Risk Management

Oakland Raiders? Suit Alleges GIC Bid-Rigging Scheme

The latest in a series of muni-bond lawsuits comes out of this Bay Area city.
Stephen TaubApril 25, 2008

The city of Oakland has sued a large number of financial giants and brokers alleging they engaged in a nationwide bid-rigging scheme involving the sale of guaranteed investment contracts (GICs). Among the targets of the class-action lawsuit are Bank of America Corp., AIG Financial Products Corp., Morgan Stanley, JP Morgan Chase, and Lehman Brothers.

Oakland’s complaint appears to be a tag-on to lawsuits filed last month by a number of states, cities, and school districts making similar allegations. In its lawsuit, Oakland claims that the financial firms engaged in a nationwide conspiracy to fix rates at low returns from January 1, 1992, through December 31, 2007. As a result of the alleged conduct, Oakland charges that investors have paid “higher supracompetitive” prices for these products, and therefore suffered injury to their business and property.

The lawsuit, which says the banks violated three antitrust laws — the federal Sherman Act, and California’s Cartwright Act and Unfair Competition Law — seeks triple damages as well as attorneys’ fees. The banks named in the lawsuit, which also include Wachovia, Bear Stearns, and Merrill Lynch, either declined to comment on the litigation or did not immediately return calls seeking comment.

In the lawsuit, Oakland explained that it has issued hundreds of millions of dollars of tax-free bonds since 1992, and used the proceeds to purchase GICs to earn a higher rate of return than if the city simply invested the proceeds in a savings account until it needed the funds. The complaint also said that because of the alleged conspiracy, there was no real competitive bidding for its business. As a result, Oakland and others received below-market returns from the investments.

Oakland’s allegations are related to federal criminal investigations launched by the Department of Justice and the Federal Bureau of Investigation dating back to November 2006, and a Securities and Exchange Commission probe of alleged securities fraud in municipal deals going back to 2000. An AIG spokesman notes that the company has been fully cooperating with the inquires.

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