WASHINGTON — James Hertz, a former vice president and marketer in JPMorgan’s municipal derivatives group, pleaded guilty Tuesday to three criminal counts for engaging in bid-rigging and fraud conspiracies connected with guaranteed investment contracts and other municipal finance agreements, the Justice Department announced.
He is the eighth individual to plead guilty in the department’s ongoing investigation of anticompetitive behavior in the municipal derivatives and GIC markets. As part of the probe, a federal grand jury has indicted CDR Financial Products, three current and former officials at that Beverly Hills-based firm, and three former financial services executives.
The Justice Department said Hertz agreed to plead guilty to conspiracy to restrain trade, conspiracy and wire fraud in the U.S. District Court for the Southern District of New York in Manhattan.
Though the combined charges carry a maximum penalty of 35 years in prison and $1.5 million in fines, Hertz is likely to face much more lenient penalties in exchange for his cooperation. However, the Justice Department said the maximum fines for each count “may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.”
The court filings say that Hertz, who lives in Cranford, N.J., was an employee of a wholly owned subsidiary of a Manhattan-based financial institution that was a provider of investment agreements and other municipal finance contracts, such as swaps, and only identifies that firm as Financial Institution C.
But regulatory filings show that Hertz worked at JPMorgan from 1998 until his employment was terminated in December 2007 and that he previously worked with Chase Securities Inc and Prudential Securities Inc. Hertz was advised that he was a target of a grand jury investigation regarding municipal securities business in December 2007, according to a Financial Industry Regulatory Authority report.
In its filing with the court, the Justice Department said Hertz and unnamed co-conspirators, including a New York City-based subsidiary of a foreign bank identified only as Financial Institution A, designated in advance which firm would be the winning bidder for certain investment agreements or other municipal finance contracts. Hertz and co-conspirators also agreed to submit intentionally losing bids for investment agreements or other municipal finance contracts that were steered to other financial institutions, giving the false appearance that the deals had been bid competitively in accordance with Treasury Department regulations and issuers’ requirements.
In addition, Justice said Hertz participated in a fraud conspiracy with an unnamed broker, identified only as Broker E, that was located in Minnesota from as early as 1998 until at least November 2006. Sound Capital Management, of Eden Prairie, Minn., was one of three GIC brokers whose offices were raided by federal agents in November 2006. Johan Rosenberg, head of Sound Capital, did not immediately respond for comment.
As part of the conspiracy, the department said the broker gave Hertz information about the prices, price levels or conditions in competitors’ bids, a practice known as a “last look,” which is explicitly prohibited by Treasury regulations.
On some occasions, the broker signaled Hertz to change his bids to specific numbers so that Hertz’s firm could make more money. Hertz and co-conspirators also submitted intentionally losing bids to the broker for certain investment agreements to make it appear that their employers had competed for those agreement or contracts, when in fact it had not. As a result of the bid manipulation, Hertz’s employer won investment agreements and other municipal finance contracts at artificially determined price levels, which deprived municipal issuers of money and property, Justice Department officials said.
Edward Gargiulo, an attorney representing Hertz, could not be reached for comment.