Department of Justice indicts three executives for municipals fraud

By Jennifer Chiou

New York, Dec. 10 - The Department of Justice announced that three former financial services executives were indicted on Friday for their alleged participation in fraudulent contracts related to municipal bonds.

The six-count indictment charges Peter Ghavami, Gary Heinz and Michael Welty with participating in separate fraud schemes at various times from 2001 until 2006. One executive was additionally indicted for witness tampering in connection with the department's investigation into anticompetitive and fraudulent conduct in municipals.

The indictment was filed in the U.S. District Court in New York City.

According to a news release, Ghavami, a Belgian national who was residing in Moscow, was originally charged by criminal complaint and was arrested earlier this month at John F. Kennedy International Airport in New York.

"The individuals charged today allegedly participated in complex fraud schemes and conspiracies that subverted competition in the market for municipal finance contracts and deprived municipal bond issuers of the benefits of their investments to the detriment of the public," Christine Varney, assistant attorney general in charge of the Department of Justice's Antitrust Division, said in the release.

"This type of anticompetitive activity in our financial markets will not be tolerated and the Antitrust Division will continue to prosecute those who engage in this illegal conduct. This includes individuals who purposely seek to obstruct the government's investigation."

The department further said that the charged conspiracies and schemes all relate to municipal finance contracts provided to public issuers, such as state, county and local governments and agencies throughout the United States.

The department added that major financial institutions, including banks, investment banks, insurance companies and financial services companies, are among the providers of investment agreements and other related municipal finance contracts.

Public issuers typically hire a broker to conduct a competitive bidding process among various providers prior to awarding these agreements and contracts, the release noted, adding that competitive bidding for these agreements is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.

According to the indictment, the financial services company where Ghavami, Heinz and Welty worked was a wholly owned subsidiary of a foreign-based financial institution that had headquarters in New York.

Bid rigging alleged

In addition, the three allegedly conspired with employees of various financial institutions to manipulate the bidding process for the agreements and contracts by discussing with co-conspirators the price or price level their employers intended to bid and determining with their co-conspirators which financial institution would win a particular investment agreement or municipal finance contract, the release stated.

The indictment also alleges that Ghavami, Heinz and Welty and their co-conspirators falsely certified that the bidding process on rigged deals was competitive and in compliance with U.S. Treasury regulations.

The Department of Justice said that this caused the municipal issuers to award investment agreements and other municipal finance contracts to providers that otherwise would not have been awarded the contracts, and in some instances, deprived the Internal Revenue Service and U.S. Treasury of money to which they were entitled.

Furthermore, the indictment alleges that Ghavami, Heinz and Welty conspired with Beverly Hills, Calif.-based Rubin/Chambers, Dunhill Insurance Services Inc. and others in order to obtain information about the prices and other information related to competing bids and then used that information to determine their employer's bid.

They also allegedly agreed to pay and arranged for kickback payments to be made to Rubin/Chambers in the form of inflated fees, the release said.

Ghavami, Heinz and Welty are also charged with participating in a conspiracy and fraud schemes in their capacity as brokers and advisors to municipal bond issuers, the release added.

According to the indictment, in different instances, Ghavami, Heinz and Welty, acting as brokers, accepted various kickbacks on behalf of their employer in exchange for manipulating the bidding process and steering investment agreements and other municipal finance contracts to certain financial institutions and entities.

In related news, three former financial services executives were indicted on July 27 for participating in fraud schemes and conspiracies. And, in October 2009, Rubin/Chambers, two of its employees and one former employee were charged for participating in bid-rigging and fraud conspiracies and related crimes. The Rubin/Chambers trial is scheduled to begin on Sept. 12, 2011.

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