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'Yield burners' burned?
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April 23, 1998: 8:41 a.m. ET
CoreStates reportedly ready to settle with Feds in illicit muni-bond case
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NEW YORK (CNNfn) - Three Federal agencies are expected to announce Thursday a joint enforcement action against a Philadelphia bank at the center of a three-year probe into alleged "yield burning" abuses in the municipal bond market, according to a published report.
In yield burning, municipal bond underwriters mark up the price of bonds sold to complete complex muni-bond transactions known as advanced refundings.
On Thursday, the Securities and Exchange Commission, the Internal Revenue Service and the Justice Department are expected to jointly divulge the terms of a settlement with CoreStates Financial Corp. covering several municipal bond deals by the bank's brokerage arm in the early to mid-1990s, the Wall Street Journal reported.
The bond deals under scrutiny apparently were designed to replace older, high-interest muni bonds with low-cost securities that enabled governments to save on interest expenses. In so doing, however, the bond underwriters "burned" down yields, securing a windfall of millions of dollars in profits that federal authorities contend were illicit gains.
CoreStates is expected to pay $3 million to resolve the case, which centers on municipal bond activities by Meridian Capital Markets, the Journal reported. CoreStates acquired Meridian in 1996. More recently, CoreStates itself was bought out by First Union Corp. in a blockbuster deal slated to close by the end of this month.
The case apparently marks the first instance in which the SEC and the IRS have collaborated on enforcement in a case involving yield burning.
The action effectively places the onus of sanctions on the yield burners themselves -- the initiators of the practice -- rather than municipalities or bondholders, which are only indirectly implicated.
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