A former UBS AG municipal-bond executive told an ex-colleague to forget about a transaction as they discussed how to handle an expanding government probe of bond big rigging, the second man testified at trial.

Mark Zaino, who worked on the bond desk at UBS, told the federal court jury in Manhattan yesterday that Gary Heinz, one of three defendants in the municipal bond big-rigging trial, told him to "forget about" a transaction involving the Massachusetts Education Financing Authority. Zaino said he, Heinz and Michael Welty, a co-defendant, had rigged the bids for that deal.

Zaino, a key witness for the prosecution, told jurors what he thought Heinz expected him to do. "I understood that we should come up with a lie with a credible reason for the payments with respect to the Massachusetts transaction," Zaino said.

Heinz and Welty are charged along with Peter Ghavami, the former head of UBS's municipal-derivatives group, with conspiracy to defraud municipal-bond issuers and U.S. tax authorities by fixing the prices on the investing agreements.

Zaino spent much of yesterday identifying and explaining audio recordings during questioning by prosecutors. He walked the jury through 21 tapes, mostly of discussions between Welty and Peter Grimm, who worked at GE's Financial Guaranty Insurance Corp. Grimm was convicted in May of conspiracy to commit fraud by manipulating auctions for municipal bond investment contracts.

Possible Sentence

Zaino pleaded guilty to three criminal counts in 2010 and faces as long as 35 years in prison when he's sentenced. He began cooperating with the government in May 2006, after the Federal Bureau of Investigation revealed they had been investigating him for bond rigging.

Jonathan Halpern, a lawyer for Heinz, asked Zaino yesterday during cross-examination whether he hoped to avoid prison by testifying in the trial. Zaino responded he "obviously" would like to stay out of prison, though he said the government hasn't indicated what sentence it would recommend.

Halpern questioned Zaino about the "benefits" he received from the government in return for his testimony, listing as examples that Zaino hasn't served any time in prison, hasn't had his assets seized, and didn't face charges for the first four years of his cooperation.

The case is U.S. v. Ghavami, 10-cr-1217, U.S. District Court, Southern District of New York (Manhattan).

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