CDR Financial Products

http://online.wsj.com/article/SB123129065062659481.html
By SARAH MCBRIDE and LESLIE EATON

The financial company under federal investigation in the sale of state-issued bonds in New Mexico has a history of making campaign contributions in the states and localities where it has worked in a largely unregulated corner of municipal finance.

Federal authorities are investigating whether CDR Financial Products contributed to two political-action committees belonging to New Mexico Gov. Bill Richardson in exchange for more than $1.5 million in work advising the state's bond operations.

Mr. Richardson has denied any wrongdoing but withdrew his name Sunday from consideration for commerce secretary in the Obama administration, citing the investigation. A CDR spokesman, Allan Ripp, said the firm hasn't engaged in any illegal pay-to-play practices and "has steadfastly cooperated with any government inquiry."

Much of CDR's business involves helping cities and states invest the funds raised by the sale of government bonds slated for such projects as housing and transportation. Because municipal bonds are considered safe and are usually tax-exempt, investors accept lower interest rates. Complex federal regulations are supposed to prevent governments from reaping windfall profits by investing that low-cost money in higher-yielding securities. But for decades, Wall Street has come up with ways to get around those rules or to turn them to its own profit.

CDR has built an extensive business profiting from local bonds, but it hasn't always been smooth sailing. In 2007, the Securities and Exchange Commission settled a civil case against the firm involving three Florida bond issues going back to 1999. The commission contended the firm had a secret deal to collect fees on bond proceeds that had been invested and not yet spent for housing or health care. CDR didn't admit wrongdoing, but agreed to a cease-and-desist order prohibiting it from violating antifraud provisions of the securities laws.

"Some of the regulations are quite confusing, but Mr. Rubin has always tried to abide by the law," said Dick Beckler, a lawyer for David Rubin, CDR's principal.

The Justice Department has investigated the municipal-bond market over the years to determine whether financial firms won jobs in exchange for political donations or other favors. In 1995, the Municipal Securities Rulemaking Board cracked down on bankers by restricting certain employees of broker-dealers from making political contributions. But such firms as CDR aren't subject to the same restrictions because they don't directly underwrite deals, acting only as unregulated advisers.

Since 1995, Mr. Rubin has donated more than $212,000 to federal election campaigns across the country, according to Federal Election Commission records. He also frequently has given to races in states where his firm did business, including at least $67,500 to campaigns in Pennsylvania and $35,000 to races in California since 2001.

Mr. Rubin's donations were "not to be pay for play, but to be active in the political process," said CDR's Mr. Ripp.

Among the donations Mr. Rubin's company made to Mr. Richardson's political-action committees was a $75,000 contribution in June 2004 to Si Se Puede Boston 04. Mr. Richardson formed the committee in February of that year to "undertake activities in relation to participation of the Latino community in the 2004 Democratic National Convention," according to the group's filings with the Internal Revenue Service.

The donation was by far the largest received by the group, and accounted for close to a quarter of the $331,000 that it raised. (The next-largest donations were for $25,000.) The group spent tens of thousands of dollars on hotels and airfare at the convention, according to IRS filings, but also transferred about $90,000 to the Democratic Governors Association, after Mr. Richardson became its chairman in December 2004; such transfers are permitted under campaign-finance rules.

The U.S. attorney for New Mexico, Gregory J. Fouratt, has declined to comment on the investigation, and a spokesman didn't return phone calls Tuesday.

Federal prosecutors have also begun to probe another CDR deal -- a $96 million bond issue sold in 2002 for the University of New Mexico. A university spokeswoman said it was complying with subpoenas it had received for documents, which show CDR was to receive a $56,000 fee for participating in the deal, and had already gotten $10,000. CDR declined to discuss the investigation.

The 47-year-old Mr. Rubin was born in Mexico and founded his firm at the age of 25, originally calling it Chambers, Dunhill & Rubin, but Mr. Rubin invented the other to names to "show that the firm had some mahogany polish to it," said Mr. Ripp.

In early 2003, Mr. Rubin served as an unpaid adviser to then-newly elected Pennsylvania Gov. Edward Rendell, advising him on revenue issues. Between 2001 and 2005, Mr. Rubin donated $40,000 to Mr. Rendell's election committee. CDR's business with the state has included monitoring derivatives and working with its housing agency, said Mr. Ripp.

Mr. Rubin donated $15,000 to Philadelphia Mayor John Street's election campaign from 2000 to 2003, records show. In 2003, Philadelphia hired CDR to advise the city on purchasing derivative contracts to hedge its interest payments.

Shortly before the transaction, Philadelphia Treasurer Corey Kemp attended the Super Bowl using tickets provided by CDR to a Philadelphia bond lawyer. Mr. Kemp in 2005 was found guilty of fraud by a federal court and sentenced to 10 years in prison for steering bond-underwriting business to certain bankers in exchange for gifts and favors. CDR wasn't named in any charges.

According to a federal affidavit in the case, CDR, with the help of the bond lawyer, solicited bond business from Mr. Kemp. The affidavit says CDR promised to provide more tickets to secure future bond deals.

In another situation, the IRS is conducting audits into whether CDR and French bank Société Générale SA fixed the prices of financial products used for proceeds from bonds issued in places such as Albuquerque, N.M. The IRS has said it believes the companies structured fees in a way that violated arbitrage regulations. Société Générale declined to comment; CDR's Mr. Ripp called the issue "a historic, long-tailed matter."

In 2006, CDR's offices were raided by federal agents, who removed documents and hard drives. CDR says the raid was likely in connection with an IRS audit.

But the IRS audits have led to further problems for CDR. Eighteen lawsuits by city and county governments and agencies were filed against CDR last year. Many of the suits cite IRS auditing in their complaints that prices were fixed on their own municipal bonds.

According to a search of federal court records, 11 of the complaints have since been closed, with some dismissed and others transferred to different courts.

Mr. Ripp notes that the municipal-bond markets froze up last year as the credit crisis grew, leading many clients to complain about "perfect storm conditions that had nothing to do with the terms of the deals that CDR worked on." He also says that CDR appears on the suits as one of multiple defendants, "including some of the biggest and best-known financial institutions in the world."
—Rhonda Rundle, Liz Rappaport and Nicholas Casey contributed to this article.

Write to Sarah McBride at sarah.mcbride@wsj.com and Leslie Eaton at leslie.eaton@wsj.com