Yield-burning in municipal bond market violates False Claims Act

Phillips & Cohen represented a former investment banker in a prominent qui tam lawsuit against major players in the municipal finance market that first exposed the Wall Street practice of yield-burning.

More than two dozen investment banking firms - including Goldman Sachs & Co., Paine Webber Inc., Prudential Securities Inc. and Merrill Lynch Pierce Fenner & Smith Inc. - paid a total that topped $200 million to settle yield-burning charges contained in the qui tam lawsuit.

Former investment banker Michael Lissack brought the qui tam lawsuit. He revealed that some investment banking firms engaged in yield-burning, where they charged excessive prices for U.S. Treasury securities sold to municipalities in connection with certain types of tax-exempt bond refinancings.

These refinancing transactions - known as "advance refundings" - permitted municipalities to refinance their debt at lower interest rates when interest rates declined, and therefore lowered their borrowing costs. Investment banks improperly pocketed the profits made by overpricing the securities rather than returning those profits to the U.S. Treasury as required.

If you are aware of any firms engaging in yield-burning and would like to discuss this with our attorneys, please contact us.