How would you construct the perfect financial crime?

First, you need the prey – someone who has a big pot of money to invest and needs financial advice. Like a large transit agency.

Then you line up bankers who conspire to make profits big enough to pay kickbacks to the advisers who set up the deals.

Finally, you hope no regulators are watching.

Such a plan worked for eight years and one of the entities defrauded was the Port Authority of Allegheny County. This spring the authority was one of the patsies featured in a New York City trial.

That trial was part of a six-year federal probe that has exposed political corruption, predatory practices and crooked financing that have diverted billions of dollars from building schools, roads and bridges in almost every state.

Nineteen people have been convicted or pleaded guilty to fraud charges. Five big banks have paid $745 million in fines and penalties. Some of that money has been returned to the victims: $26.5 million was given back to local governments in Pennsylvania, $4.9 million to schools and towns in the Pittsburgh area, and $256,000 to the Port Authority. [See table below for local reimbursements.]

A parade of witnesses provided a peek behind the curtain at how the conspirators operated and why it’s tough to catch the bad guys in these complex, but important, financial transactions.

No one in Pittsburgh wants to talk about it.

Stephen Bland, chief executive officer of the Port Authority, would not discuss the case, said the authority’s spokesman Jim Ritchie, because the transaction happened before he joined the agency in 2006.

Paul Skoutelas, who was CEO at the time, declined to talk. “Given the years that have passed,” he wrote in an email, “I don’t recall details.”

Board members of the authority at the time of the deal either could not be reached, declined to comment or did not speak directly to the issue. Dean Richardson of the law firm Eckert Seamans Cherin & Mellott said in an email that he was unable to respond about his role as bond counsel because of attorney-client relationship with the Port Authority, “as well as the ongoing legal proceedings.”

A raid in Los Angeles

In 2006, federal investigators raided Chambers, Dunhill, Rubin & Co., a municipal finance adviser in Los Angeles.

CDR’s role was to set up the schemes, according to court documents.

In 2001, the Port Authority sold $251 million in bonds to pay for construction projects, such as extending the Martin Luther King Jr. East Busway. The transit agency could invest the revenue before the money was needed for construction.

That was the big pot of money that the conspirators coveted.

CDR owner David Rubin figured he could represent the Port Authority in an investment auction, “if we went in low enough,” company vice president Doug Goldberg testified in federal court in Manhattan in April. CDR asked for an unusually low advisory fee of $5,000. The Port Authority jumped at it and hired the firm.

Rubin could ask for such a low fee because he knew that a General Electric Co. subsidiary wanted the Port Authority deal and was willing to pay a kickback.

The more money that GE made on the transaction, Goldberg testified, the more GE would kick back to his firm.

CDR and GE officials could reasonably expect that no one was looking. Historically, municipal financial advisers, and their activities, have been largely unregulated.

CDR did have to circumvent a tax law. It was required to get at least three secret bids. In an honest auction, the bank that pledges the highest interest rate wins the right to invest the public’s money.

CDR and several banks were not running honest auctions. Designated losers deliberately submitted low bids. Designated winners bid just enough to get the business.

Rubin admitted that his firm rigged the market from 1998 to 2006, and he and his employees cooperated with prosecutors. GE settled charges by paying $70.4 million in fines and penalties.

But three former GE bankers decided to fight the charges. Dominick P. Carollo, Peter S. Grimm and Steven E. Goldberg (no relationship to CDR’s Doug Goldberg) went on trial in U.S. District Court in Manhattan in April.

Prosecutors used the Port Authority transaction to illustrate how the advisers and the bankers skimmed public money.

Lowering the bid

On March 12, 2001, Doug Goldberg at CDR called Steve Goldberg at GE, according to a tape recording of the phone call played at the trial. American International Group, an insurance company, had offered a 4.97 percent return on the Port Authority’s $227 million construction fund, and that was the highest offer so far.

This is what a sham auction sounds like, according to the tape recording.

“AIG is pretty aggressive here,” Doug Goldberg says. “What are you thinking?”

GE bids 5.04 percent.

Doug Goldberg wants to shave more off the bid and he ignores the bid. “So, five percent,” he declares.

Steve Goldberg hesitates. “Five percent? … Five point oh oh?

“Yep,” Doug Goldberg responds.

“Done,” Steve Goldberg says.

The contrived auction took 37 seconds.

“I provided him information about my other bidders, told him approximately where he needed to be, and let him reduce his initial bid,” Doug Goldberg explained to the jury. CDR managing director Stewart Wolmark “told me to make sure that Steve won at a rate he was happy with.”

Two weeks after the deal was struck, GE kicked back $57,400 to CDR, disguised as a commission on an unrelated deal. CDR certified to the Port Authority that no bidders had received inside information and that the only money it had collected was its $5,000 fee.

The difference between GE’s top bid of 5.04 percent and final bid of 5 percent was just four one-hundredths of a percent. If applied to a personal savings account, no one would notice.

But tiny amounts multiplied by the Port Authority’s $227 million, and to billions of dollars from other municipal investments, add up to big profits for banks and big losses for transit agencies and schools and cities.

GE skimmed $12.4 million from 229 transactions and submitted 125 intentionally lower bids to allow other banks to win, according to the U.S. Department of Justice. The Port Authority was defrauded of at least $87,600.

The jury found the three bankers guilty of conspiracy to commit wire fraud and to defraud the United States. Last month a judge sentenced Steven Goldberg to four years in prison, and Grimm and Carollo to three years each.

Stalled rules

The obscure corner of public finance whose players swindled state and local governments for eight years remains lightly regulated.

The Dodd-Frank Act of 2010 requires municipal advisers to register with the Securities and Exchange Commission and to conduct themselves as fiduciaries. That means that advisers would have to put the public’s financial interests above their own and that regulators could monitor them.

But the fiduciary standard cannot take effect until the SEC defines what a “municipal adviser” is. The regulation has been stalled for two years, as the municipal finance industry fights over whom the rule should cover.

The federal probe into bid rigging in municipal finance continues.

Reach Bill Heltzel at 412-315-0265 or at

We don't have paywalls — but your support helps us bridge crucial information gaps.

Readers tell us they can't find the information they get from our reporting anywhere else, and we're glad to provide this important service for our community. We work hard to produce accurate, timely, impactful journalism without paywalls that keeps our region informed and moving forward.

However, only about .1% of the people who read our stories contribute to our work financially. Our newsroom depends on the generosity of readers like yourself to make our high-quality local journalism possible, and the costs of the resources it takes to produce it have been rising, so each member means a lot to us.

Your donation to our nonprofit newsroom helps ensure everyone in Allegheny County can stay up-to-date about decisions and events that affect them. Please make your gift of support now.

Bill Heltzel was a reporter for PublicSource between 2012 and 2014.