The early 1990s were fat years for investment banks that specialized in public finance. Business was plentiful, as falling interest rates spurred many local government agencies in Florida to refinance outstanding debt. Some banks profited from the traditional underwriting of new bonds, while others earned advisory fees. In what became a common practice, many investment firms also pocketed millions of dollars off the sale of Treasury securities to their local government clients.
When refinancing old debt, municipalities typically invest the proceeds from new bond issues in securities. Federal law limits the interest a municipal government can earn on these securities, and special federal low-interest Treasury securities were available to municipalities. But instead of advising their clients to buy the special securities, the brokerages sold them regular Treasury securities at higher-than-market prices. Paying higher-than-market reduced the yield on the bonds to legally acceptable levels. The practice of reducing the yield became known as "yield-burning." The investment firms justified the markups on the basis of the risk they assumed when buying the Treasury securities on behalf of the municipalities. The brokers argued they would be at risk if they purchased the Treasuries and the bond issue didn't go through and in the meantime the price for those securities fell.
At least one Florida banker disapproved. In 1994, Joseph K. Mooney objected to his firm's plans to overcharge a client, the city of Gulf Breeze, for its South Santa Rosa Utility System Bonds, on the purchase of Treasury securities as part of a refinancing deal. When he confronted his bosses at Masterson, Moreland & Co. about his concerns, he was told, "That's the way it is," says Erika Kelton, a Washington, D.C., attorney who represents Mooney, who declined to be interviewed. Rather than go along, Mooney quit the Houston-based firm.
Even before the showdown over the Gulf Breeze bond issue, Mooney had misgivings about the yield-burning practice, according to Kelton. "Public finance in Florida is a small community," Kelton says. "He knew all the players. Bankers talked about how they were gouging their clients, making big profits. Joe Mooney is just not constitutionally like that. He has integrity. He's not in it to scalp his clients."
Mooney set up his own small public finance firm in Pensacola, Joseph Mooney & Co. But having broken ranks with the industry, he found it difficult to land many deals. "People made it difficult for him to get work," Kelton says. As a result, his annual income was cut in half. He sold a large waterfront house, a beach condominium and a yacht and moved into a small 1950s-era two-bedroom home in an older section of Pensacola. He traded in his Mercedes for a Toyota Camry.
Still troubled over what he believed to be an unfair practice, Mooney decided to go to the authorities. It wasn't an easy sell. He met with officials in the Florida Attorney General's Office. He had several discussions with the U.S. Attorney. He talked with the IRS. He even talked with a top official in the U.S. Treasury Department's Office of Tax Legislative Council, the office that specializes in municipal tax-exempt bond issues. Nothing happened.
In all fairness, says Kelton, yield-burning is an arcane topic. By early 1997, nearly three years after he had gone to the government agencies, Mooney still hadn't gotten any response other than, "We'll look into it."
Meanwhile, a former investment banker in New York named Michael Lissack also had been raising questions about yield-burning. Instead of waiting on the feds to take action, Lissack filed a federal false claims suit against some of the biggest names in Wall Street.
Under the Civil War-era False Claims Act, individuals can sue on behalf of the federal government to collect damages from companies that have allegedly defrauded the government. In 1986, Congress strengthened the law with heftier financial incentives. Individuals who file a false claims act can collect anywhere from 15% to 25% of any settlement.
Mooney filed his own false claims suit against Smith Barney (now Salomon Smith Barney), a firm Lissack didn't include in his complaint. Kelton's law firm, Phillips and Cohen, which specializes in false claims cases, represented both Mooney and Lissack.
Most of the settlement -- $120 million -- goes to the U.S. Treasury, with the rest going to the state and local governments that issued bonds. Two St. Petersburg-based bond firms are part of the settlement. Raymond James & Associates will pay $3.41 million, while William R. Hough & Co. will pay $3.26 million. "I am pleased that, through our settlement, the tax-exempt status of our clients' transactions is protected," says W. Robb Hough, president of William R. Hough & Co. "We are pleased to put this matter behind us."
Mooney, now 55, still lives in Pensacola, where he's president of his own firm, Government Credit Corp. Mooney and his lawyers stand to collect about 20%, or $9 million, of the $45 million Salomon Smith Barney agreed to pay. Mooney, through his attorney, says he'll use his take to buy a college prepaid tuition plan for a grandson. Some of the money will go to his son, who works with him, and the rest will be used to build his retirement account. Kelton says Mooney is "gratified" that yield-burning was exposed and that his allegations were finally taken seriously. "He's pleased that those who took money fraudulently from the federal government had to pay it back.''