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Attorney General's News Release

July 28, 2011

Attorney General Koster announces agreement with former broker

Jefferson City, Mo. -- Attorney General Chris Koster today announced a settlement with Martin Kanefsky under which Kanefsky has agreed to pay $250,000 in restitution to state agencies and municipalities in various states. In Missouri, the City of Lee’s Summit will receive $23,753.

Kanefsky is the former chief executive officer of Kane Capital Strategies, Inc., a now defunct financial products and services firm that offered brokerage services to governmental and not-for profit entities seeking to invest the proceeds of municipal bonds. The settlement is part of an ongoing nationwide investigation of alleged anticompetitive and fraudulent conduct in the municipal bond derivatives industry.

The $250,000 in restitution will be paid to affected state agencies and municipalities in several states that entered into municipal bond derivative contracts for which Kanefsky acted as a broker between 2001 and 2006. Kanefsky has also agreed to cooperate in the multistate working group’s continuing investigation.

Kanefsky is the first broker to settle with the multistate working group. Previously, the state working group has entered into settlements with Bank of America, UBS AG & J.P. Morgan, settlements that altogether are valued at approximately $250 million.

The settlement between the Attorneys’ General’s working group and Kanefsky follows his plea agreement last year with the United States Department of Justice (DOJ). On August 12, 2010, Kanefsky entered into a plea agreement with the DOJ’s Antitrust Division in which he pleaded guilty to two counts of conspiracy and one count of wire fraud relating to his role as a broker or bidding agent hired to conduct a competitive bidding process for the award of investment agreements.

In his role as broker, Kanefsky solicited and received intentionally losing bids for certain investment agreements and gave coconspirators at major financial institutions who were bidding on the investment agreements information about the prices, price levels, or conditions in competitors’ bids. This practice, known as a "last look," is explicitly prohibited by U.S. Treasury regulations. The “last looks” allowed marketers at certain financial institutions – with whom Kanefsky had a close business relationship – an opportunity to see their competitors’ bids before giving their own final bid. The illegal "last looks" and bidding manipulation compromised a competitive bidding process and allowed coconspirator financial institutions to win investment contracts at artificially determined price levels.

"This settlement should be a warning to all who participate in schemes to defraud Missouri taxpayers: We will seek restitution, no matter how big or small you are," Koster said.

Koster commended Kanefsky for reaching out to the working group and agreeing to cooperate. He said the cooperation Kanefsky agreed to provide will be important as the working group moves forward on investigating other schemes with municipal bond derivative providers.

Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest proceeds of bond sales until the funds are needed, or to hedge interest-rate risk. In April 2008, several states, including Missouri, began investigating allegations that certain large financial institutions, including national banks and insurance companies, and certain brokers and swap advisors engaged in various schemes to rig bids and commit other deceptive, unfair and fraudulent conduct in the municipal bond derivatives market.

To date, the working group’s investigation of the municipal bond derivatives industry has revealed collusive and deceptive conduct involving brokers active in the municipal bond derivatives industry and marketers at various financial institutions with whom they had working relationships. The wrongful conduct took the form of "last looks," bid rigging, submission of non-competitive courtesy bids, and submission of fraudulent certificates of compliance to government agencies, among others, in contravention of U.S. Treasury regulations.

The overall objective of the scheme was to enrich the financial institution and/or the broker at the expense of the issuer – and ultimately taxpayers – by depriving the issuer of a competitive, transparent marketplace. As a result, state, city, local, and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they would have otherwise.



 
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