SEC's 'flipping' case prejudicial, accused argues

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WASHINGTON - The Securities and Exchange Commission's case against Richard Gounaud should be dismissed because the SEC used slang terms like "flipping" to prejudice the case against him, Gounaud told a federal court this week.

Gounaud, representing himself, took issue with the SEC’s characterization of his conduct in a motion filed in U.S. District Court for the Southern District of California Monday. Gounaud was among 18 individuals charged with engaging in a so-called flipping and kickback scheme to improperly divert newly issued municipal bonds to certain broker-dealers for a fee at the expense of retail investors.

While most of those accused have already settled and been barred from the industry, Gounaud and two others are continuing to litigate. Gounaud has asked that his trial be moved to his home state of New Jersey due to health reasons, but is still hoping to persuade a judge to strike the SEC’s claims against him.

“The plaintiff’s complaint is more appropriate for a press release than a legal pleading,” Gounaud wrote. “It is replete with inflammatory slang terms and allegations about defendant Richard Gounaud that have no basis in law and serve no purpose other than to inflame and scandalize this lawsuit and goes well beyond the ‘ordinary and concise’ facts required in a complaint.”

The SEC alleged that Gounaud, as an associate of a firm called RMR Asset Management, acted as an unregistered broker and committed fraud by falsely holding himself out as a retail investor or asset manager representing retail investors in order to buy muni bonds during retail order periods and then “flip” them to a broker-dealer at pre-arranged prices.

The term “flipping” is indeed an informal one not codified in either federal law or in Municipal Securities Rulemaking Board rules, but is used by some in the industry and was used by the SEC in its complaint to refer to the purchase and subsequent quick sale of a security with the knowledge that a broker-dealer would be willing to purchase it at a price profitable to the initial buyer.

Some securities lawyers have said that the line between so-called “flipping” and commonly-accepted “day trading” could be fuzzy. But the SEC’s complaint also alleged specific misrepresentations by Gounaud and others.

Gounaud also attacked the SEC’s press release, which used the terms “flipped,” “flippers,” and “flipping.” The press release did not point out that buying and quickly selling a security is not illegal, Gounaud said, but that the release did “insinuate to the public” that such activity is unlawful.

The use of “colloquial, slang, and inflammatory” characterizations could threaten a defendant’s due process rights, Gounaud argued, and “reflects cruelly” upon his moral character, he told the court.
Judge Anthony Battaglia has set a Jan. 31, 2019 hearing on Gounaud’s motion, which the SEC is scheduled to file an answer to later this month. Gounaud did not respond to a request to be interviewed.

Gounaud’s co-defendants, Michael and Jocelyn Murphy, have denied wrongdoing and similarly claimed to have been acting as ordinary investors.

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Enforcement actions SEC enforcement Securities law Primary bond market Secondary bond market SEC MSRB Washington DC