Risk Management

City Investment Contracts Draw SEC’s Eye

Financial Security Assurance, a guaranty insurance provider, may be charged with bid rigging in the awarding of municipal contracts.
Stephen TaubFebruary 8, 2008

The Securities and Exchange Commission is weighing whether to bring civil charges against Financial Security Assurance Holdings for bid-rigging in connection with the investments of municipalities.

Financial Security, a subsidiary of Belgium-based Dexia Holdings, provides financial guaranty insurance on public finance and asset-backed obligations. The charges are related to how guaranteed investment contracts are awarded. Local governments use GICs to invest proceeds of municipal bond offerings until the money is needed to pay for projects.

The Internal Revenue Service also is involved. The IRS is investigating whether the auctions in which banks compete for investment work from local governments are being rigged, potentially boosting the cost to taxpayers and depriving the federal government of tax revenue.

FSA said in a regulatory filing that the SEC had sent a Wells Notice saying it may begin a civil injunctive action or institute administrative proceedings against the company. In November 2006, FSA and a number of other financial institutions received a subpoena from the SEC relating to this matter.

Through its wholly owned subsidiary, Financial Security Assurance, FSA primarily provides financial guaranty insurance on asset-backed and municipal obligations. It was initially owned by a number of large insurance companies and other institutional investors when it was created in 1985. It went public in 1994 and became a direct subsidiary of Dexia Holdings in 2000.

4 Powerful Communication Strategies for Your Next Board Meeting