Alleged bond flippers say SEC trying to rule through enforcement

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WASHINGTON - The Securities and Exchange Commission engaged in a "gross abuse of power" by accusing Michael and Jocelyn Murphy of flipping bonds when they acted no differently from other investors and acted in good faith at all times, their lawyers told a federal court this week.

The Murphys, who live in Denver, Colo. according to the SEC complaint, filed their arguments against the SEC in U.S. District Court for the Southern District of California in San Diego on Monday. The pair stand accused of participating in a municipal bond flipping and kickback scheme in which they allegedly misrepresented themselves as retail investors in order to buy and quickly sell or flip the securities for a profit. Most of the several other individuals charged in the case in August settled with the SEC, but the Murphys have chosen to fight it out in court.

The SEC charged both Jocelyn and Michael Murphy with acting as unregistered broker-dealers and also said Jocelyn committed fraud. The two allegedly participated in a years-long scheme stretching from about 2009 to 2016 in which a number of individuals placed new issue orders pretending to be local retail investors in order to obtain priority during retail order periods.

But the SEC said those people, including allegedly the Murphys, were associates of unregistered broker-dealers. After acquiring the bonds, the SEC claimed, the defendants quickly resold them to broker-dealers, typically for a fixed, pre-arranged commission, and then sought to conceal the flipping activity from issuers and underwriters.

The tactics involved included allegedly providing inaccurate zip codes on the orders. The SEC complaint states that Jocelyn Murphy placed orders in both California and Puerto Rico indicating that she was located in each place and that the bonds were being purchased on behalf of retail customers. In fact, the SEC said, she was acting on behalf of an unregistered San Diego-based broker-dealer called RMR Asset Management Co. and her orders were always intended to be re-sold to dealers.

Both Murphys previously held brokers’ licenses but not during this time.

Attorneys Robert Knuts of Sher Tremonte in New York and Thomas D. Mauriello of the Mauriello Law Firm in San Diego offered firm denial of the SEC’s charges in their Oct. 29 reply.

“Mr. and Mrs. Murphy acted in good faith at all times and they specifically deny any allegation to the contrary, Knuts and Mauriello wrote. “As will be proved at trial (if a trial is even necessary), Mr. and Mrs. Murphy purchased and sold securities in U.S. public securities markets at their own economic risk, trading profitably on many occasions and losing money at other times.”

The defense reply accuses the SEC of selectively targeting the Murphys in an effort to enforce a policy change through enforcement rather than a proper rulemaking process, calling it a “gross abuse of power.”

“The truth is that Mr. and Mrs. Murphy, like hundreds (if not thousands) of other small, individual investors have played an important role in the issuance and distribution of securities in the United States, including securities issued by municipalities,” the defense wrote. “If the SEC now believes that this eco-system, which has operated successfully for decades, needs to be changed, the proper way to effect that change would be for the SEC to propose and enact new rules to govern the securities markets after receiving comments from all market participants.”

One other defendant, Richard Gounaud, is asking that his trial be moved to his home state of New Jersey due to health issues. If the Murphys do proceed to a trial, it likely would not take place until at least late 2019, according to a source familiar with the matter.

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SEC enforcement Enforcement actions Securities law Primary bond market Secondary bond market Broker dealers SEC Washington DC