SEC cracks down on failure to follow issuer rules

Register now

Some market participants are happy that the Securities and Exchange Commission appears to be trying to ensure that the marketplace adheres to the offering restrictions issuers put in place.

In the second case in about a year involving dishonesty allegedly used to skirt issuer restrictions, the SEC on Tuesday charged a former Wells Fargo Clearing Services trader for submitting fraudulent retail orders in order to receive higher priority in new issue bond allocations. Elements of the case echoed the major "flipping" cases filed a year ago and cheered some in the market who said it was important to be sure issuers' wishes are followed.

“We see issuers all the time for a variety of reasons impose some kind of restrictions on either the primary offering or even on secondary transfers and we have to expect that the marketplace will comply with those,” said Dee Wisor, an attorney at the law firm of Butler Snow. “Personally, I’m glad to see that the SEC is making sure that they do.”

Thomas Muldoon, 69, was the man charged Tuesday for allegedly placing fraudulent retail orders on 16 occasions between January and October of 2017, violating both the anti-fraud provisions of the federal securities laws and the Municipal Securities Rulemaking Board’s Rule G-17 on fair dealing. He agreed, without admitting or denying the SEC's findings, to be barred from the industry and to pay a $25,000 fine.

Issuers hold retail order periods to prioritize the sale of bonds to retail investors, often providing them the first chance to get the bonds in a primary offering. Broker-dealers don’t qualify for retail priority and are typically lower priority.

According to the SEC, Muldoon knew the priority rules and submitted the fraudulent orders through “friendly” sales representatives at underwriting firms, who then submitted the "retail" orders on behalf of Wells Fargo.

Wisor noted some similarities in the Muldoon case and the August 2018 "flipping" enforcement actions, in which the SEC charged two firms and 18 individuals with improperly diverting newly issued municipal bonds to certain broker-dealers for a fee at the expense of retail investors.


“The similarities are that in both circumstances the issuer imposed a requirement on the offering and that requirement was not honored,” said Wisor. “And there was an attempt to get around the requirement and to hide that attempt.”

Overall, Wisor said he does not see dishonest trading as a widespread problem.

Issuers fairly regularly reserve some amount of issues to be offered to retail orders by creating larger denomination sizes or restrictions on the types of investors who can participate in an offering, Wisor said. Issuers are not in the position to enforce or monitor for bad behavior, so enforcement agencies like the SEC have to do it, Wisor said.

“If you’re the one violating the rule and taking steps to hide that you’re violating the rule, that’s just bad behavior in anybody’s book,” he said.

The SEC found that Muldoon took steps to avoid detection, such as by instructing the sales representatives to delay placing the orders to simulate the period it would take for a legitimate retail order to be placed.

Muldoon became a municipal bond trader in 1975 and from 2004 to 2017, he worked as a retail municipal bond trader for Wells Fargo. He did not receive additional compensation for his trading of new issue municipal bonds.

“At Wells Fargo Advisors we hold our team members to the highest professional standards,” said a Wells Fargo spokesperson on Wednesday, adding that Muldoon was no longer with the company.

A municipal market participant, who preferred anonymity, said to see conduct like what the SEC alleged of Muldoon is frustrating for those that follow the rules.

“It’s just frustrating to those of us that follow the rules because certain people sit back and scratch their heads and wonder why we’re getting inundated with another rule,” the market participant said.

The Muldoon case, although alleged to have included three as-yet uncharged co-conspirators, did not take place on the same scale as last year's flipping case. In that instance, the SEC claimed that from at least 2009 to 2016, Core Performance Management LLC and RMR Asset Management Co. as well as their principals and some of their associates posed as retail investors to gain priority in obtaining newly issued bonds.

They then resold them to broker-dealers, typically for a fixed, prearranged commission. They tried to hide the flipping from the issuers and underwriters by manipulating sales tickets.

Following the flipping enforcement actions, the MSRB issued draft guidance earlier this year on certain prearranged trading in connection with primary offerings. It warned that arrangements in which a dealer firm uses an intermediary to allow the firm the purchase the bonds it might not have been able to obtain itself are against the rules and a threat to market integrity.

In another instance of SEC enforcement used to punish lack of compliance with issuer restrictions, from recent memory, the commission in 2014 charged 13 firms for selling Puerto Rico bonds in denominations below the $100,000 minimum set by the issuer. The Financial Industry Regulatory Authority later fined seven firms for that same conduct.

It is not clear whether any additional enforcement actions will arise from the Muldoon case, whether from the SEC or from FINRA.

For reprint and licensing requests for this article, click here.