NEW YORK (Bloomberg) ? Prosecutors investigating bid-rigging in the municipal bond market have brought their case to a federal grand jury in New York, a person with knowledge of the case said.

Ralph Giordano, chief of the New York office of the US Justice Department?s Antitrust Division, and Rebecca Meiklejohn, a trial attorney, are leading the criminal investigation, the person said. Also participating in the probe are agents from the Federal Bureau of Investigation?s New York office as well as the Internal Revenue Service, according to the person.

Giordano and his staff won the conviction of former Sotheby?s Holdings Inc. chairman A. Alfred Taubman, found guilty in 2001 of plotting with arch-rival Christie?s International Plc to fix sellers? fees. Meiklejohn has prosecuted anti-competitive practices in the advertising industry.

?It?s a very big deal that this is now a criminal investigation, it ratchets up the stakes,? said David Gourevitch, a former Securities and Exchange Commission enforcement attorney who now has his own practice in New York.

Prosecutors are probing whether banks, financial firms and brokers conspired to rig bids on contracts bought by local governments when they invest money from bond sales. The municipalities invest the money until it is needed to pay for schools, roads and other projects.

The investigation grew out of an IRS inquiry that found dozens of municipal bond deals failed to pay $100 million in taxes. It is the broadest criminal probe of the industry. The Justice Department has subpoenaed more than a dozen banks and insurers and raided three brokers in a search for evidence of bid rigging in the market where state and local governments nationwide raised more than $400 billion last year.

Bermuda-based XL Capital Ltd. last month said a unit received a subpoena from a federal grand jury in New York?s Southern District drafted by the Antitrust Division ?seeking documents in connection with an investigation into the municipal guaranteed investment contract market and related products.?

Giordano declined comment, referring questions to Justice Department officials in Washington. Meiklejohn, 56, couldn?t be reached. Kathleen Blomquist, a Justice Department spokeswoman, would only say she is authorised to confirm the government is conducting an ?investigation of anti-competitive practices in the municipal bond industry?.

Giordano and Meiklejohn are ?up to the job,? said Gourevitch. ?At the end of the day, depending on the outcome of the prosecution, it may be a life-altering deal for some individual.?

Taubman was convicted by a federal jury in New York and sentenced to serve a year and a day and fined $7.5 million. His lawyers had asked the sentencing judge to spare him a prison term, saying he was in poor health. JPMorgan Chase & Co. banker Charles LeCroy was sentenced to three months in prison and fined $50,000 last year after pleading guilty to federal fraud charges in a municipal finance corruption scandal in Philadelphia.

Meiklejohn has prosecuted executives in the advertising industry for anti-competitive bidding in a federal probe that also involved the IRS and FBI.

She also led a case that delved into the relationship between some advertising agencies and printers. Mitchell Mosallem, a former executive with New York-based Grey Global Group Inc., and ten others were convicted in 2003 in the investigation, which uncovered bid-rigging, bribery and fraud in the advertising, printing and graphics industry.

Meiklejohn also successfully prosecuted Michele Komack, a former executive at New York-based Home Box Office Inc. who pleaded guilty in 2004 to bid-rigging, antitrust-conspiracy and tax charges. In that case, Meiklejohn said Komack received about $439,000 in kickbacks from vendors to whom she steered business. Evidence showed Komack obtained free designer shoes, foreign trips and parties at the Plaza Hotel as part of the scheme.

George Stamboulidis, a former federal prosecutor who is monitoring Merrill Lynch & Co.?s and Bank of New York Co.?s compliance with US government settlements, said the investigation is going to have long-lasting repercussions.

?It is something that?s going to be around for awhile and affect a lot of firms and banks,? said Stamboulidis, now a partner at Baker & Hostetler in New York. ?Banks are going to be scrutinising more of their deals and there will be more scrutiny on all financial institutions. There are some serious allegations about a lack of transparency in the market.?