2011 News Releases

Attorney General Schmidt: Municipal bond settlements return money to state, local entities

Release Date: Dec 28, 2011

TOPEKA – (December 28, 2011) – Kansas Attorney General Derek Schmidt today announced settlements with Wachovia and GE Funding Capital Market Services that are expected to return more than $250,000 to a state agency, municipalities and nonprofit organizations.

The settlements resulted from an investigation by several states and federal agencies. The ongoing nationwide investigation is looking into allegations of anticompetitive and fraudulent conduct in the municipal bond derivative industry.

“These settlements will return funds to Kansas municipalities and nonprofit organizations harmed by this conduct,” Schmidt said. “We are continuing to work with our counterparts in other states to investigate other companies that may have engaged in these unfair business practices.”

GE Funding has agreed to pay $30 million in restitution to affected state agencies, municipalities, school districts and not-for-profit entities nationwide that entered into municipal derivative contracts with GE Funding or its subsidiaries Trinity Funding Company, LLC, and Trinity Plus Funding Company, LLC, between 1998 and 2006. It is anticipated that $208,000 of that amount will be returned to Kansas entities harmed by the company’s practices.

A large portion of the Kansas funds will be returned to the Kansas Development Finance Authority. KDFA facilitates long-term financing for capital projects and programs, including healthcare, education, and housing, via the issuance of taxable and tax-exempt bonds or other securities. KDFA is the only multi-purpose, state-level finance authority serving Kansas.

The Wachovia settlement will return $54.5 million to state agencies, municipalities, school districts and not-for-profit entities nationwide that entered into municipal derivative contracts with Wachovia between 2001 and 2005. An estimated $58,000 of that amount will be returned to Kansas entities.

Once all eligible entities have been identified, those municipalities and non-profit agencies should be notified by the settlement administrator in the coming months.

Municipal bond derivatives are contracts used by tax-exempt issuers to reinvest bond proceeds until the funds are needed, or to hedge interest-rate risk. In April 2008, the states began investigating allegations that some financial institutions engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the bond derivatives market.

The investigation revealed improper conduct involving individuals at several financial institutions and certain brokers with whom they had working relationships. The wrongful conduct deprived bond issuers of a competitive, transparent marketplace. As a result, states, local governments and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they would have otherwise, thereby adding costs to taxpayers. Six settlements have been reached since the start of this investigation, including five this year.

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News releases issued prior to 2011 are available through an archive hosted by the Kansas State Library.