Derivative in United States

Derivative Definition

Coming from another; taken from something preceding; secondary; as, derivative title, which is that acquired from another person. There is considerable difference between an original and a derivative title. When the acquisition is original, the right (according to the definition of Derivative based on the Cyclopedic Law Dictionary) thus acquired to the thing becomes property, which must be unqualified and unlimited, and, since no one but the occupant has any right to the thing, he must have the whole right of disposing of it. But with regard to derivative acquisition it may be otherwise; for the person from whom the thing is acquired may not have an unlimited right to it, or he may convey or transfer it with certain reservations of right. Derivative title must always be by contract. Derivative Conveyances. Those which presuppose some precedent conveyance, and serve only to enlarge, confirm, alter, restrain, restore, or transfer the interest granted by such original conveyance. Read more about the meaning of Derivative in the legal Dictionaries.

Municipal Derivative Scandal

by Thomas Brom (2010)

Even by the heightened standards of the day, the municipal derivatives scandal is a beaut. It involves a vast bid-rigging and kickback conspiracy, implicating every major Wall Street bank and an assortment of brokers, dealers, and con artists. The perps allegedly manipulated the bidding for short-term investments in the proceeds from the sale of municipal bonds – an arcane but lucrative practice that violated the Sherman Antitrust Act and cheated bond issuers out of billions of dollars.

Official probes abound: The IRS began its investigation in 2005, the FBI in 2006, the Department of Justice (DOJ) Antitrust Division in 2007, two state attorneys general in 2008, and last year California’s attorney general and the Securities and Exchange Commission.

In October 2009 the DOJ indicted three executives in CDR Financial Products, a Beverly Hills?based muni derivatives broker, for bid-rigging, receiving illegal kickbacks, and fraud. In May a former director of UBS, the Swiss bank, confessed to bid-rigging, conspiracy, and wire fraud in the elaborate scheme.

And of course the scandal inspired follow-on civil suits – lots of them, coordinated in 2008 before District Judge Victor Marrero of the Southern District of New York (In re Mun. Derivatives Antitrust Litig., No. 08 MDL 1950 (J.P.M.L.)). The suits come in three bunches: a putative class action brought by public entities in multiple states represented by dozens of law firms, and two clusters of individual cases brought by public entities in California.

“The bid-rigging involved a small number of individuals who all knew each other,” says Stuart G. Gross, a principal at Burlingame’s Cotchett, Pitre & McCarthy who represents individual public entities against multiple defendants. “Their compensation was substantially bonus-based, and tied to the highest level of profits on the transactions. As alleged in our complaint, two muni derivatives traders said at a New York steak house they were glad they weren’t ‘kicking each other’s teeth out’ making competitive bids.”

But Wall Street fraud isn’t exactly news anymore. What’s extraordinary about the muni derivatives scandal is how it unraveled. The whistleblower was one of those two traders in New York, an employee of Bank of America (BofA), which was a counterparty to many of the transactions.

According to court documents, an investigation by BofA’s outside counsel in 2004 revealed its complicity in muni derivatives bid-rigging. By 2005 the IRS was closing in, and a year later the DOJ had convened a criminal grand jury.

At that point BofA was confronted by the classic “prisoner’s dilemma” – whatever the other co-conspirators choose to do, each will be better off confessing than remaining silent. As luck would have it, the DOJ’s Antitrust Division had a program built on that game theory. Its corporate leniency policy, promulgated in 1993, had just been expanded under provisions of the Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA) of 2004 (Pub. L. No. 108-237, codified at 15 U.S.C. section 1).

Derivative in Foreign Legal Encyclopedias

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