JPMorgan: The Losing Bid Was Part of the Deal

JPMorgan municipal bond bid rigging involved manipulated bids for investing municipal bond proceeds, conduct the bank admitted under its 2011 non-prosecution agreement. Municipalities put their money out for competitive bids to earn a return. The criminal case against a former municipal-derivatives employee described providers agreeing who would win, submitting bids intended to lose and promising future business to the losers. The issuer saw competing offers. Behind them was an agreement about whose turn it was to get paid.

The suppressed returns left municipalities with less money for the public work their bonds financed. Honest providers faced a bidding process shaped by private arrangements between their rivals.

What Municipal Investment Bids Were Supposed to Do

Municipal investment bids put money raised through bond sales to work until the issuer needed it. The return on that money mattered to the public bodies financing projects and operations, including schools, utilities and water districts. Bond proceeds could also support nonprofit hospitals or schools.

The criminal information’s account of the business explains why issuers bought these products. They usually spent bond proceeds over time, so they invested some or all of the money in agreements designed around their needs. Banks, insurance companies and other financial institutions competed to provide those agreements.

For a typical investment agreement, the providers quoted an interest rate and the highest rate generally won. Other bids could turn on a dollar price or a date. Municipalities also bought derivative contracts to manage the interest-rate risk associated with their bonds. The competitive term depended on the product, but the purpose was the same: let independent offers determine the deal.

A broker often ran the bidding for the issuer. The filing describes brokers drafting specifications, choosing whom to invite, emailing bid packages, taking bids by telephone at an appointed time and receiving confirmation by fax. The winning provider generally paid the broker’s fee and factored it into its bid. The broker therefore occupied a position where it could see the competing offers and influence which providers got a chance to make one.

How a Last Look Changed the Deal

A last look let a provider adjust its offer after learning what a competitor had bid. The criminal information charged that a broker supplied the former employee with competing rates and prices, sometimes the exact numbers, and that the employee used that information to change his institution’s bid.

The filing described the broker and employee discussing which competitors should be invited to bid and which should be left out. At bid time, the broker could tell the employee how much room he had to change his offer while still winning. Sometimes the broker suggested the precise change. According to the charge, the employee followed those suggestions, increasing the provider’s profits at the issuer’s expense.

One transaction makes the advantage concrete. In the information’s account of a town buying a portfolio of securities, the lowest price was supposed to win. The employee quoted a price and asked the broker:

He also asked whether the broker had other bids. The first broker representative said a co-owner was on the telephone with other bidders. A minute later, that co-owner called the employee and signaled that he could raise the price by $5,000 and still win. The information charged that he did so and the town awarded the agreement at the higher price.

The question invited the broker to tell him where his offer stood against other bids. In that account, the town was buying the same portfolio. The private call gave the provider room to charge more for it.

A Losing Bid Bought a Future Win

The former employee’s criminal information also described a reciprocal arrangement: providers agreed to lose particular bids in return for other contracts.

The charge said providers designated the winner before bids were submitted, agreed on bid prices or levels, and submitted intentionally losing bids with an understanding that the losing providers would receive other investment agreements or municipal-finance contracts. The losing offer had a job to do. It made the chosen winner appear to have beaten an independent competitor.

That arrangement could pay the cooperating provider through future business. For the municipality, the consequence was immediate: the filing charged that providers paid artificially determined or suppressed yields for the duration of the affected agreements. The lower return increased the winning provider’s profitability throughout those contracts.

The information described the employee as a vice president and marketer whose compensation, including his bonus, depended in part on revenues generated by the municipal-derivatives group.

The same kind of bargain appeared in a New York City school whiteboard case. In its account of a salesman’s guilty plea, the Justice Department described sham bids in which the salesman supplied the winning reseller and the losing conspirator received installation work. A future investment contract and an installation job served the same purpose: give the losing participant a reason to cooperate.

The Certification Said the Bids Were Independent

The criminal information charged that the employee and other participants sent false certifications claiming the bidding was competitive. Those certifications put an official-looking account of the process in the issuer’s hands while concealing how the bids had actually been arranged.

The filing describes competitive bidding designed to comply with federal tax rules for tax-exempt municipal bonds. Providers typically certified they had not consulted another potential provider about their bid and that everyone had an equal opportunity to bid. Brokers also often had to certify that the bidding complied with Treasury requirements. The no-last-look promise mattered because a provider privately told a rival’s price had an advantage the other bidders did not share.

According to the charge, intentionally losing bids made the process appear competitive to municipalities and, where applicable, the Internal Revenue Service. The alleged harm reached both the municipality’s investment income and, in some transactions, money owed to the Treasury.

How Is Bid Rigging Detected?

Bid rigging is detected by connecting the bids to the communications and arrangements behind them. In a municipal investment case, a rate sheet shows the offer. A broker’s message can explain why it changed, and records of later allocations can show what a deliberately losing provider expected in return.

That is where an insider’s account adds something a table of winning rates cannot. A desk employee may know when a number changed and who supplied the competing price. A broker may know why a provider was invited to submit a losing bid. An issuer-side or compliance employee may recognize the certification describing those offers as independent. We connect those accounts to the same transaction: the invitation, the bid, the communication and the agreement ultimately awarded.

Someone who knows the desk can explain the promise behind a losing bid and connect it to the business awarded afterward. The conversation gives the pattern its meaning.

What JPMorgan Admitted

Under its non-prosecution agreement, JPMorgan admitted employees’ manipulation of bids for investing municipal bond proceeds and managing bond-issuance risks from 2001 through 2006. The Justice Department’s July 7, 2011 account also reported the former employee’s guilty plea.

How Much of a Settlement Does a Whistleblower Get?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For municipal-finance conduct, our whistleblower experts trace how public money moved and what the certifications said to identify the case and reward opportunity your evidence can support.

Questions about the available reward programs or your own role in the bidding are part of that work with you.

You Know What Happened Before the Bid

Our whistleblower experts can connect a deliberately losing municipal-investment bid with the future work promised to the provider.