The National Association of Securities Dealers expelled the former Columbus, Ohio-based broker-dealer firm Michael Patterson Inc. and permanently barred its owner and president, Michael W. Patterson, from the securities markets, claiming they charged investors excessive and fraudulent markups on municipal bonds.
In a related case, the NASD also censured the former Quantum Capital Corp., which had been based in Columbus, and suspended for six months Ernest L. "Duke" Dahlen 3d, a fixed-income trader at the firm. The association alleged that QCC, acting through Dahlen, either knew or were reckless in not knowing about the excessive prices being charged to the firm's retail customers.
The NASD claimed that Patterson, who had worked at QCC and had held a 10% ownership interest in that firm, bought QCC's retail accounts for $300,000 in November 1997. Patterson then formed and registered his own firm as a broker-dealer in March 1998.
Under an exclusive trading agreement that was never disclosed to customers, Patterson agreed to place all of his firm's retail trades with QCC for execution unless QCC waived the requirement, the NASD said.
Between Sept. 1, 1998, and March 31, 1999, the Patterson firm placed its municipal securities trades through QCC in all but one instance, it said.
As a result, Patterson's retail customers did not get the best market prices available on their trades, the NASD said. Patterson and his firm violated the securities fraud laws as well as the Municipal Securities Ruling Board's Rule G-17 on fair dealing and G-30 on fair pricing, it said. QCC and Dahlen violated the securities fraud laws and Rule G-17 on fair dealing, according to the association.
The two NASD cases focused on trades of bonds that had been issued by the North Central Texas Health Facilities Development Corp. and the Orange County Florida Health Facilities Authority.
According to the association, in 61 of 63 transactions done between Sept. 18, 1998, and Oct. 14, 1998, the Patterson firm charged its customers higher prices for North Central Texas bonds than the best available market prices shown by other dealers in the market. Patterson's retail customers paid at least 4.47% above market price. The overcharges totaled $69,061, the NASD said.
In all but one instance, the trades were executed on a riskless principal basis, meaning there was virtually no risk of any loss to QCC or the Patterson firm. QCC, acting through Dahlen, purchased the bonds from other dealers at prices ranging from 93.5 to 94 and then sold the bonds to the Patterson firm at prices ranging between 97 and 97.1. The Patterson firm sold the bonds to customers at prices of about 100.
From March 23, 1999, to March 29, 1999, the association said, the Patterson firm sold Orange County bonds to its customers in nine trades that were executed on a riskless principal basis. In each of these transactions, the firm charged its customers at least 21% more than the best available market price. The overcharges totaled $69,420, according to the NASD.
Dahlen purchased the Orange County bonds from another dealer at a price of 35. QCC, acting through Dahlen, sold the bonds to the Patterson firm at prices ranging between 45 and 45.5. The Patterson firm then sold the bonds to its retail customers at prices ranging between 47 and 50.
