The municipal finance industry is rife with fraud, and it's often industry insiders who expose fraudulent schemes. Yield-burning is one way banks can defraud both the federal and municipal governments. Phillips & Cohen represented a former investment banker in a prominent qui tam (whistleblower) lawsuit against major players in the municipal finance market that first exposed the Wall Street practice of yield-burning and returned more than $200 million to the government.
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 millions to settle allegations that the banks had charged excessive prices for U.S. Treasury securities sold to municipalities in connection with certain types of tax-exempt bond refinancings known as "advance refundings."
Mispricing of securities can reach far beyond yield burning on traded securities, however. For example, frauds in the municipal finance industry also extend to mispriced or other defects in "designer" investments like municipal derivative contracts, swaps, forward supply and other guaranteed-investment contracts which may also be susceptible to bid-rigging.