WASHINGTON - Merchant Capital LLC has agreed to pay $55,000 to settle Securities and Exchange Commission charges that it violated muni bond rules by treating issuer officials, family members and friends to upscale restaurants and Broadway shows and then reimbursing itself with public money, including bond proceeds.
The sanctions, which the SEC announced late Thursday, stemmed from five trips to New York from June 2003 through May 2005 that the Montgomery, Ala.-based underwriter sponsored for officials from two issuers, as well as their friends and family members.
The SEC did not identify any of the individuals, the issuers, or the bond issues that were involved. The firm neither admitted nor denied the allegations and Merchant officials could not be reached for comment
But Gerald Hodgkins, an assistant director in the SEC's enforcement division, said: "The division of enforcement continues to closely monitor the conduct of industry professionals, issuer officials and other participants in the municipal securities market."
The trips were for the issuer officials to meet with rating agencies and bond insurers about forthcoming municipal bond issues.
But Merchant shelled out a total of $26,364 to pay for airfare, car services, tickets to the Broadway musicals Hairspray, Gypsy and Chicago, and dinners at Smith & Wollensksy and the Manhattan Ocean Club, as well as other lavish entertainment for the issuer officials and guests who did not attend the bond meetings.
During each of the trips - which occurred in June 2003, September 2003, June 2004, and November 2004 and May 2005 - half to three quarters of the individuals treated by Merchant were friends or family members of the issuer officials, the SEC said.
The underwriter then typically billed the bond issuing entities for the expenses in invoices under a single-line item entitled "rating trip expenses." Merchant was reimbursed by the issuing entities or from bond proceeds.
During the June 2004 trip, for example, Merchant paid $2,247, or 15% of bond issuance costs excluding underwriter's discount, to cover expenses for four family members of two issuer officials.
The SEC said Merchant willfully violated Municipal Securities Rulemaking Board Rules G-20 on gifts and gratuities, G-17 on fair dealing and G-27 on supervision.
Rule G-20 prohibits broker-dealers from directly or indirectly giving any thing or service of value in excess of $100 per year to issuer officials and other outside parties in connection with municipal securities activities. Rule G-17 requires firms to deal fairly with all persons and to not engage in any deceptive, dishonest or unfair practice. Rule G-27 requires broker-dealers to adopt, maintain, and enforce written supervisory procedures that are reasonably designed to ensure compliance with securities law provisions and rules.
This is the second SEC case of its kind. In February, RBC Capital Markets Corp. agreed to pay $125,000 for using bond proceeds to reimburse itself for treating city officials from Mesquite, Tex., along with their family members, to lavish entertainment in connection with rating agency trips.