CHICAGO — St. Louis-based broker-dealer L.J. Hart & Co. was censured and paid a $200,000 fine to settle Financial Industry Regulatory Authority charges that it violated municipal rules on gifts and supervision by distributing more than $183,000 in tickets to professional sporting events to issuer clients.
The tickets scrutinized by FINRA came from season ticket purchases made by the firm for Kansas City Chiefs, Kansas City Royals, St. Louis Blues, St. Louis Cardinals, and St. Louis Rams games. The firm also purchased additional tickets for playoff games or additional regular season games the firm "believed municipal issuer representatives would enjoy," reads a settlement order.
FINRA's enforcement department late last year filed a disciplinary complaint against the firm and its founder and principal Larry Joe Hart. The firm responded with a settlement offer last month, and it was accepted and the order entered on Sept. 24. The firm does not admit or deny the allegations in the order. The firm in a formal filing as part of the enforcement action said it believed its long-standing ticket gift program did not run afoul of any regulations as it asserted past examinations by regulators had cleared it.
"From Jan. 1, 2009 to March 31, 2011, L.J. Hart engaged in a program of improperly gifting tickets to various sporting events in Kansas City, Missouri and St. Louis, Missouri," the settlement order said. Those gifts were doled out to employees of municipal securities issuers such as public school superintendents, county commissioners, or members of the governing boards.
The firm "improperly" handed out more than 2,000 tickets valued at $183,546, the order alleged. On 598 distinct occasions within a one-year period, L.J. Hart gifted tickets to sporting events that were valued in excess of $100 to individual municipal issuer representatives, in violation of the Municipal Securities Rulemaking Board's Rule G-20 on gifts and gratuities.
L.J. Hart did not host the municipal representatives at the sporting events and no Hart employees were present. No tickets were gifted to municipal issuers that retained other firms for their underwriting business.
Rule G-20 limits the value of gifts to $100 per year if they are in relation to a broker-dealer's municipal securities activities. The rule does not prohibit occasional gifts of meals or sports tickets if hosted by the dealer or sponsored by it as a legitimate business function recognized by Internal Revenue Service rules on business expense deductions.
In settling the charges, L.J. Hart defended itself in a so-called statement of mitigation acknowledging it distributed the tickets without hosting the events but said it did so only because it believed after regulatory examinations in 2007 and 2008 that its existing ticket program did not run afoul of the rule.
"The Securities and Exchange Commission's and FINRA's previous clean examinations mitigate and explain L.J. Hart's conduct with regard to the ticket program during the stated time period," said the statement filed by Hart's attorneys at Husch Blackwell LLP.
The firm has run a program since 1994 in which it provides existing clients tickets to Missouri sporting events.
"L.J. Hart never used the tickets as an inducement to be retained on a specific pending or future project or as a means to induce a non-client into becoming a client," said the firm's statement. "Rather, L.J. Hart uses the tickets as an expression of its appreciation to its clients for their previous business and to serve as a reminder advertising of L.J. Hart's services between financings and bond offerings.
"L.J. Hart did not host these games because it believed that it was not necessary under the Rules and Regulations and, it believed that the tickets best served as a thank you if an employee of L.J. Hart did not also attend the game," the firm's statement said.
FINRA also accused the firm of violating the MSRB's supervisory Rule G-27 for failing to establish and maintain an adequate system to supervise the ticket gifting. The rule requires broker-dealers have adequate policies in place designed to ensure compliance with securities rules.
L.J. Hart, founded in 1991, primarily underwrites bonds for school districts and counties in Missouri. The firm ranks 7th in Missouri so far this year as a senior manager with 77 deals valued at $207 million, according to Thomson Reuters. It finished 7th last year, senior managing 121 deals totaling $312 million and ranked 5th in 2011 leading 109 deals valued at $309 million. It finished both 2009 and 2010 in the sixth position managing 146 transactions worth $369 million in 2010 and 111 deals $266 million in 2009.
Hart allegedly distributed the tickets to county and school district clients for which it underwrote bonds and maintained ongoing relationships, and stopped giving tickets to clients who opted to go with another underwriting firm, according to the order.
About one-third of the tickets it purchased were passed out to various school boards at an annual conference hosted by the Missouri School Boards Association.
"L.J. Hart personnel asked school board members to fill out a piece of paper with their contact information and professional affiliation if they wanted to attend one of the offered football, baseball, or hockey games," the order said.
The firm later separated the names of issuer officials who were associated with L.J. Hart clients from those not associated with clients, who did not receive tickets. Tickets were handed out in a similar fashion following another annual conference staged by the Missouri Association of Rural Education.
About one-half of its season tickets were passed out to school superintendents who represented district clients. Hart also gifted a number of the remaining tickets to county commissioners for counties that retained L.J. Hart's underwriting services, and to personnel of banks that purchased bonds from Hart.
Tickets ranged in price from $32 to $260 with the most expensive tickets sometimes going to issuers the firm considered significant, according to the order.
FINRA also found that Hart's written supervisory procedures regarding gifts and gratuities did not properly state MSRB rules on gifts. The firm's notice said simply that exceptions to the $100 per year limit were allowed for sporting events.
"The activities of L.J. Hart went unchecked by any supervisor or supervisory process, and resulted in the gifting of over 2,000 tickets to sporting events that were not hosted by the firm, in violation of Rule G-20," the filing read.
The order said the sanctions including the fine and censure were sufficiently remedial to deter the firm from any future misconduct, and represent a proper discharge by FINRA of its regulatory responsibility.