WASHINGTON – The Financial Industry Regulatory Authority has filed a complaint against Phoenix-based Lawson Financial Corp. and the firm's president and chief executive officer, charging them with securities fraud in connection with the sale of millions of dollars of municipal revenue bonds to customers.
The complaint also charges LFC's President and CEO Robert Lawson and Chief Operating Officer Pamela Lawson, his wife, with self-dealing by abusing their positions as co-trustees of a charitable remainder trust. In addition, Robert Lawson is charged with misuse of customer funds related to the transfer of millions of dollars from the charitable remainder trust account.
"We've been in business for 32 years as a [registered firm of the Municipal Securities Rulemaking Board] and have a proud heritage for what we do," Robert Lawson told The Bond Buyer in response to the FINRA complaint. "We've always acted in the best interest for all of our clients. We firmly believe FINRA has alleged facts that are incorrect. They have drawn conclusions that are incorrect; we just want our opportunity and are requesting a hearing."
LFC and the Lawsons can choose to file a response to the complaint and request a hearing before a FINRA disciplinary panel. The FINRA complaint does not seek specific sanctions, but if the allegations are found to be true, they can include fines, censures, suspensions or bars from the securities industry, disgorgement of ill-gotten gains, and payments of restitution.
The allegations stem from four bond offerings where LFC served as the sole underwriter. Two offerings, which FINRA calls the Destiny Bonds and Hillcrest Bonds, funded a Mesa, Ariz. charter school while the other two, named the Cullman Bonds and Decatur Bonds, funded assisted living facilities in Cullman and Decatur, Ala.
FINRA alleges that Robert Lawson and LFC were aware of financial difficulties that their conduit borrowers faced and fraudulently hid this from customers who purchased the bonds.
The complaint further alleges that aside from hiding the "severe financial stress" the borrowers were under, LFC and Lawson hid from the firm's customers the fact that Lawson, in his role as co-trustee of a LFC customer charitable remainder trust account, with knowledge from his wife, the other co-trustee, improperly transferred about $14 million from the trust to pay the charter school and assisted living facilities operating expenses.
One of the firm's clients designated by FINRA as "WP" established the trust account with LFC in 1999 and then died in February 2008. The trust account originally had three trustees, including Lawson, but by February 2012, Lawson and his wife Pamela were the only trustees. In January 2013, before Lawson authorized the transfers, the account contained about $23 million.
The Destiny Bonds were underwritten in June 2010 with an aggregate principal amount of $4 million from approximately 197 LFC customers. The securities fraud charges stem from the secondary market sale of those bonds to LFC customers between May 2015 and September 2015.
The fraud charges from the Hillcrest Bonds relate to $10.5 million in primary market sales of the bonds to LFC customers and subsequent secondary market sales of the bonds to LFC customers. Fraud charges related to the Cullman and Decatur bonds meant to fund the assisted living facilities relate to secondary market sales of the bonds to LFC customers between January 2013 and July 2015.
FINRA is alleging that Robert Lawson and LFC willfully violated federal securities laws prohibiting fraud as well as MSRB Rule G-17 on fair dealing. The complaint also alleges that Lawson and his firm violated MSRB Rule G-19 on suitability of recommendations and transactions by recommending that customers purchase the municipal revenue bonds backed by struggling entities, according to the complaint.
Additionally, FINRA said Lawson and his wife violated FINRA Rule 2010, which outlines the co-trustees' fiduciary obligations to the WP Trust. Lawson also violated other FINRA rules by misusing LFC customer funds, the self-regulator alleges.