April 23, 1998 -- The Justice Department announced today that it had intervened in and settled a whistleblower (qui tam) lawsuit brought under the False Claims Act against Meridian Securities (now CoreStates Financial Corp.) of Philadelphia involving "yield-burning" in the municipal bond market.
Michael Lissack, a former managing director of Smith Barney who brought the qui tam lawsuit, was pleased with the settlement.
"I am gratified that the Justice Department took my allegations seriously and is moving to recapture illegal profits investment banking firms made at the expense of taxpayers," Lissack said. He was the first to bring to public attention the nationwide practice of yield-burning, in which investment banks pocket proceeds from bond transactions made on behalf of municipalities that should have gone to the federal government.
John R. Phillips, a Washington, D.C., attorney whose firm, Phillips & Cohen, represented Lissack, praised the work and cooperative efforts of the U.S. Attorney's office, other Justice Department officials, the SEC and the IRS.
"The Justice Department's involvement is significant," Phillips said. "It shows the government can utilize the False Claims Act to recover money that investment banks took from the U.S. Treasury through a tricky scheme involving the sale of overpriced securities to municipalities."
"Wall Street has engaged in yield-burning for many years and caused many hundreds of millions of dollars in damages to federal, state and local governments," Phillips added.
The False Claims Act allows people to file lawsuits against companies that are defrauding the federal government and recover damages and penalties on the government's behalf. They are then entitled to receive 15 percent to 30 percent of whatever money the government recovers as a result of their qui tam lawsuit.
Lissack's False Claims Act lawsuit was filed in 1996 in the southern district of New York (Manhattan) by Phillips & Cohen.
Lissack and the Los Angeles County Metropolitan Transportation Authority (LAMTA) have pending a False Claims Act lawsuit under California law against Lazard Freres & Co. The qui tam lawsuit, unsealed in April 1996, alleges that Lazard secretly and illegally overcharged LAMTA by more than $3 million for securities it sold to LAMTA as part of a municipal bond transaction. The qui tam lawsuit also charges that Lazard breached its fiduciary obligations by defrauding LAMTA, its financial advisory client.
The media has publicized other yield-burning cases, including those in:
- Jacksonville, Fla., involving William R. Hough & Co.
- Phoenix, Ariz., involving Rauscher Pierce Refsnes Inc. (now Dain Rauscher Inc.)
- Pennsylvania, involving Prudential Securities Inc.
For more information about this case, see the following news stories:
- "CoreStates settles bond case with U.S. for $3.7 million," David Barboza, The New York Times, 4/24/98.
- "CoreStates settles in muni tax fraud case," Thomas S. Mulligan, Los Angeles Times, 4/24/98.
- "CoreStates pays $3.7 million to end yield-burning case," Lynn Stevens Hume, The Bond Buyer, 4/24/98.
- "First joint 'yield burn' case is seen," John Connor and Charles Gasparino, The Wall Street Journal, 4/23/98.