WASHINGTON — The Justice Department is seeking to intervene and temporarily halt fact-finding by a group of localities in their class action suit against Wells Fargo & Co. and 15 other banks, broker-dealers and investment brokers for allegedly conspiring to rig bids and fix prices of investment and derivatives contracts in the municipal market.
Justice’s antitrust division recently made the request to U.S. Magistrate Judge Gabriel W. Gorenstein, who ordered the department to file a motion on the matter by April 27, according to a court filing.
The antitrust division appears to be seeking a reinstatement of a similar restrictive order on fact-finding or discovery that it obtained nine months ago from Gorenstein in the case, knowledgeable sources said.
In a June 24, 2009 order, Gorenstein banned Hinds County, Miss., Baltimore, the Mississippi Department of Transportation, the Bucks County, Pa., Water & Sewer Authority and four other localities from seeking tape recordings or transcripts of the conversations of employees of banks, broker-dealers and investment firms.
The order also severely restricted the localities from obtaining depositions and interrogatories from individuals.
The department was worried that information the localities obtained in the class action suit could compromise its criminal investigation of anticompetitive practices in the muni market, sources said.
But the previous restrictive order, or stay, expired on March 25 when Judge Victor Marrero, of the U.S. District Court for the Southern District of New York, refused to dismiss the localities’ class action suit against the firms. The localities filed the suit against the firms in March 2008.
The antitrust division essentially wants Gorenstein’s earlier order reinstated until April 2011, sources said.
The eight localities are expected to fight the division’s attempt to reinstate the restrictive order, or stay, according to sources close to the case. They may argue that such an order would be too broad, the sources said.
Thus far, the only legal action stemming from the Justice Department’s probe is a federal grand jury indictment of CDR Financial Products, its founder David Rubin, its former chief financial officer Zevi Wolmark, and vice president Evan Andrew Zarefsky. A trial has been scheduled in that case for Feb. 7, 2011, and is expected to last six to eight weeks.
In addition, three former CDR employees have pleaded guilty to criminal charges and have agreed to cooperate with the probe. They are Matthew Adam Rothman and Douglas Alan Goldberg, former CDR vice presidents, and Daniel Naeh, who has not worked for the firm in years but was believed to be living in Israel and acting as a bidding agent on muni deals.
The localities also could argue that a year-long restriction on fact finding would hurt their lawsuit. Court filings have suggested that the Justice Department has some 670,000 audio tapes of conversations between firm officials supporting its claim that there was a broad bid-rigging and price-fixing conspiracy in the municipal investments and derivatives market. It would take an individual four full years to listen to that many hours of recordings.
The local governments could claim key information about Justice’s investigation has already been made public. The department has included a list of transactions central to its probe in court filings.
Firms’ financial filings and the Financial Industry Regulatory Authority’s central registration depository have indicated which individuals have been targeted in the grand jury probe and which have received Securities and Exchange Commission Wells Notices and subpoenas in a parallel civil investigation.
The SEC sends Wells Notices to firms and individuals indicating its staff is preparing to file charges against them and giving them a chance to respond.
One of the firms in the class action complaint filed a court document last month listing the firms and individuals cited as co-conspirators in the antitrust division’s probe. That document was immediately removed from the public docket and sealed by Marerro at the request of firms that were cited.
The defendants in the class action suit, besides Wells Fargo, include: Bank of America, Bear Stearns & Co., JPMorgan Chase & Co., Morgan Stanley, National Westminster Bank PLC, Piper Jaffray & Co., Societe Generale SA, UBS AG, Wachovia NA, Natixis SA, Investment Management Advisory Group Inc., CDR Financial Products, Winters & Co., George K. Baum & Co., and Sound Capital Management Inc.
