WASHINGTON – The Securities and Exchange Commission has settled with an Arizona-based brokerage firm, its chief executive officer, and its former underwriter's counsel and head of investment banking over charges related to fraudulent municipal bond offerings.
The SEC said Lawson Financial Corp. failed to conduct reasonable due diligence when it underwrote bond offerings from 2010 through 2014 to finance the purchase and renovation of nursing homes and senior living facilities tied to Atlanta-based businessman Christopher Brogdon. The SEC found that Brogdon exercised control over each of the relevant entities with which LFC engaged in underwriting.
Brogdon currently faces a court order to repay $85 million to investors over charges he commingled investor funds in senior living projects and used the money for personal expenses and other business ventures.
Lawson's CEO Robert Lawson and the firm's former underwriter's counsel and head of investment banking John Lynch Jr. were charged with failing to conduct reasonable due diligence. Lynch also made representations to investors in bond offering documents that he was authorized to practice law. However, he has not been an active member of any state bar since 1983.
Lawson Financial and Robert Lawson agreed to pay a combined disgorgement of ill-gotten gains of nearly $200,000 as well as penalties of $198,326 for the firm and $80,000 for Lawson. Lawson will also be barred from the market for three years.
The firm and Lawson agreed to the settlement without admitting or denying the SEC's findings. Peter Anderson, a partner with Eversheds Sutherland in Atlanta and the lawyer for LFC and Lawson, declined to comment for the article.
The Financial Industry Regulatory Authority revoked LFC's membership and barred Lawson from the industry in February after it found that they fraudulently sold millions of dollars of municipal revenue bonds. FINRA also found that Lawson and his wife Pamela engaged in self-dealing by abusing their positions as co-trustees of a deceased client's trust.
The SEC said that Lawson Financial would have been eligible for more lenient remedies if it had voluntarily submitted violations under the commission's Municipalities Continuing Disclosure Cooperation initiative. Instead, it paid double what it would have under MCDC, the SEC said.
"Underwriters are critical gatekeepers relied upon by investors to ensure that accurate information is being provided in municipal bond offering documents," said Andrew Calamari, director of the SEC's New York Regional Office. "Lawson Financial failed to confirm that continuing disclosure obligations were being met by the Brogdon-controlled borrowers, allowing Brogdon's nursing home investment scheme to continue."
Lynch agreed to a bifurcated settlement without admitting or denying the SEC's findings. He will pay nearly $45,000 and will be permanently suspended from appearing and practicing before the SEC as an attorney.
The SEC found that from 2010 to 2014, LFC served as underwriter for 13 Brogdon conduit bond offerings through which Brogdon raised more than $87 million. Lynch served as a banker and LFC's underwriter's counsel for 12 of the 13 offerings, the SEC said.
The SEC found that LFC underwrote two Brogdon bond offerings in 2010 on which Brogdon signed continuing disclosure agreements (CDAs) on behalf of the borrowers he controlled. LFC, through Lawson and Lynch, helped prepare the draft official statements, conducted due diligence, and reviewed drafts of both the preliminary and final official statements. The final official statements had a summary description of the CDA provisions, the commission said.
The 2010 borrowers failed to comply with their CDA undertakings in all material respects, according to the SEC, including failures to provide: annual financial information; audited financial statements; and event notices on the Municipal Securities Rulemaking Board's EMMA system.
Lawson was made aware of those failures but that did not keep the firm from underwriting five more offerings for Brogdon-controlled entities in 2012 that said there were no prior failures to comply with any undertaking under the SEC's Rule 15c2-12 on muni disclosure.
"Brogdon's representations omitted material facts investors would need to know in order to evaluate the likelihood that a particular Brogdon-controlled entity would comply with its CDA," the SEC said in the settlement.
The commission cites multiple examples throughout 2013 where Lawson and Lynch were made aware of Brogdon's failures to comply with the disclosure requirements. It also said Lawson was made aware of the increased regulatory scrutiny on issuers' and obligated persons' compliance with CDA obligations.
Despite that, LFC underwrote five more offerings from Brogdon-controlled entities in 2013 and one more offering in 2014 that similarly stated there had been no past failures to comply with continuing disclosure undertakings, according to the SEC.
"No LFC employee conducted a review of EMMA of any of the Brogdon-controlled borrowers in connection with these underwritings, despite the numerous red flags associated with the Brogdon bond offerings," the SEC said in the complaint. LFC, Lawson, and Lynch instead relied on Brogdon, his representatives, and other parties to the transaction, according to the commission.