ATLANTA - The Securities and Exchange Commission yesterday accused Charlotte, N.C.-based broker-dealer Marion Bass Securities Corp. of charging customers excessive markups on U.S. government and municipal securities between 1991 and 1994.
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Marion Bass president Robert Brietz said his firm had rejected a settlement and would "vigorously defend ourselves" at a hearing. The SEC made its allegations in an administrative proceeding that seeks to have Marion Bass cease and desist.
The case involves an area where federal regulators haven't brought many cases offering clear guidance about acceptable markups on government securities. The markup issue has gotten a lot of attention lately on a different front - yield-burning investigations into Treasuries sold into escrows for municipal bond refundings.
Marion Bass earned $447,510 of "illegal profits," the SEC alleged, by charging "undisclosed, excessive markups" ranging from 4.17% to 16.07% on 121 municipal securities transactions, and markups and markdowns of 3.26% to 4.44% on 66 trades of government securities.
The vast majority of the questioned profits - $418,094 worth - came from sales to and purchases from Marion Bass customers of Fannie Mae and Resolution Trust Corp. securities from April 1993 to February 1994, according to the complaint. Only $29,416 of the markups involve municipal bonds, most of which were health care or industrial revenue debt issued by local authorities in several states.
SEC representatives arrived at Marion Bass offices in Charlotte in 1994 saying they were conducting "an overall muni bond and government bond review of the entire industry," Brietz recalled. Eventually, investigators scrutinized about 33,000 Marion Bass trades, he said, and told firm officials that any markups or markdowns exceeding 4% on government trades and markups over 4% on muni trades were too much.
"They have clearly miscalculated the markups" on Marion Bass trades, Brietz argued. Richard Murphy, an SEC senior trial counsel in Atlanta, said investigators calculated markups against the prices Marion Bass paid other dealers for specific securities.
A 4% benchmark on government trades might be appropriate today, but it wasn't in 1993-94 because there was less information available at that time about regulators' expectations, Brietz contended.
Murphy countered that there were enough case results and commission opinions around and a sufficiently widespread understanding of acceptable market practices that "the markups Marion Bass charged were excessive." He said he couldn't comment on what SEC field operatives may have told Marion Bass about their mission and markups.
In Rule G-30, the Municipal Securities Rulemaking Board lays out several factors that go into "fair and reasonable" municipals pricing without getting into a specific markup scale.
In recent weeks, the National Association of Securities Dealers proposed guidelines to the SEC that have yet to be circulated for public comment. In them, NASD suggests markups and markdowns on government securities usually should be substantially less than 5% over the prevailing market price, which is best determined by recent inter-dealer trades. If that data is unavailable, NASD says, a broker-dealer should look to its own "contemporaneous cost" of buying the security in question.
He also took issue with SEC allegations that Gerald Chandik, then and now Marion Bass' compliance officer, failed to adequately supervise traders.
A hearing will be convened in 30 to 60 days before an administrative law judge. The SEC at that hearing can pursue disgorgement of trading profits as well as civil penalties.
William R. Baker 3d, associate director in the SEC's enforcement division, said he didn't think the Marion Bass case "has any significance for" yield-burning investigations because it involves retail transactions that are small relative to escrow purchases.
