Fifth Guilty Plea Entered in Ongoing Federal Muni Investigation

WASHINGTON — Martin Kanefsky, the former owner and chief executive officer of a Great Neck, N.Y.-based firm that helped municipal issuers secure guaranteed investment contracts for their bond proceeds, pleaded guilty to participating in two separate fraud conspiracies and wire fraud, the Justice Department announced Thursday night.

Kanefsky also agreed to cooperate with the Justice Department’s ongoing antitrust probe of the muni market, according to court documents filed in the U.S. District Court for the Southern District of New York in Manhattan.

The documents do not name Kanefsky’s former firm, only referring to it as Broker A, but an Internet search shows that it was Kane Capital Strategies, Inc. Kanefsky was not available for comment Thursday night.

Kanefsky’s firm was supposed to conduct competitive bidding processes for GIC providers. But the Justice Department claims he gave unidentified co-conspirator GIC providers information about the prices, price levels or conditions in competitors’ bids, a practice known as a “last look,” which is explicitly prohibited by U.S. Treasury regulations.

He also solicited and received intentionally losing bids for GICs and other municipal finance contracts.

As a result of this manipulation of the bidding process, the co-conspirator providers won contracts at artificially determined price levels, which deprived muni issuers of money and property, Justice said in court documents. Kanefsky also misrepresented to muni issuers or their bond counsel that the bidding process was in compliance with U.S. Treasury rules, leading the issuers to file false reports with the Internal Revenue Service that jeopardized the tax-exempt status of their bonds.

Kanefsky engaged in one fraud conspiracy from as early as October 2001 until at least November 2006, and in a second from as early as August 1999 until at least November 2006, the Justice Department said.

According to court documents, on or about April 7, 2005, an unidentified Marketer A asked Kanefsky if the rate he was prepared to bid on behalf of his firm, identified only as Provider A, a group of related financial services companies located in New York City and owned or controlled by a company headquartered in New York City, was too high. Kanesky stated that if the bid was too high, he would “shave a little.” Later the same day, Kanefsky told the same marketer to submit a bid that was lower than the one he had previously stated. The marketer lowered his bid and was awarded the investment contract, for a state financing authority.

The court documents said that on or about Feb. 21, 2002, Kanefsky told a marketer for another firm, identified only as Provider B, that it could lower the rates it had bid for an investment contract with a state housing finance agency. Provider B was ultimately awarded the contract and continues to make schedule interest payments at an artificially suppressed rate, the department said.

As for the wire fraud count, the Justice Department said that on or about June 30, 2006, through a wire transfer from New York to Minnesota, Provider A made an interest payment of about $38,770.39 to a state finance authority in Minnesota that was “artificially determined and supressed” because Kanefsky got a GIC provider to bid lower than it had offered to bid.

Each of the fraud conspiracies for which Kanefsky is charged carries a maximum penalty of five years in prison and a $250,000 fine.  The wire fraud charge carries a maximum penalty of 20 years in prison and a $250,000 fine.  The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Kanefsky’s guilty plea is the fifth to arise from the ongoing investigation into the municipal bonds industry, which is being conducted by the Justice Department’s antitrust division’s New York field office, the FBI and IRS Criminal Investigation.  The department is coordinating its investigation with the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York. 

Three former employees of Rubin/Chambers, Dunhill Insurance Services Inc., also known as CDR Financial Products (CDR), a Beverly Hills, Calif.-based financial products and services firm that acted as a broker of investment agreements and other municipal finance agreements, have pleaded guilty to bid-rigging and fraud conspiracies in relation to the ongoing investigation. A former employee of another financial services company also pleaded guilty to bid-rigging and fraud charges in relation to the ongoing investigation.

As a result of the ongoing investigation, three former financial services executives were indicted on July 27, 2010, for participating in fraud schemes and conspiracies related to the bidding for investment agreements.  In addition, CDR, two of its employees and one former employee were charged in October 2009 for participating in bid-rigging and fraud conspiracies and related crimes.  The CDR trial is scheduled to begin on Sept. 12, 2011.

Kanefsky’s guilty plea  is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force, the Justice Department said.