WASHINGTON — The Financial Industry Regulatory Authority has filed a complaint against Gardnyr Michael Capital Inc. and three of its officials, charging that there was trading between personal and company accounts that resulted in excessive markups ranging from 5.36% to 22.92% on municipal bonds sold to customers.
FINRA disclosed the case, which is pending before one of its three-member hearing panels, in its monthly report on disciplinary actions.
The firm denies the charges, saying the bonds were reasonably priced and that no customers have complained.
According to the complaint FINRA filed on Dec. 2, GMC and Anthony A. Grey, a general securities representative who worked at the firm’s Winter Park, Fla., office, marked up prices by transferring bonds between the firm’s accounts and Grey’s personal accounts.
FINRA said the firm, through Grey, “interposed” his personal accounts between the firm and the fair market for the bonds without disclosing it to customers.
“[GMC], through Grey, intentionally or recklessly charged unfair, unreasonable, excessive and fraudulently excessive markups on municipal bond transactions with retail customers,” FINRA said in the complaint.
As a result, the self-regulator said, Mobile, Ala.-based GMC and Grey violated the Municipal Securities Rulemaking Board’s G-17 fair-dealing rule and G-30 fair-pricing rule, as well as federal securities laws and the federal securities antifraud rule.
The authority’s complaint asks FINRA’s hearing panel to order GMC and Grey to return any “ill-gotten gains,” plus interest.
Firm officials declined to comment and referred calls to their lawyer.
Philip Snyderburn, a lawyer with Snyderburn, Rishoi & Swann in Orlando, which is representing the firm and officials, denied any wrongdoing occurred. He said Grey was engaged in proprietary trading in personal accounts and that the bonds were sold at fair-market prices, considering their attractive yields.
“Our stance is that we believe that the pricing was fair based upon the market conditions at the time,” said Snyderburn. He said GMC will present its case at hearings with FINRA in Orlando on Sept. 10 and 14.
The authority’s complaint alleges that between October 2008 and July 2009, GMC escalated Florida municipal bond prices by shuffling them between Grey’s and the company’s accounts.
FINRA said that in half the transactions, GMC, through Grey, bought the bonds from the street in a house account, then Grey sold the bonds to a personal account at a markup, and then sold the bonds back to GMC at another markup before selling them to customers.
The other half of the transactions followed a similar pattern but started from Grey’s personal account.
The markups, which occurred in 10 transactions, all of which involved the bonds of issuers in Florida, ranged between 5.36% and 22.92%, according to FINRA.
“GMCI and Grey did not disclose to their customers that one of Grey’s personal accounts had been interposed or otherwise involved in the transactions or that they had charged excessive markups,” FINRA said in the complaint.
GMC’s Jan. 27 response to the complaint claims Grey made a total profit of only $12,559 on the trades, compared to his annual revenues from trading of more than $500,000.
“The customers of Grey who purchased the municipal bonds at issue had been his personal customers for over 30 years and, in some cases, purchased bonds from Grey on the basis of yield,” the firm said. “GMC and Grey provided the customers of the firm with reasonably priced municipal bonds based upon the market conditions in the fall of 2008 and early 2009.”
The bonds yielded up to 7.5%, well above Treasury bond returns, GMC said.
In addition to Grey, FINRA alleged wrongdoing by two other GMC staffers: president and chief compliance officer Pfilip Gardnyr Hunt Jr. who works in Mobile, Ala., and executive vice president James Michael Pietkiewicz, who works at GMC’s Winter Park office.
Hunt’s and Pietkiewicz’s names were redacted from the publicly available complaint, but FINRA BrokerCheck reports note pending regulatory action against them and GMC’s court filings refer to them.
The reports say Pietkiewicz allegedly “functioned as a municipal securities principal for his firm while he was not registered or qualified to act in that capacity.”
In addition, FINRA alleges GMC and Pietkiewicz violated Rule G-27 on supervision by failing to “reasonably supervise” Grey or to follow GMC’s written supervisory policies.
FINRA claims GMC violated Rule G-2 on professional qualification standards and the firm and Hunt violated MSRB Rule G-3 on classification by permitting Pietkiewicz to act as a GMC principal without being properly registered.
FINRA also charged GMC with violating its Rules G-32 on primary offerings for failing to file official statements for 10 primary offerings in a timely fashion.