Bermuda-based Security Capital Assurance Ltd. said yesterday that it had received a subpoena from federal prosecutors investigating whether banks and financial firms conspired to rig bids for investment deals with local governments.

Security Capital, which went public this month after being spun off by Bermuda-based XL Capital, said it intended to full cooperate with the investigation after the subpoena from the US Attorney’s Office for the Southern District of New York was served on its subsidiary XL Capital Assurance Inc.

The subpoena was served as US law enforcement agents seized documents from three brokers and subpoenaed companies including bond insurers and General Electric Co.

Bloomberg News reported that te probe by the US Justice Department centres on guaranteed investment contracts, which municipalities buy to hold bond money until funds are needed to pay for projects. The contracts are what banks and brokers used to invest at least $7 billion of proceeds from bonds issued by local governments across the US; that money was never spent to benefit the public, according to an October 4 Bloomberg News report.

“There’s a lack of transparency in the whole market,” said Dan Veres, executive vice president of Grant Street Group, a Pittsburgh-based firm that conducts guaranteed investment contract auctions on its Web site. “It is ripe for abuse, the whole process.”

Federal Bureau of Investigation agents searched CDR Financial Products of Beverly Hills, California, yesterday, said Laura Eimiller, a spokeswoman for the FBI in Los Angeles, without providing further details.

CDR had a secret agreement with the provider of a guaranteed investment contract for bonds issued in 1999 by an authority in Gulf Breeze, Florida, Bloomberg News reported on October 4. The deal allowed CDR to increase its fees if none of $220 million in bond proceeds was used for its intended purpose —affordable housing.

Financial Security Assurance Holdings Ltd., a unit of Brussels-based financial services company Dexia SA, yesterday said it was subpoenaed by the Justice Department.

FGIC Corp., a New York-based bond insurer, also received a Justice Department subpoena, Brian Moore, a spokesman for the company, said today. Moore said FGIC, a former unit of Fairfield, Connecticut-based General Electric, had exited the guaranteed investment contract business in 2003 when GE sold the company. The outstanding contracts remained with GE.

Moore said FGIC was unaware of any specific issues and the company is cooperating fully. GE also received a subpoena as part of the US probe, said GE spokesman Russell Wilkerson. He said GE, the world’s second-biggest company by market value, is cooperating fully with the request.

Federal investigators also took documents yesterday from Investment Management Advisory Group Inc., a broker of guaranteed investment contracts and a municipal derivatives adviser based in Pottstown, Pennsylvania, said Gene Grabowski, a spokesman for the firm, known as IMAGE.

The actions by the Justice Department show that an investigation into how banks compete for the right to reinvest money raised in the $2 trillion tax-exempt bond market has expanded beyond the IRS. The IRS has been looking into whether brokers awarded the work to favoured banks, potentially boosting the cost of the investment agreements and depriving the federal government of tax revenue.