WASHINGTON — John Kendrick, the former Southwest Securities Inc. banker who is being charged in a Securities and Exchange Commission administrative proceeding for allegedly violating pay-to-play restrictions, wants to reach a settlement with the SEC but is considering taking legal action against his former employer.
In an interview Thursday, a day after the SEC brought its administrative proceeding against him, Kendrick said he was wrongfully fired in July and that he may have grounds for a lawsuit because Southwest failed to adequately inform him of his responsibilities under the Municipal Securities Rulemaking Board’s Rule G-37 on political contributions.
G-37 bans firms from engaging in negotiated municipal securities business with an issuer for two years if they, their municipal finance professionals, or political action committees make significant contributions to elected issuer officials or candidates. But the rule permits muni finance professionals, or MFPs, to contribute up to $250 for anyone for whom they can vote.
Kendrick, a Massachusetts resident, conceded that he violated the rule by making contributions to state Treasurer Timothy Cahill totaling $1,625 between 2003 and 2008 — in excess of $250 in each of two election cycles. But he claims he did so only because he thought the safe harbor applied on an annual basis.
“Clearly I was incorrect,” he said, insisting that the safe harbor did apply on an annual basis at one point during the 1990s.
Despite Kendrick’s claim of ignorance, MSRB rulebooks show that since G-37 was implemented in 1994 — long before he joined Southwest in 2000 — the $250 safe harbor has applied to each election cycle and never on an annual basis. Several MSRB releases and SEC lawsuits — most of them in the late 1990s — reiterated this guidance.
Kendrick said he also had no idea that solicitations could trigger the ban when he co-hosted a June 2005 fundraiser for Cahill in which he made 82 solicitation requests for campaign contributions that netted $9,000.
He said one point of confusion for him is that the individual safe harbor applies to each election cycle while the safe harbor for contributions to a state political party or a political subdivision in which an MFP is entitled to vote applies on an annual basis. But the bottom line, Kendrick said, was that he not informed by his employer as to what the current regulations were.
“Anyone who knows me know that I cross my t’s and dot my i’s,” he said. “It’s possible it was my responsibility, but it was also Southwest Securities’ responsibility to inform me when I joined the firm.”
Neither Southwest nor the SEC would comment.
As evidence of his upstanding character, Kendrick said he testified on behalf of the Justice Department in its 1996 case against former Lazard Freres & Co. financial adviser Mark Ferber, who was sentenced to 33 months in prison for failing to disclose to his financial advisory clients the secret kickback contract between Lazard and Merrill Lynch.
“It demonstrates the credibility of my ethics and my standing in the profession,” he said. “If I’m to step forward in the Ferber case... and not participate in a quid pro quo, then that is something I wouldn’t do [now] nor would I contribute against the MSRB regulation had I known what it is.”
Kendrick urged The Bond Buyer to call Brien O’Connor, a former U.S. prosecutor involved in the Ferber case who is now a partner at Ropes & Gray LLP in Boston, who he said would vouch for him. However, O’Connor could not be reached for comment.
Kendrick said Southwest did not have appropriate compliance and supervisory procedures. The first and only communication about Rule G-37 came immediately prior to his dismissal last summer, he said, when an e-mail circulated to all MFPs from Richard Litton, the head of public finance, informed the staff that they were limited to contributing $250 per election cycle for candidates they could vote for.
“It was very coincidental that it came out at that particular time,” Kendrick said, adding it likely came shortly after the SEC notified Southwest Securities that it was under investigation.
Under its separate settlement with the SEC that was also announced Wednesday, the firm is required to pay the federal government $470,147, including a $50,000 civil penalty, plus $348,154 in the disgorgement of ill-gotten fees obtained from co-managing 19 negotiated underwritings totaling $14 billion, and $71,993 in prejudgement interest.