Recently, I read with much interest a story wherein three former UBS bankers were found guilty of rigging bids in the 3.7 trillion dollar municipal bond market. The verdict was returned last week by a federal jury in Manhattan.
Bid rigging is a form of fraud in which the competitive bidding process for government or public contracts is compromised by the parties submitting the bids. For instance, often the commercial contract is promised in advance to one party even though other parties are also invited to present bids in an effort to give the appearance of a fair process. The predetermined winner is then tipped off as to the price of the other bids to ensure that the contract is obtained at a lower price than would have been possible in a competitive bidding scenario. This form of price-fixing rigs both the eventual recipient of the contract and the price of the bid which causes economic harm to the entity seeking the bids.
In relation to the U.S. municipal bond market, the indictment alleged that the UBS bankers manipulated the competitive bidding process when selecting firms to invest the proceeds from the bond sales by prearranging who would win the bid and what interest rate would be paid to the issuer. By fixing the interest rate, prosecutors alleged that the defendants cheated American cities and towns because a competitive process would have resulted in a higher interest rate and greater returns to the issuer-turned-investor.
The defendants will be sentenced at a later date and could face substantial time in federal prison. In determining the length of the sentence. a key issue will be the amount of loss suffered by the bond issuers. The amount of loss will be determined under the U.S. Sentencing Guidelines and is directly related to the length of prison exposure to a convicted defendant. In this case, the amount of loss is somewhat speculative as it is difficult – if not impossible – to determine the actual interest rate that the winning bid would have brought had there not been any rigging. I am sure that the attorneys for the defendants will strongly contest any calculation of loss to ensure that their clients have the best chance at a minimum sentence.