WASHINGTON – Gates Capital agreed to pay a $125,000 fine and three of its employees will be fined and suspended to settle Financial Industry Regulatory Authority charges that the firm acted as both financial advisor and underwriter in a municipal bond transaction, among other violations.

New York City-based Gates, which neither admitted nor denied FINRA’s charges, also agreed to hire an independent consultant to review its policies and procedures as part of the settlement of charges that it violated Municipal Securities Rulemaking Board rules.

Three employees – John Fitzgerald, a municipal securities representative with Gates from April 2013 to February 2018, as well as James Casey, and Youngwhi Kim, both of whom were registered principals – also agreed to pay fines and serve suspensions without admitting or denying FINRA’s findings.

FINRA’s charges stemmed from a 2014 bond offering in California. MSRB Rule G-23 prohibits dealers that act as financial advisors on an issuance of municipal securities from also serving as an underwriter on that transaction.

In the past, dealer firms commonly played both roles but resigned as advisors in order to underwrite the bonds. The rule originally allowed them to do so long as the issuer consented. The MSRB amended the rule in 2011 after the Dodd-Frank Act placed a strict fiduciary duty on firms advising municipalities. Role-switching is no longer permitted.

But that’s what FINRA examiners alleged that Gates did on a roughly $2.2 million issuance of variable-rate securities intended to refund some 2003 bonds. Fitzgerald had been the lead banker on that earlier issuance while registered at a different firm.

According to FINRA, a city official contacted Fitzgerald in early 2013 and asked him to analyze the city’s outstanding bonds and provide advice about refunding options. Fitzgerald provided three options to the city, FINRA said, including a refunding of the 2003 issuance. Fitzgerald’s work included estimates of both the costs and the savings the city could expect to realize under each of the refinancing options.

FINRA said that the city selected the 2003 bonds to be refunded, and asked Fitzgerald to further analyze that option. Fitzgerald produced two VRDO refunding options for the 2003 bonds, and met with city officials in June 2013 to discuss them, FINRA found. The city chose an option and asked Fitzgerald to proceed with the refinancing because the city needed cash to hire additional police officers. Casey, who was Fitzgerald’s supervisor, did not review the proposals and as a “general rule” only sometimes reviewed Fitzgerald’s work before it was presented to a municipal client, according to FINRA.

Fitzgerald continued to provide the city with financial advice, FINRA said, and minutes from an August 2013 city council meeting referred to him as the “financial advisor.” Casey understood that the firm’s and Fitzgerald’s role in any particular issue could be specified either formally in an engagement letter or informally in the meeting minutes of a city council meeting, FINRA found, but he did not review the meeting minutes.

The city then engaged Fitzgerald’s firm Fitzgerald Public Finance, a division of Gates Capital, to serve as a “financing team member” and “placement agent” on the deal. The engagement was written on FPF letterhead which identified FPF as a “financial advisor or underwriter to local governments.”

At this time, FINRA alleged, Gates had not provided the city with a letter disclosing the arm’s-length nature of an issuer-underwriter relationship or potential conflicts of interest as required by the MSRB’s Rule G-17 on fair dealing. Further, examiners found, Fitzgerald in September 2013 helped city officials convince city council members and residents to support the transaction. Gates provided its G-17 disclosures to the city in December, and the deal closed only 21 days later, FINRA said. Rules G-23 and G-17 require such disclosures to be made in the “earliest stages” of the relationship, and Gates’ own written supervisory procedures also said that according to FINRA.

The conduct represented violations of G-17, and G-27 on supervision by the firm, FINRA said, as well as G-23 by Fitzgerald and G-27 by Casey.

FINRA also identified eight other instances between 2013 and 2015 in which Gates delivered G-17 letters late.

FINRA further found that Fitzgerald used a personal email account to conduct securities business from 2013 through 2016, a violation of the firm’s policy and of MSRB rules G-9 on preservation of records and G-8 on books and records because none of the emails were captured or retained by the firm. Both Casey and Kim were aware of the problem and instructed Fitzgerald to use his official firm email, but FINRA found that Fitzgerald continued to use his personal email and that Kim and Casey did not respond sufficiently.

“Fitzgerald willfully violated MSRB Rule G-17; Gates Capital, Kim, and Casey violated MSRB Rule G-27; and Gates Capital and Kim violated MSRB Rules G-8 and G-9,” FINRA concluded.

FINRA found that Fitzgerald’s son assisted his father on firm business, including the 2014 deal, and was identified as a vice president of Fitzgerald Public Finance on distribution lists received by Casey despite not being a registered broker or formally contracted by the firm. FINRA charged that this was a G-27 violation on Casey’s part.

FINRA further found that Fitzgerald’s business expenses were not tracked or reviewed, a responsibility of both Casey and Kim according to the firm’s policies. Gates Capital, Casey, and Kim therefore violated Rule G-27, FINRA found, and Gates Capital and Kim violated Rules G-8 and G-9.

Lastly, FINRA found that from December 2013 through July 2015, Gates facilitated at least 21 cross trades in municipal securities for customers of another broker-dealer, which presented indications that the other broker-dealer may have been engaged in interpositioning, an illegal practice in which a superfluous second broker collects compensation despite providing no service to the customer.

The firm’s procedures required a principal to review trades for manipulation, but did not specify how or when, FINRA found, and the firm failed to reasonably review those trades in violation of G-27.

To settle the charges, Gates agreed to a censure, a $125,000 fine and to hire an independent consultant to help clean up the firm’s supervisory system. Fitzgerald agreed to an 18-month suspension and a $10,000 fine, while Casey will be suspended six months and pay $5,000. Kim agreed to be suspended in in all principal capacities with the exception of any activities requiring a Series 27 (financial operations principal) license for four-months and to pay a $5,000 fine.

Gates Capital declined to comment on FINRA’s findings.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is a reporter covering market trends, infrastructure, and the Far West region for The Bond Buyer.