A former JPMorgan Chase & Co. banker who conspired to fix prices on municipal-bond investment contracts said he was aided by a Minnesota company that ran auctions for the deals on behalf of public agencies.
James Hertz, 53, who admitted fraud and conspiracy charges, said Sound Capital Management Inc., an Eden Prairie-based financial adviser to local governments, told him what a competitor bid so he could adjust his offer and win the deal, according to a transcript of his plea hearing Nov. 30. The charges say Hertz received tips about other bids from "Broker E," an unidentified Minnesota firm.
Sound Capital was one of at least three financial advisers that federal agents raided in 2006. The action was part of a national investigation of a conspiracy among banks to carve up the market for investments made with money that public agencies raise in the $2.8 trillion municipal-bond market.
The Justice Department hasn't accused Sound Capital of wrongdoing. Johan Rosenberg, the company's chief executive, said he has no indication that anyone at the firm will face charges and disputed Hertz's characterization.
"Every situation can be interpreted two ways," he said. "Sound Capital continues to stand by its practices."
Rosenberg is also chief executive of DerivActiv LLC, a firm that values derivatives for municipalities and non-profits.
Former employees of UBS AG, CDR Financial Products Inc. and two other brokers for local governments have pleaded guilty to running sham auctions for investments that delivered banks money at taxpayers' expense.
Hertz testified that information from Sound Capital boosted JPMorgan's earnings on the transaction.
"This resulted in JPMorgan Chase being awarded the contract at an increased profit," he said during his court appearance.
Hertz didn't return a message left at his home in Cranford, New Jersey. He is cooperating with the investigation, according to a Nov. 30 Justice Department news release.
Jennifer Zuccarelli, a JPMorgan spokeswoman, declined to comment. She said in a Nov. 30 e-mail that JPMorgan fired Hertz in 2007 when he failed to cooperate with the bank's internal investigation of the matter.
As a result of the federal probe, advisers have admitted to receiving kickbacks from bankers in return for steering investment work their way.
Eight people have admitted to participating in the conspiracy, including a former banker with Bank of America Corp., and nine others are fighting charges. Bank of America this month agreed to pay $137 million to settle state and federal investigations into the reinvestment business.
The investigation centers on investments that municipalities buy with money raised by selling bonds. The investments, known as guaranteed investment contracts, allow them to earn a return until the cash is needed for schools, roads or other public works. The contracts can be awarded on several factors, including dollar amounts, interest rates offered or an investment's duration.
The U.S. Treasury Department encourages competitive bidding to ensure that localities aren't receiving below-market returns. Overcharges also cost the federal government, because it requires localities to return some earnings on the investment of tax-exempt-bond proceeds to the Internal Revenue Service.
In the charges against Hertz, the government says he conspired with Broker E, which it said worked for local governments across the country.
During his court appearance, Hertz said Sound Capital helped him boost his earnings on a 2004 investment agreement, whose purchaser wasn't identified.
The bidding to win the contract was decided by which bank would provide the agreement with earliest termination. After he submitted the winning bid, Sound Capital let him revise it to extend the maturity closer to that of the second-highest bidder, which made the contract more profitable to the bank, he said.
"I did this with full knowledge that it would defraud the government," Hertz said.