The Financial Industry Regulatory Authority has filed an administrative complaint against David Lerner Associates Inc. and its head trader, William Mason, charging they excessively marked up some 1,538 municipal bond transactions over a two-year period.
DLA spokesman Lawrence Aarons denied the charges and said evidence will demonstrate its prices have been “significantly lower than the prices courts have traditionally found to be fair and reasonable.”
“The firm vigorously denies FINRA’s allegations, believes its claims to be unfounded and expects to be completely vindicated upon the conclusion of this process,” he said.
The FINRA complaint, which was disclosed as part of monthly disciplinary actions released yesterday, comes just two weeks after Malcolm Northam, FINRA’s director of fixed income, warned at an industry conference that the group will take a series of enforcement actions this year against firms for excessive markups and markdowns of municipal securities.
Separately, FINRA censured and fined Wedbush Morgan Securities Inc. $12,500 for selling municipal securities at unfair and reasonable prices and Stoever, Glass & Co. $10,000 for failing to timely report muni securities trades.
In its complaint against Mason and Syosset, N.Y.-based DLA, FINRA said it found a pattern of excessive markups of investment-grade municipals that were readily available in the market at significantly lower markups than DLA charged between Jan. 1, 2005, and Jan. 31, 2007.
Specifically, the excessive muni markups ranged from 3.01% to 5.78% and constituted violations of the Municipal Securities Rulemaking Board’s Rule G-30 on prices and commission as well as its Rule G-17 on fair dealing, the self-regulator said.
In addition, the firm failed to record the order receipt time of 2,307 municipal order tickets, as required by Rule G-8 on records, FINRA found. It also faulted both the firm and Mason for failing to establish supervisory provisions as required by the Rule G-27 on supervision.
The alleged excessive markups included 500 Johnson City, N.Y., Central School District general obligation bonds DLA purchased at a price of $99.160 on July 25, 2005. The bonds had a coupon of 4.375%, matured on June 15, 2032 and carried triple-A ratings when the firm bought them.
DLA sold the same bonds the next day to 10 individual customers at prices from $102.375 to $103.375, reflecting markups of 3.24% to 4.25% and resulting in the customers realizing yields ranging 3.92% to 4.05%, according to FINRA. However, on that same day, customers at other broker-dealers purchased the same bonds at prices ranging from $100 to $101.975, resulting in yields of 4.11% to 4.37%.
During a slightly longer review period, FINRA found the firm and Mason also charged excessive markups on 1,817 collateralized mortgage obligations securities. A panel comprised of one hearing officer and two members of the industry will review the complaint and issue a decision that can be appealed by either side to FINRA’s 14-member appellate body, the National Adjudicatory Council.
Possible remedies include a fine, suspension or being barred from the industry, as well as restitution and disgorgement of ill-gotten gains associated with the alleged violations.
Meanwhile, FINRA claimed that, from April 1 to June 30, 2008, Los Angeles-based Wedbush Morgan Securities sold municipals for its own account to a customer at an aggregate price that was not fair and reasonable, but it did not cite the price in enforcement documents. The conduct violated the rules G-17 and G-30, FINRA said. The firm made restitution to customers totalling $5,986. Wedbush officials could not be reached for comment.
From Jan. 1 to March 31, 2009, New York City-based Stoever Glass failed to report timely trade information from 235 transactions, in violation of Rule G-14 on transaction reporting, which generally requires trades to be reported within 15 minutes, FINRA found. The late transactions constituted about 3.4% of the 6,794 municipal transactions the firm was required to report to the MSRB during the review period. It also was cited for supervisory failures in violation of the Rule G-27.
In a phone interview, Stoever president Frederick Stoever said the firm improved its timing since the FINRA review by instituting practices that limit late trades.
“We do our best, but we’re a very small firm and we do a tremendous amount of tickets for a company our size,” he said, adding that about 30% of the trades considered late were actually done on time but corrected after the 15-minute time limit. He said employees who enter written tickets into the firm’s computer system have since been instructed to closely scrutinize a handful of details where corrections have been necessary in the past.
