SEC wins 'flipper' lawsuit
The Securities and Exchange Commission won a legal victory over the three alleged municipal bond flippers still litigating the RMR Asset Management case, when a judge ruled Monday that the facts of the case supported a finding the defendants broke the law.
The U.S. District Court for the Southern District of California judge issued an order of summary judgment against Jocelyn Murphy, her husband, Michael Murphy, and Richard Gounaud, ruling the undisputed facts of the case support a finding that all three were operating as unregistered brokers and that Jocelyn Murphy committed fraud by providing false ZIP codes to brokers to get priority allocations of new-issue bonds.
The ruling is a significant win for the SEC, which previously settled with more than a dozen individuals in this and related cases but continued litigation against the Murphys and Gounaud when they maintained their innocence.
“Plaintiff has established that there is no genuine issue of material fact and as a matter of law defendant Jocelyn Murphy fraudulently obtained new-issue bonds in violation of Section 10(b) and Rule 10b-5,” Judge Anthony J. Battaglia wrote in his decision.
The trio participated in nearly 20,000 combined transactions on behalf of the now-defunct RMR Asset Management, an unregistered San Diego-area firm that was shut down in 2018.
RMR and its president, Ralph Riccardi, previously settled the SEC’s charges without admitting or denying the allegations.
All three of the defendants were charged as part of a major enforcement action in August 2018, when the SEC brought actions against two firms and 18 individuals alleged to have participated in a scheme to improperly obtain new-issue bonds from at least 2009 to 2016.
According to the SEC, individuals including the Murphys and Gounaud acted as unregistered brokers by falsely holding themselves out as retail investors or asset managers representing retail investors to buy muni bonds during retail order periods and then “flip” them to a broker-dealer at pre-arranged prices.
To win a summary judgment, a party to a lawsuit must show there is no factual dispute at issue and the facts of the case can only support a finding in that party’s favor. Michael Murphy and Gounaud faced charges of violating Section 15(a)(1) of the Securities Exchange Act of 1934, which does not require the plaintiff show scienter, the defendant’s knowledge of wrongdoing. Jocelyn Murphy’s more serious fraud charges under Section 10b-5 of the Exchange Act do require a showing of scienter, which the judge decided the SEC had proven without dispute.
Murphy, a Colorado resident, falsely provided Oregon, Puerto Rico, and California ZIP codes to brokers to get allocations in those places, the judge ruled, and “knew when she provided these brokers with false ZIP codes her order could be considered in the local retail allocation in jurisdictions where she did not reside,” Battaglia ruled.
Attorneys for the Murphys and Gounaud, representing himself, have contended from the start they engaged in no more than trading at their own economic risk, as thousands of ordinary Americans do, and accused the SEC of selectively targeting their clients.
Battaglia instructed the SEC to file a motion within 45 days of the summary judgment detailing what consequences it wants the court to impose on the defendants. The court is not bound by the SEC recommendations.
The defendants may appeal the ruling to the United States Court of Appeals for the Ninth Circuit. A lawyer for the Murphys declined to comment.