Aug. 3, 2000 — A Bank One Co. and several regional investment banks have agreed to pay more than $13 million to settle charges that they defrauded the federal Treasury by overpricing securities sold in connection with certain municipal bond transactions — a practice known as "yield burning."
The settlement brings the total that investment banks have paid to settle yield-burning charges to $191 million. The settlements resulted from whistleblower ("qui tam") lawsuits brought by former investment banker Michael Lissack and related charges brought by federal agencies.
"Yield-burning was a common practice not only by Wall Street's largest players, but also by the smaller, regional banks," said Erika A. Kelton, a Washington, D.C., attorney whose firm, Phillips & Cohen LLP, represents Lissack. "There was such a small risk of getting caught that few banks could resist the huge profits gained by illegally jacking up the prices of securities. The only losers were taxpayers and the U.S. Treasury."
The settlement resolves the banks' potential liabilities under the False Claims Act, securities law and tax law. It was agreed to by the Justice Department, the Securities and Exchange Commission, the Internal Revenue Service and NASD Regulation Inc. — the independent subsidiary of the National Association of Securities Dealers Inc. charged with regulating the securities industry.
Yield burning occurred when banks sold securities at prices above their fair market value to municipalities and state and local agencies. The excessive mark-ups lowered — or "burned" — the yield of the securities. In the case of municipal debt refinancings known as "advance refundings" — done to refinance old, expensive debt at lower interest rates — underwriters pocketed profits that should have gone to the federal government.
The settlement announced today has two components: The securities firms will pay approximately $7.6 million to the federal government, the bulk of which will go toward settling the qui tam lawsuits. About $4 million will be returned to municipalities that were harmed by the firms' yield-burning practices.
Of the total settlement, Bank One will pay roughly $4.4 million to settle charges that First Chicago Capital Market Inc. — a corporate predecessor of Bank One's subsidiary, Banc One Capital Market Inc. — engaged in yield burning.
John Nuveen & Co., based in Chicago, will pay about $6.6 million.
Smaller amounts will be paid by:
- BB&T Corp. subsidiary Scott & Stringfellow Inc., of Richmond, Va., to settle charges against Craigie Inc. ($392,000). Craigie merged with Scott & Stringfellow in 1999.
- Peacock, Hislop, Staley & Given Inc., an investment bank based in Phoenix ($500,000).
- Omega Private Management Ltd. to settle charges against corporate predecessor RRZ Public Markets of Pittsburgh. ($212,000)
- Butler Wick Corp., of Youngstown, Ohio ($119,000)
In addition, Cain Brothers & Co. Inc., based in New York City, has agreed to reimburse Salomon Smith Barney and PaineWebber Inc. a total of $1 million for its share of settlements that the two investment banks already had paid to the federal government to settle yield-burning charges related to deals that the three were involved in together.
Lissack's lawsuit was filed in 1995 in the Southern District of New York (Manhattan) under the False Claims Act. The qui tam provisions of the law allow private citizens to sue companies that are defrauding the federal government. Liable companies may be required to pay up to three times the government's losses plus $5,000 to $10,000 for each false claim. Whistleblowers are entitled to 15 percent to 30 percent of the amount the government recovers as a result of the lawsuits.
For more information about this case, see the following news stories:
- "Securities firms to settle charges of yield-burning," John Connor, The Wall Street Journal," 8/7/00.
- "Nuveen, Bank One pay securities fraud penalty," Melissa Allison, Chicago Tribune, 8/6/00.
- "Firms in $13.5 million settlement of U.S. 'yield-burning' charges," The New York Times," 8/5/00.