The Bond Buyer of Thursday, February 25, 2016 brought a reminder that The Big Short (see our commentary released February 24, 2016) is not the only story of Wall Street malfeasance leading up to the Great Recession. The headline on the lead story is “Six Firms To Pay $103.5M in Preliminary Settlements Over Bid-Rigging.” This settlement in a case brought in the United States District Court for the Southern District of New York came after five other firms agreed to settlements totaling $125 million. The 11 firms were JPMorgan Chase (which paid $44.59 million, the largest amount), Morgan Stanley, GE Funding Capital Market Services Inc., Bank of America, Wachovia Bank (now Wells Fargo & Co.), Natixis Funding Corp., Societe Generale, UBS AG, Piper Jaffray & Co., National Westminister Bank and George K. Baum & Co.

The settlement is in a law suit brought by governmental entities and public corporations represented by private attorneys and attorneys general in several states. The alleged misconduct was bid rigging and price fixing in connection with the investment of proceeds of tax exempt bond issues where federal tax laws limited the interest rates at which the proceeds could be invested. The allegation was that the defendants, working through middle men, collaborated to arrange for one bidder to submit an above market bid thereby earning a higher profit while delivering a yield at or slightly below the maximum permitted. This is a practice that came to be known as “yield burning” and was frequent in the public finance industry.

In response to these and other abuses, Congress enacted the burdensome Dodd-Frank Act which further regulated the financial services industry, rather than relying on vigorous enforcement of existing law. Remedies available under existing law included criminal penalties, which the government may have been loathe to apply after the destruction of the auditing firm Arthur Anderson as a result of an improvident indictment. Some financial institutions are not just too big to fail, they are too big to indict without seriously damaging the economy.

With specific regard to public finance, Dodd-Frank encourages (but does not require) governments and their affiliates to retain municipal advisors and imposes on municipal advisors a fiduciary duty to guard the interests of their public clients. Porter, White & Company, Inc. is registered with the SEC as a municipal advisor and works to achieve its clients’ financial objectives in a manner consistent with the law and best practices.