BAS has agreed to pay more than $36m in disgorgement and interest, to settle the SEC’s charges. In addition, BAS and its affiliates have agreed to pay another $101m to other federal and state authorities for its conduct.
According to SEC, it found that the bidding process was not competitive because it was tainted by undisclosed consultations, agreements, or payments and, therefore, could not be used to establish the fair market value of the reinvestment instruments.
As a result, the improper bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, the principal amounts of which totaled billions of dollars.
According to the Commission’s Order, certain bidding agents steered business from municipalities to BAS through a variety of mechanisms.
In some cases, the agents gave BAS information on competing bids (last looks), and deliberately obtained off-market ‘courtesy’ bids or purposefully non-winning bids so that BAS could win the transaction (set-ups).
As a result, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).
In return, BAS steered business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. In addition, those bidding agents were at times rewarded with, among other things, undisclosed gratuitous payments and kickbacks. The Commission also found that former officers of BAS participated in, and condoned, these improper bidding practices.
Currently, BAS is known as Merrill Lynch, Pierce, Fenner & Smith Incorporated following a merger.
SEC’s Division of Enforcement director Robert Khuzami said this ongoing investigation has helped to expose wide-spread corruption in the municipal reinvestment industry.
SEC’s Municipal Securities and Public Pensions Unit chief Elaine Greenberg said this conduct threatened the integrity of the municipal marketplace, affecting not only the municipal issuers who were directly defrauded, but also the thousands of investors nationwide who purchased their tax-exempt municipal securities.
