WASHINGTON -First Union Securities Inc. and three others have agreed to pay $14.7 million to settle federal yield-burning charges stemming from their business in the municipal securities market, said lawyers for the whistleblower behind the cases.
Phillips & Cohen in Washington said the settlement, which the law firm announced Tuesday, was signed by the Justice Department, the Internal Revenue Service, and NASD Regulation, an independent subsidiary of the National Association of Securities Dealers.
Spokesmen for First Union Securities parent First Union Corp. and the three other firms could not be reached for comment. The Justice Department, the IRS, and NASDR did not issue statements Tuesday. A Justice Department spokesman declined comment.
The settlement would be the sixth such agreement between the federal government and dozens of securities firms since 1995, when a lawsuit filed by Phillips & Cohen client Michael Lissack, a former Smith Barney managing director, accused 20 firms of yield-burning.
Yield-burning is when brokerages charge too much for Treasury securities that state and local governments buy in the process of refinancing outstanding debt. Such overcharges are against federal tax law, which means the bonds issued by the municipalities could lose their tax-exempt status and bondholders could be left holding the tax bill.
First Union, of Charlotte, N.C., will pay the bulk of the settlement - $12.7 million - to settle charges against Everen Securities, according to Phillips & Cohen (First Union bought Everen in 1999). Kidder Peabody & Co., a former subsidiary of General Electric Co., will pay $1.7 million; Donaldson, Lufkin & Jenrette Inc. $104,000; and Bear Stearns & Co. $94,000, the law firm said.
In April, Salomon Smith Barney, Paine Webber Group Inc., and other brokerages agreed to pay $140 million to settle yield-burning charges. In August, Banc One Capital Markets and seven other firms agreed to pay a total of $13.5 million. Since 1998, securities firms have paid $205 million to settle yield-burning charges.