UBS Financial Services has agreed to pay more than $10 million to resolve charges that it circumvented the priority given to retail investors in certain municipal bond offerings, the Securities and Exchange Commission announced Monday.
According to the SEC’s order, between August 2012 and June 2016, “UBS violated retail order period restrictions in new issue municipal bond offerings it distributed by allocating bonds intended for retail customers to certain customers that were known in the bond industry as ‘flippers.’ The flippers obtained allocations of negotiated new issue bonds from UBS and then immediately resold or ‘flipped’ the bonds to other broker-dealers at a profit.” The SEC order finds UBS registered representatives knew or should have known that flippers were not eligible for retail priority.
In addition, the SEC order finds UBS registered representatives facilitated over 2,000 trades with flippers, which allowed UBS to obtain bonds for its own inventory, thereby circumventing the priority of orders set by the issuers and improperly obtaining a higher priority in the bond allocation process. “Retail order periods are intended to prioritize retail investors’ access to municipal bonds, and we will continue to pursue violations that undermine this priority,” said LeeAnn Gaunt, chief of the Enforcement Division’s Public Finance Abuse Unit.
The SEC order also stated the company’s written supervisory procedures “did not address retail order period restrictions to comply with federal securities laws and applicable [Municipal Securities Rulemaking Board] rules. UBS lacked policies and procedures to verify the retail eligibility of customer orders or the accuracy of zip codes. Under these circumstances, UBS failed to establish policies and procedures that would reasonably be expected to prevent and detect violations.”
The SEC previously brought charges of municipal bond offering “flipping” and retail order period abuses in four other instances: In August 2018 against Core Performance Management and RMR Asset Management; December 2018 against Chris Rosenthal, a former registered representative and municipal bond salesman for UBS Financial Services; September 2019 against former Wells Fargo Clearing Services trader Thomas Muldoon; and April 2020 against Boenning & Scattergood and two of its registered representatives.
Without admitting or denying the findings, UBS consented to a cease-and-desist order finding it violated the disclosure, fair dealing, and supervisory provisions of Municipal Securities Rulemaking Board Rules G-11(k), G-17, and G-27 and also failed reasonably to supervise within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934. The order imposes a $1.75 million penalty, $6.74 million in disgorgement of ill-gotten gains, more than $1.5 million in prejudgment interest, and a censure.
In related actions, the SEC instituted administrative proceedings against UBS registered representatives William Costas and John Marvin. The SEC’s orders find Costas and Marvin negligently submitted retail orders for municipal bonds on behalf of their flipper customers and that Costas also helped UBS bond traders improperly obtain bonds for UBS’s own inventory through his flipper customer.
Costas and Marvin agreed to settle the charges without admitting or denying the SEC’s findings and consented to orders finding they violated MSRB Rules G-11(k) and G-17. Costas agreed to pay disgorgement and prejudgment interest totaling $16,585 and a civil penalty of $25,000, and Marvin agreed to pay disgorgement and prejudgment interest totaling $27,966 and a civil penalty of $25,000.
Both consented to a 12-month limitation on trading negotiated new issue municipal securities. The SEC previously settled charges against Jerry Orellana, a former UBS executive director, for submitting retail orders to the underwriting syndicate from certain UBS customers who were flippers.