* Part of U.S. probe of $3.7 trillion muni bond market
* Fraud by ex-UBS employees spanned five years -prosecution
* Defense lawyer indicates an appeal is likely
By Basil Katz and Grant McCool
NEW YORK, Aug 31 (Reuters) - Three former UBS AG executives were convicted on Friday of conspiring to deceive U.S. cities and towns by operating a scheme to rig bids to invest municipal bond proceeds.
The verdict by a federal court jury in Manhattan is the latest victory for the U.S. Department of Justice in its broad investigation of the $3.7 trillion U.S. municipal bond market. The widespread probe has touched some of the world's largest banks.
The three defendants, Peter Ghavami, Gary Heinz and Michael Welty, were charged in 2010 as part of a probe focused on rooting out schemes to fix prices and rig bids on bond transactions. The former bankers denied wrongdoing and said government witnesses had lied to ensnare them.
Each defendant was found guilty on two counts of conspiracy. The jury also convicted Heinz and Welty on other charges, but found Welty not guilty on one wire-fraud count, and Heinz not guilty of witness tampering. Heinz was the only one of the three to face that charge.
Ghavami, a Belgian national, left UBS in 2007 as global head of commodities. Both Heinz, of Jersey City, New Jersey, and Welty, of New York, worked on UBS' municipal bond reinvestment and derivatives desk at the time of the suspected offenses.
Prosecutors said the men took part in separate fraud conspiracies between March 2001 and November 2006. The U.S. government has a 10-year window to bring criminal charges over suspected crimes that affect financial institutions.
In this case, since the three bankers were charged in December 2010, the case falls within the statute of limitations, according to rulings by the trial judge, Kimba Wood. The trial lasted a month.
"For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects," Scott Hammond of the U.S. Department of Justice Antitrust Division said in a statement after the verdict.
The two conspiracy charges involved rigging bids in 2001 and 2002 for guaranteed investment contracts, which cities and counties use to park proceeds from municipal bond sales.
The conspiracy charges carry a maximum of five years in prison each. The charge of conspiracy to commit wire fraud carries a maximum 30 years in prison and a $1 million fine. The judge did not immediately schedule sentencing dates.
Charles Stillman, a lawyer for Ghavami, told reporters: "We are obviously disappointed with the verdict. We are looking forward to an appeal... "
Lawyers for the other two defendants declined to comment.
Stillman told the jury in his closing arguments this week that his client "did nothing more than his job entirely in good faith and that he never intended to and never did cheat a municipality, the Internal Revenue Service, anyone."
During the trial, the jury heard from government witnesses who pleaded guilty to similar crimes and agreed to testify against the defendants, and also heard audio recordings of conversations between the bankers.
The jury began deciding the case on Wednesday afternoon.
"It was horrendously difficult. It was a big deal, what we had to weigh," one juror, who asked not to be identified, said after the verdict.
Nineteen people have been convicted or pleaded guilty to charges stemming from the bid-rigging investigation, Friday's government statement said. It said one company has pleaded guilty.
In July, former JPMorgan Chase & Co banker Alexander Wright pleaded guilty to one count of conspiracy to commit wire fraud for manipulating the bidding process for a June 2002 contract.
Wright and former UBS employee Mark Zaino testified for the government at the trial of the former UBS executives. Zaino pleaded guilty in 2010 to bid-rigging charges.
The case is USA v. Peter Ghavami et al, U.S. District Court for the Southern District of New York, No. 10-cr-1217.
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