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Securities and Exchange Commission

settled a civil fraud case with 10 large Wall Street firms Thursday, calling for them to pay a total of $118 million in fines and ending several years of investigation into whether those firms overcharged state and local governments for Treasury securities used to refinance debt.

The firms that settled with the SEC, the

Justice Department

and the

Internal Revenue Service

constitute a virtual who's who of early-1990s Wall Street, including such giants as

Goldman Sachs

(GS) - Get Free Report


Salomon Smith Barney

, now a unit of


(C) - Get Free Report

, and

Prudential Securities


The settlement marks an end to several lawsuits filed against the investment banks in the 1990s over a practice known as "yield burning," in which firms overcharged municipalities for Treasury bonds. This practice "burns" away bond yields, as Treasury prices and yields move in opposite directions.

By artificially raising the prices for Treasury bonds, the Wall Street dealers could make the Treasury yields conform to Federal requirements that enable municipalities to refinance their higher-interest debt while still maintaining the tax-exempt status of their bonds.

Ordinarily, the price differential needed to satisfy federal requirements legally should be returned to the Treasury Department, but the firms instead pocketed the difference or potentially shared it with state and local treasurers.

William R. Baker, an SEC spokesman, said no individuals or municipalities were named in the case.

"Today's actions are among the most important steps in the commission's crusade to clean up public finance," Richard H. Walker, director of the SEC's enforcement division, said in a statement.

By settling the case, the firms ended the investigation without acknowledging or denying the findings. Each firm consented to a censure, a promise never to engage in yield burning again, and a fine. The SEC called for payments of $118 million, of which $103 million will go to the federal government and $15 million will go to 112 municipalities.

The 10 firms included in the settlement, many of which have been sold or merged into other companies, agreed to these fines:

Lehman Brothers ( LEH), $4.95 million

Merrill, Lynch, Pierce Fenner & Smith, now known as Merrill Lynch ( MER), $5 million

Morgan Stanley & Co., now merged into Morgan Stanley Dean Witter ( MWD), $2.5 million

Dain Rauscher , $12.8 million

Goldman Sachs, $5.2 million

PaineWebber ( PWJ), $26.2 million


Prudential Securities, $5.88 million

Salomon Smith Barney, $45 million

Warburg Dillon Read, $6.68 million

William R. Hough & Co., $3.264 million

The SEC's case focused on activity from 1990 through 1994, and charged the 10 brokerage firms with excessive, undisclosed markups on Treasury securities. It said the firms were knowingly charging the higher prices, even though they certified that the prices were at fair market value. In most cases, the falsified prices were crucial to maintaining the tax-exempt status of certain municipal bonds, the single attribute that makes municipal bonds attractive to investors.

In a declining interest rate environment, municipalities often refinance their bond debt by using proceeds from their old bonds to buy Treasury securities, and divert the interest from the Treasury issues to the holders of the municipal bonds. They are then free to go to the market and borrow fresh money at lower prevailing interest rates.

If any part of that transaction does not conform to federal guidelines, the government has the right to revoke the tax-exempt status of the municipality's bonds, making investors less likely to buy them.

Since the SEC's investigation begun in the mid-1990s, municipalities have largely switched back to using so-called Treasury slugs, or bonds tailor-made by the Treasury for refinancing purposes, to avoid potentially losing their bonds' tax-exempt status.

The case was brought to light by Michael R. Lissack, who, as an investment banker at the former Smith Barney in the early 1990s, blew the whistle on yield-burning practices by several Wall Street dealers. After Smith Barney dismissed him, he filed suit against the firms under the federal False Claims Act, which provides for whistle-blowers to receive 15% to 20% of amounts recovered by defendants.

With the settlement, Lissack stands to gain $20 million or more. Lissack could not be reached for comment.