Four banks will pay $14.7 million to settle other yield-burning charges
Oct. 31, 2000 — Sakura Global Capital Inc. cheated the federal government out of tens of millions of dollars through its fraudulent pricing of investment contracts, according to documents filed today in federal district court in New York.
The documents — filed as part of a whistleblower lawsuit against Sakura — charge that, at least as early as 1990, Sakura fraudulently mispriced investment contracts, known as "forward supply agreements," that are often used in connection with advance refunding refinancings of tax-exempt municipal bonds.
In some instances as well, Sakura and others engaged in corrupt bidding practices to ensure that Sakura won the contracts, according to the lawsuit. Sakura Global Capital is a wholly-owned subsidiary of Sakura Bank Ltd.
"Sakura defrauded the government through a 'yield-burning' scheme involving its forward supply agreements," said Erika A. Kelton, a Washington, D.C., attorney with Phillips & Cohen LLP, which represents the whistleblower, Michael Lissack. "Sakura's pricing of its forward supply agreements was grossly unfair and put municipal bond issues at risk of losing their tax-exempt status."
Lissack, a former managing director of Smith Barney, first brought yield burning to the public's attention through a whistleblower lawsuit filed in 1995 against more than 20 Wall Street firms.
Among them are four investment banks who today settled federal yield-burning claims, including the False Claims Act lawsuit brought by Lissack.
First Union Securities Inc. (as successor to Everen Securities), Kidder Peabody & Co., Donaldson Lufkin Jenrette Securities Corp. and Bear Stearns & Co. Inc. agreed to pay a total of about $14.7 million to settle yield-burning charges.
This brings the total to $205 million that investment banks have paid to settle yield-burning claims. The settlement today resolves all remaining claims against Wall Street firms brought by Lissack for yield-burning, with the exception of Sakura.
"After five and a half years, it's great to have the first phase of yield-burning cases resolved," said Lissack, who filed his initial whistleblower lawsuit in 1995. "I look forward to reaching a fair and just result against Sakura as well."
Sakura: Forward supply contractor in advance-refunding deals
Sakura Global Capital, formerly known as Mitsui Taiyo Kobe Global Capital Inc., was a "forward supply provider" in many deals involving the advance refunding of tax-exempt municipal bonds.
States and local agencies refinance old municipal debt when interest rates decline by issuing tax-exempt advance-refunding bonds. The proceeds of the advance refunding bonds are invested and placed in escrows that are used to pay debt service on the old bonds. Forward supply agreements are often used to help keep the escrows fully invested.
Tax exempt advance refundings are "yield restricted." Federal law strictly prohibits escrow investments from earning higher aggregate yields than the yield earned on the advance refunding bonds. Any excess yield must be paid to the federal government.
Lissack's lawsuit charges that Sakura improperly boosted its profits by fraudulently "burning yield" on forward supply agreements purchased in connection with advance refundings. Yield burning on forward supply agreements occurs when the provider pays below market value for the agreement.
"Sakura saw an easy way to rip millions of dollars out of refunding transactions — millions owed to the federal Treasury," Kelton said. "Sakura probably felt that it wouldn't get caught because the transactions were so complex.
"The company will have to pay for cheating the government, just as other Wall Street firms did," she said.
Earlier this year, Sakura paid $2.1 million to settle the Oklahoma Transportation Authority's lawsuit that charged that Sakura secretly paid Stifel, Nicolaus & Co. more than $6.5 million for its help in assuring that Sakura would be awarded the forward supply agreement for the authority's 1992 refunding bond issue. Stifel also paid $2.1 million to settle the case.
Yield-burning settlement covers IRS liabilities
The settlement today was agreed to by the Justice Department, the Internal Revenue Service and NASD Regulation, the independent subsidiary of the National Association of Securities Dealers Inc. charged with regulating the securities industry. It covers potential False Claims Act, security law and IRS liabilities against the four investment banks.
First Union Securities will pay $12.7 million to settle charges of yield-burning by Everen Securities.
Kidder Peabody will pay $1.7 million. Two other investment banks will pay smaller amounts: Donaldson Lufkin will pay $104,000, and Bear Stearns will pay $94,000.
Lissack brought his lawsuit under the False Claims Act, which allows private citizens to sue companies that are defrauding the government and recover damages on the government's behalf. The case was filed in federal district court in Manhattan (the Southern District of New York).
For more information about this case, see the following news stories:
- "Four firms settle yield-burning suit; Sakura case unveiled," Lynn Hume, Bond Buyer, 11/1/00.
- "Securities firms expected to settle yield-burning case," John Connor, The Wall Street Journal, 10/31/00.