A former Bank of America executive has pleaded guilty to participating in a bid-rigging scheme that manipulated how contracts to invest municipal bond proceeds were awarded, the U.S. Justice Department announced Monday.
The executive, Phillip D. Murphy, worked in Charlotte as the bank’s managing director of municipal derivatives products from 1998 to 2002, court documents say.
According to federal prosecutors, Murphy was a player in a fraud conspiracy and wire fraud scheme that also involved a California broker known as CDR Financial Products.
The charges against Murphy are related to a wide-ranging government investigation of the U.S. municipal bond market. In December 2010, four federal agencies and 20 states announced a sweeping $137 million settlement with Bank of America for its role in a scam authorities said defrauded state agencies, cities and nonprofits that sought to invest with banks the millions they borrowed through bond offerings for hospitals, apartment complexes and other projects.
That settlement, which included $3.4 million for North Carolina, resulted from a 2007 leniency agreement the bank reached with the Justice Department, sparing it from criminal prosecution. Bank of America, which officials then said was the first and only company to self-report its activities in the case, paid restitution but no fines after it approached the Justice Department, prompting the investigation.
Other banks also have reached settlements over bid-rigging allegations. Wells Fargo & Co. in 2011 announced it would pay $148 million to resolve accusations that Charlotte’s Wachovia, which the bank bought in 2008, participated in the scheme. JPMorgan Chase & Co. settled similar charges in 2011 for $228 million.
Central to the cases are the funds that public bodies, such as state and local governments, raise from issuing bonds. The proceeds are designed to pay for public projects or as operating funds, but public bodies invest them until it’s time to use them for their intended purposes.
According to a July 2012 indictment, Murphy and co-conspirators manipulated the bidding process to win the investment contracts. CDR Financial Products would give out interest rate and other details on bid submissions in advance, the indictment says. Bidders competing for the contracts would decide ahead of time whose bid would win, the indictment says.
As a part of the conspiracy, Murphy and co-conspirators agreed to have kickbacks paid to CDR in exchange for the company’s help in manipulating the bidding process, the indictment says.
Bank of America increased its profits from the contracts by paying artificially determined and suppressed low interest rates, the indictment says.
The public bodies that issued the bids were led to believe the bidding process was competitive when it actually wasn’t, placing the tax-exempt status of the underlying bonds in jeopardy, prosecutors said. Prosecutors said Murphy conspired with CDR and others to increase the number – and profitability – of contracts awarded to Bank of America.
“Mr. Murphy ripped off hard-working American taxpayers and cash-strapped municipalities all in pursuit of his own lucre,” George Venizelos, assistant director in the FBI’s New York field office, said in a statement. “Let this serve as a reminder to others who are entrusted to act in the public’s best interest; your lack of candor won’t go without notice.”
Murphy has pleaded guilty to fraud conspiracy, false bank records conspiracy and wire fraud, according to the Justice Department.
The fraud conspiracy carries a maximum penalty of five years in prison and a $250,000 fine. The false bank records conspiracy carries a maximum penalty of five years in prison and a $250,000 fine.
The wire fraud charge carries a maximum penalty of 30 years in prison and a fine of $1 million.
Sentencing in the case is not expected until summer at the earliest.
Including Murphy, 17 individuals have been convicted or pleaded guilty in the Justice Department’s investigation. That number includes former Bank of America employees Douglas Campbell, who worked at the bank’s offices in Charlotte and New York, and Brian Zwerner, who worked in the bank’s offices in Chicago, court documents say.
In December, Bank of America agreed to pay $20 million to settle a 5-year-old related lawsuit that accuses it of rigging bids for municipal securities. That settlement is separate from the December 2010 deal.