It's being called one of the longest running, most economically pervasive antitrust conspiracies ever uncovered in the U.S. For nearly two years, the DOJ, the IRS and the SEC have been probing industrywide collusive practices in the municipal bond industry.

Now Fairfax County, Va., the State of Mississippi and the City of Chicago, among other plaintiffs, have filed two nationwide class action lawsuits against 37 leading banks, insurance companies and brokers. The suits allege widespread price-fixing and bid-rigging in the multibillion-dollar municipal derivatives industry dating back to 1992. Plaintiffs in the suits, filed March 12 in the U.S. District Court for the District of Columbia, are seeking to recover treble damages.

“These lawsuits demonstrate that once the criminal process begins, companies face the prospect of civil litigation and costly damages–and as further punishment, the law allows the initial damage amount the banks must pay to be tripled,” says Andre P. Barlow, a partner focusing on antitrust law at Doyle, Barlow & Mazard's Washington, D.C., office.

The first lawsuit, which stems partly from information obtained from Charlotte, N.C.-based Bank of America, is against 36 major banks and brokers, including JP Morgan Chase & Co., Bear Stearns & Co. Inc., Morgan Stanley and Merrill Lynch & Co. Bank of America is the sole defendant in a second suit that plaintiffs filed separately because of the bank's cooperation with plaintiffs and because its alleged wrongdoing occurred during a shorter period than that of the co-conspirators.

In the related criminal probe, Bank of America in February won amnesty from the DOJ in return for being the first defendant to provide information to the government. The DOJ has charged the other defendants with entering into anticompetitive rigging agreements, which are illegal under the Sherman Antitrust Act.

“As a reward for cooperating, the DOJ will not bring any criminal antitrust prosecution against Bank of America and, if the DOJ and the court presiding over the class action are satisfied with Bank of America's cooperation, Bank of America will be limiting its civil liability to single rather than treble damages,” Barlow says.

Organized Scheming
Municipal bonds are issued to investors by municipalities to raise funds for large public works projects, including the construction and repair of roads and buildings. The funds are often invested in tax-free investment vehicles called municipal derivatives to earn interest until they are needed.

Brokers arrange auctions where municipal entities looking to purchase a municipal derivative receive bids from competing banks. The complaint alleges the banks issued complementary bids, which are not truly competitive because they are purposely priced out of the market and thus are not considered–therefore making the favored bidder's bid the most attractive.

Another method the banks allegedly employed is called “last look,” in which the competitors allowed the favored bidder to take a look at other banks' bids so the bank deemed the favored bidder could structure its bid to beat the rest. In other situations involving multiple bidders–some with courtesy bids and some with legitimate bids–the winning bidder splits the benefits with the losing bidders.

“What plaintiffs alleged here is that the brokers and banks conspired to rig those bids so that instead of getting the kind of interest the municipalities and other public entities would enjoy in a competitive market, they were getting less,” says Michael Lehmann, a partner at Cohen Milstein Hausfeld & Toll, one of the firms representing the plaintiffs. “In a competitive marketplace, providers would be expected to compete against each other for an issuer's business on the basis of the highest rate of return.”

Limiting Damage
In seeking amnesty, Bank of America made use of statutes that provide for lesser penalties in civil and criminal prosecutions for the entity to first report the misconduct.

“Bank of America provided a lot of the information contained in the complaint,” Lehmann says. “Counsel need to be aware that their company can be fingered by an amnesty applicant who gives information about the other participants in a conspiracy in exchange for getting the best possible deal.”

For general counsel, this means it is vitally important to avoid getting into antitrust trouble. “With the risk of treble damages from class action lawsuits and possible criminal fines and jail time, top management must assess corporate procedures to avoid any allegations of price-fixing and bid-rigging before they surface,” Barlow says. “Keeping everyone educated about the antitrust laws is the essence of good management.”

General counsel should carefully develop and implement proactive antitrust compliance policies and programs. A carefully tailored and detailed corporate antitrust policy will make clear a company's commitment to complying with antitrust laws, in addition to establishing procedures for how to do it.
“The key is to make sure you take measures to keep your company in compliance with all antitrust laws, and out of trouble in the first place,” Lehmann says.