SEC Settles Case Against Underwriter for Pricing Related Fraud in the Municipal Securities Market
The SEC announced its settlement of charges against a St. Louis-based brokerage firm and the former head of its municipal underwriting desk. The firm and its head were penalized for overcharging customers for new municipal bonds, and for separate misconduct related to supervisory failures in the firm's review of certain secondary market municipal bond trades. The SEC found that instead of offering bonds to customers at the initial offering price, the brokerage firm took new bonds into its own inventory and offered them to customers improperly at higher prices. In other instances, the SEC found that the brokerage firm refrained from offering the bonds to its customers until after trading commenced in the secondary market, and then offered the bonds at prices that were higher than those initially offered.
According to the SEC, the firm's supervisory failures concerned dealer markups on secondary market trades that involved the firm's purchase of municipal bonds from customers, which it then added to its inventory and sold to other customers - often within the same day. Because of the short holding periods, the firm "faced little risk as a principal and almost never experienced losses on these intraday trades." The SEC's investigation found that the firm's supervisory system was not designed to monitor whether the markups it charged for certain trades were reasonable.
The firm consented to the order without admitting or denying the SEC's findings that the firm willfully violated Sections 17A(a)(2) and (3) of the Securities Act of 1933, Section 15B(c)(1) of the Securities Exchange Act, and MSRB Rules G-17, G-11(b) and (d), G-27, and G-30(a). The firm also failed to supervise secondary market trades adequately within the meaning of Section 15B(b)(4)(E) of the Exchange Act, and agreed to pay more than $20 million overall, including nearly $5.2 million in disgorgement and prejudgment interest that will be distributed to current and former customers who were overcharged for the bonds.
See: SEC Press Release; SEC Order against Brokerage Firm. See also: Public Statement on Enforcement Action by Commissioners Aguilar, Gallagher, Stein and Piwowar.Related news: FINRA Updates FAQ on Eligibility Proceedings for Firms Participating in MCDC Initiative (May 11, 2015); SEC Modifies Municipalities Disclosure Initiative (July 31, 2014); SIFMA and Other Associations Submit Comments to SEC on Structure of MCDC (July 25, 2014).