OVERVIEW OF LEADING UNDERWRITERS

According to Thomson Financial, 2003 was a record year for long-term new municipal issuance. Excluding short-term notes and private placement issues, the total for the year ending December 31, 2003 was $379.1 billion -- a 6.5 percent increase compared to 2002.

The top ten underwriters brought $265.4 billion of new long-term issuance to market in 2003, or 70 percent of the total business conducted by the industry.  

The following table ranks the top 10 managing underwriters for long-term municipal issuance (includes both competitive and negotiated sales) in 2003: 

Source: Thomson Financial

The ten largest underwriters for U.S. long-term municipal new issuance in 2003 were financial services companies that operate globally. Except for UBS AG, which is a Swiss public company, and RBC Dain Rauscher, which is wholly owned by the Royal Bank of Canada, all the others are publicly traded U.S. companies.

The companies are competitors in most of their business segments, including investment banking, which usually handles the underwriting business.

While the volume of municipal bonds issued has soared in recent years (particularly revenue bonds backed by state appropriations), they have not been without controversies. There are numerous examples of citizens challenging the constitutionality of such debt.

CURRENT LEGAL PROCEEDINGS

All of these companies, except UBS and the Royal Bank of Canada, disclose numerous legal proceedings against them in their most recent 10-Ks filed with the U.S. Securities and Exchange Commission (SEC). The number of cases reported by UBS and the Royal Bank of Canada in their equivalent SEC filings for foreign companies (20-Fs and 40-Fs) is small by comparison.  

The U.S. companies have been accused of violating state and federal laws and rules pertaining to the same issues in a number of cases. For example, except for Morgan Stanley, all seven U.S. companies have been named as defendants in the Enron case. A majority of the U.S. companies are defendants in the WorldCom case. In May 2004 Citigroup agreed to pay $2.65 billion to settle investor lawsuits related to WorldCom.

Other recent high profile cases in which one or more of the leading underwriters are involved in litigation include Global Crossing, Adelphi Communications, Dynegy and Parmalat. A number of the companies have been embroiled in the mutual funds scandal. 

In many cases, the companies have settled without admitting wrongdoing, which is a common practice. Some of the cases are still ongoing.   

All the U.S. companies have been accused of conflict of interest related to research, failure to disclose such matters and IPO (initial public offering) allocation practices. Broadly, the allegations against the companies involve violation of various state and federal securities laws and state unfair competition statutes, breach of fiduciary duty, and conspiracy (e.g., conspiring to inflate prices of securities and conspiring to fix the fee paid to initial public offerings of securities in violation of antitrust laws), among other matters.

MUNICIPAL BANKRUPTCIES, FRAUD AND OTHER LITIGATION

Orange County: Merrill Lynch and Other Securities Firms

In the Orange County bankruptcy case, the largest municipal bankruptcy in U.S. history, 14 firms, including 5 leading Wall Street investment houses were sued by bondholders in 1995. In addition to settling with bondholders, in June 1998, Merrill Lynch agreed to pay Orange County $400 million to settle civil charges.¹ The company also paid $30 million to end a criminal investigation against its investment dealings with Orange County.²

State of California and Goldman Sachs

In November 1995, the State of California filed a lawsuit against Goldman seeking $586 million in damages from the securities firm for failing to disclose that it represented both buyer and seller in the sale of two hospitals. The suit accused Goldman of breach of fiduciary duty and violating the state's Fair Political Practice Act.

Triad Healthcare Corp., which bought two Los-Angeles based hospitals from Nu-Med Inc., had been specifically created by Nu-Med to buy the two private hospitals. The lawsuit alleged that Goldman hid the fact that it represented both Triad and Nu-Med in a deal that involved the sale of $142 million of taxable notes that a decade later were refinanced with $167 million in certificates of participation. Triad later defaulted on the certificates of participation, which were backed by state insurance. The state was forced to pay debt service after the default, leading to investigations that revealed Goldman's role in the deal.

The lawsuit charged that Goldman created the illusion of an arm's length transaction with an independent public benefit corporation (the issuer of the certificates) and also negotiated a price that was preset. The state was eventually paid $31 million by Goldman. The company also agreed to pay $20 million more if the state did not receive payments from other parties involved in the case.⁴

Political Contributions: Merrill Lynch and Other Securities Firms

Other high profile issues that have been the subject of investigations in relation to the municipal bond business include political contributions made by underwriting firms.  

In the 1990s, a flurry of investigations were initiated across the country, which were partly triggered by the New Jersey Turnpike Authority scandal, in which underwriters allegedly used political contributions to get bond business from the administration of Governor Jim Florio. The investigation focused on whether Merrill Lynch, a senior manager in the syndicate, had steered business to a local firm to win two of the largest Turnpike refunding deals. After Merrill Lynch found irregularities in the account, it placed three senior officials on administrative leave. Florio's chief of staff, Joseph P. Salema, pleaded guilty to a criminal charge of securities fraud in the wake of the investigations.⁷

Around the same time, the Securities and Exchange Commission also reprimanded the National Association of Securities Dealers for lax enforcement of the Municipal Securities Rulemaking Board's Rule G-37, which was intended to deter pay-to-play practices in the municipal bond market. 

Denver International Airport Bondholder Lawsuit