Wachovia and its successor, Wells Fargo, settled charges by 25 states and several federal agencies (the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Internal Revenue Service (IRS) and the Federal Reserve) that it participated in a nationwide scheme to allegedly rig bids and engage in other anticompetitive conduct relating to municipal bond derivatives that defrauded state agencies, local governmental entities and not-for-profit entities. The multistate settlement is part of a $148 million settlement Bank of America entered into simultaneously with the federal agencies.
Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed,
or to hedge interest-rate risk. In April 2008, the states began investigating allegations that various schemes to rig bids and commit
other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market, were being used by certain large financial
institutions, including national banks and insurance companies, and certain brokers and swap advisors. The ongoing investigation uncovered alleged collusive and deceptive conduct involving individuals at Wachovia and other financial institutions, and certain brokers with whom they had working relationships. The alleged wrongful conduct took the form of bidrigging, submission of non-competitive courtesy bids and submission of fraudulent certifications of compliance to government agencies, among others, in contravention of U.S. Treasury regulations. The objective of the schemes was to enrich the financial institution and/or the broker at the expense of the issuer – – and ultimately taxpayers – – depriving the issuer of a competitive, transparent marketplace. As a result of the alleged wrongful conduct, state, city, local, and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they would have
otherwise.