WASHINGTON — A Financial Industry Regulatory Authority hearing panel has fined Syosset, N.Y.-based David Lerner Associates Inc. $2.3 million and suspended head trader William Mason for six months with a $200,000 fine for charging excessive markups on municipal bond and collateralized mortgage obligation transactions over a two-year period.
The panel also ordered the firm to pay more than $1.4 million, plus interest, in restitution to affected customers, according to the hearing panel’s decision, which was released Wednesday.
David Lerner Associates’ general counsel Joseph C. Pickard said in a statement that the firm will appeal the decision. It can appeal the order to FINRA’s National Adjudicatory Council.
“David Lerner Associates Inc. believes that the current hearing panel’s ruling is simply wrong, completely ignores the relevant facts, and fails to follow the law,” he said.
In its decision, the panel said the firm and Mason, an executive vice president who heads its fixed-income trading department, charged excessive markups to retail customers on more than 1,500 muni bond transactions between Jan. 1, 2005, and Jan. 31, 2007.
The hearing panel decision said DLA bought bonds from brokers and dealers, held them for part of that day or the next day, and then sold them to retail customers at markups ranging from 3.01% to 5.78%.
The decision included testimony from James McKinney, a principal and manager at William Blair & Co., who said his firm’s municipal bond markups during the same period generally ranged from 0.25% to 2.9%.
“As a result of its municipal bond prices, [David Lerner Associates’] retail customers consistently received municipal bond yields that were significantly lower in comparison to customers who held the same bonds at other firms,” the panel wrote.
The firm’s “pattern of excessive markups was intentional, or, at a minimum, extremely reckless,” it added.
The hearing panel said the trades violated the Municipal Securities Rulemaking Board’s Rule G-17 on fair dealing and Rule G-30 on prices and commissions.
For those violations, the panel ordered DLA to pay a $1 million fine and $765,000 in restitution to muni bond customers.
The panel also hit Mason — who has worked at David Lerner Associates since 1998 — with a $100,000 fine and suspended him from associating with any FINRA member firm for six months.
In addition, the panel fined DLA $25,000 for failing to record the time of receipt on municipal bond customer orders, a violation of the MSRB’s Rule G-8 on books and records.
It also fined the firm $150,000 for “willfully” failing to supervise municipal bond pricing, and failing to establish and maintain adequate procedures, a violation of Rule G-27 on supervision.
The panel also found that DLA and Mason violated NASD rules in connection with excessive prices charged on collateralized mortgage obligations along with supervisory failures.
For those violations, the panel fined the firm more than $1 million and fined Mason $100,000.
It also must pay $693,000 of restitution to customers for these trades.
FINRA hearing panels consist of a hearing officer who is employed by the authority in the office of hearing officers, and two industry officials.
In this case, FINRA hearing officer Maureen A. Delaney dissented from the majority decision, saying she would have suspended Mason from associating with FINRA members for 18 rather than six months.
Delaney noted that Mason was a head trader who set prices, or was involved in setting prices, and was familiar with MSRB and NASD rules, which are now administered by FINRA, NASD’s successor self-regulator.
“I conclude that Mason was, at a minimum, extremely reckless in pricing the municipal bonds and CMOs. He ignored market data that clearly demonstrated the extensive disparity between DLA’s pricing and that of other firms,” Delaney said in her dissent. “Unlike the majority, I cannot agree that Mason’s misconduct warrants such a minor suspension.”
Pickard said the “hearing panel decision reflects FINRA’s attempt to unfairly seize funds from a broker-dealer by making allegations which are simply not based on facts, recognized industry standards, or current law.”
The firm and Mason look forward to “vindication at a fair and impartial hearing,” and intend to continue DLA’s 36-year tradition of “providing its clients with excellent, personal, and professional service at fair and reasonable prices,” he added.
Firms and individuals can appeal hearing panel decisions to FINRA’s National Adjudicatory Council within 25 days. They can appeal the NAC decision to the Securities and Exchange Commission and they can appeal that decision to a federal court of appeals.
Pickard noted that FINRA “did not question” that the bonds under investigation were “all high-quality, investment-grade securities,” and said that FINRA did not “challenge the other 95%” of the firm’s transactions during the period.
He added that David Lerner Associates defeated earlier, similar FINRA allegations.
The hearing panel said it levied tough sanctions against the firm and Mason in part because they were previously warned about excessive markups. FINRA issued a “letter of caution” to the firm after a 2004 routine examination found that it had charged excessive markups on 17 municipal bond transactions.
The letter said that “repeat violations will be taken into consideration in determining any future matter,” according to the hearing panel.
And in 2009, FINRA sent the firm a Wells Notice saying it intended to recommend formal disciplinary action against the firm.
In May 2010, FINRA’s department of enforcement filed a complaint against the firm with the agency’s office of hearing officers. In June 2011, Mason and other top staffers at David Lerner Associates testified before a FINRA hearing panel.
Despite warnings, DLA continued charging excessive markups, the decision said.
“Respondents have not taken any corrective measures to improve their fixed-income markups policies and practices,” the hearing panel said in its decision.
David Lerner Associates has five offices in the New York metropolitan area and an office in Boca Raton, Fla.
