States, Goldberg was found guilty on four counts of conspiracy to commit wire fraud and defraud the United States and Grimm was found guilty on three counts of conspiracy to commit wire fraud and defraud the United States.

A total of 20 individuals have been charged as a result of the department’s ongoing municipal bonds investigation. Including today’s convictions, a total of 19 individuals have been convicted or pleaded guilty, and one awaits trial. Additionally, one company has pleaded guilty.

The sentences announced today resulted from an ongoing investigation conducted by the Antitrust Division’s New York Office, the FBI and the IRS-CI. The division is coordinating its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

Today’s convictions are part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov .

THREE FORMER UBS EXECUTIVES CONVICTED FOR FRAUD

FROM: U.S. DEPARTMENT OF JUSTICE
FRIDAY, AUGUST 31, 2012　
WASHINGTON — A federal jury in New York City today convicted three former financial services executives for their participation in frauds related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.

Peter Ghavami, Gary Heinz and Michael Welty, all former UBS AG executives, were found guilty on conspiracy and fraud charges in the U.S. District Court in New York City. Ghavami was found guilty on two counts of conspiracy to commit wire fraud and one count of substantive wire fraud. Heinz was found guilty on three counts of conspiracy to commit wire fraud and two counts of substantive wire fraud. Welty was found guilty on three counts of conspiracy to commit wire fraud. Heinz was found not guilty on one count of witness tampering and Welty was found not guilty on one count of substantive wire fraud.

The trial began on July 30, 2012. Ghavami, Heinz and Welty were initially indicted on Dec. 9, 2010.

"For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects," said Scott D. Hammond, Deputy Assistant Attorney General of the Antitrust Division’s criminal enforcement program. "Today’s convictions demonstrate that the division is committed to holding accountable those who seek to unfairly and illegally undermine competitive markets."

According to evidence presented at trial, while employed at UBS, Ghavami, Heinz and Welty participated in separate fraud conspiracies and schemes with various financial institutions and with a broker, at various time periods from as early as March 2001 until at least November 2006. These financial institutions, or providers, offered a type of contract—known as an investment agreement— to state, county and local governments and agencies, and not-for-profit entities, throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine the winning provider.

According to evidence presented at trial, while acting as providers, Ghavami, Heinz and Welty, with their provider and broker co-conspirators, corrupted the bidding process for more than a dozen investment agreements to increase the number and profitability of the agreements awarded to UBS. At other times, while acting as brokers, Ghavami, Heinz, Welty and their co-conspirators arranged for UBS to receive kickbacks in exchange for manipulating the bidding process and steering investment agreements to certain providers.

Ghavami, Heinz and Welty deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities to refinance outstanding debt and for various public works projects, such as for building or repairing schools, hospitals and roads. Evidence at trial established that they cost municipalities around the country and the U.S. Treasury millions of dollars.

During the trial, the government presented specific evidence relating to approximately 26 corrupted bids and approximately 76 recorded conversations made by the co-conspirator financial institutions. Among the issuers and not-for-profit entities whose agreements or contracts were subject to the defendants' schemes were the Commonwealth of Massachusetts, the New Mexico Educational Assistance Foundation, the Tobacco Settlement Financing Corporation of Rhode Island and the RWJ Health Care Corp at Hamilton.

"Corrupt bidding schemes serve to weaken the public’s trust in the municipal bond market and prevent public entities from enjoying the benefits of a true competitive bidding process," said Mary E. Galligan, Acting Assistant Director in Charge of the FBI in New York. "Today’s conviction is further proof of our efforts to weed out these corrupt criminals and ensure justice is served."

Today's verdict is important because it confirms that these complex, seemingly uninteresting backroom deals have a real impact on taxpayers, who should benefit from a municipal bond issue and are ultimately responsible for paying it off," said Richard Weber, Chief, Internal Revenue Service-Criminal Investigation (IRS-CI). "Today’s convictions send a strong message to the municipal bond industry and demonstrates the commitment of the Internal Revenue Service and the Justice Department to rid the industry of corrupt practices."

A total of 20 individuals have been charged as a result of the department’s ongoing municipal bonds investigation. Including today’s convictions, a total of 19 individuals have been convicted or pleaded guilty, and one awaits trial. Additionally, one company has pleaded guilty.

Two of charged fraud conspiracies carry a maximum penalty per count of 30 years in prison and a $1 million fine. A third fraud conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine. The two wire fraud charges carry a maximum penalty per count of 30 years in prison and a $1 million fine. These maximum fines per count may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either amount is greater than the statutory maximum fine.

The verdict announced today resulted from an ongoing investigation conducted by the Antitrust Division’s New York and Chicago Offices, the FBI and the IRS-CI. The division is coordinating its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.

THREE FORMER FINANCIAL SERVICES EXECUTIVES CONVICTED OF BID RIGGING

FROM:  U.S. DEPARTMENT OF JUSTICE
Mon, May 14, 2012 at 10:11 AM
WASHINGTON — A federal jury in New York City today convicted three former financial services executives for their participation in conspiracies related to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.
Dominick P. Carollo, Steven E. Goldberg and Peter S. Grimm, all former executives of General Electric Co. (GE) affiliates, were found guilty on all remaining counts of a superseding indictment in the U.S. District Court for the Southern District of New York. Carollo was found guilty on two counts of conspiracy to commit wire fraud and defraud the United States, Goldberg was found guilty on four counts of conspiracy to commit wire fraud and defraud the United States and Grimm was found guilty on three counts of conspiracy to commit wire fraud and to defraud the United States.

The trial began on April 16, 2012. Carollo, Goldberg and Grimm were initially indicted on July 27, 2010.
“The defendants corrupted the competitive bidding process and defrauded municipalities across the country for years,” said Deputy Assistant Attorney General Scott D. Hammond of the Antitrust Division. “Through corruption and fraud, they cheated cities and towns out of money for important public works projects. Today’s convictions reflect our determination to preserve fairness and competition in the financial services market. ”

According to evidence presented at trial, while employed at GE affiliates, Carollo, Goldberg and Grimm participated in separate fraud conspiracies with various financial institutions and insurance companies and their representatives at various time periods from as early as 1999 until 2006. These institutions and companies, or “providers,” offered a type of contract, known as an investment agreement, to state, county and local governments and agencies throughout the United States. The public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects. Goldberg also participated in the conspiracies while employed at Financial Security Assurance Capital Management Services LLC (FSA).

According to evidence presented at trial, Carollo, Goldberg and Grimm and their co-conspirators corrupted the bidding process for dozens of investment agreements to increase the number and profitability of investment agreements awarded to the provider companies where they were employed. Carollo, Goldberg and Grimm deprived the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities for various public works projects, such as for building or repairing schools, hospitals and roads. Evidence at trial established that they cost municipalities around the country millions of dollars.

“Fundamentally, this case is about fraud in the investment of public money,” said Janice K. Fedarcyk, Assistant Director in Charge of the FBI in New York. “The actions of the defendants denied public entities the benefits of true competitive bidding, and artificially depressed the yield on invested public funds. ”
“Today’s convictions are an important step forward in the coordinated effort by the IRS and the Department of Justice to aggressively rid the municipal bond industry of unfair and corrupt practices,” said Internal Revenue Service (IRS)-Criminal Investigation (IRS-CI) Special Agent in Charge Victor W. Lessoff. “Moreover, the convictions represent an important victory for America’s taxpayers, especially those who live in the municipalities harmed by the actions of the defendants. ”

A total of eighteen individuals have been charged as a result of the department’s ongoing municipal bonds investigation. Including today’s convictions, a total of 15 individuals have been convicted and three await trial. Additionally, one company has pleaded guilty.

Each of the fraud conspiracy charges carries a maximum penalty per count of five years in prison and a $250,000 fine. The maximum fines for the fraud conspiracy offense may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

The verdict announced today resulted from an ongoing investigation conducted by the Antitrust Division’s New York Office, the FBI and the IRS-CI. The division is coordinating its investigation with the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.