Texas muni advisor charged by SEC for violating fiduciary duty
WASHINGTON -- Mario Hinojosa and his muni advisory firm Barcelona Strategies have agreed to pay nearly $600,000 in disgorgement of ill-gotten gains and civil penalties to settle Securities and Exchange Commission charges of defrauding a south Texas school district and violating its fiduciary duty.
Hinojosa, 57, also agreed to be barred from the industry. He and the firm neither admitted nor denied the SEC's findings.
The SEC announced Wednesday that Barcelona and Hinojosa had agreed to settle charges that the Edinburg, Texas-based firm violated its fiduciary duty by lying to the La Joya Independent School District in connection with three bond offerings between January 2013 and December 2014.
The SEC charged that Barcelona broke the federal securities laws and the Municipal Securities Rulemaking Board’s fair-dealing rule because it made false statements to win the school district’s business and failed to disclose a conflict of interest.
Under federal law already in force since the Dodd-Frank Act’s passage in 2010, municipal advisors have had a fiduciary duty to put their clients’ interests ahead of their own. Market observers have said since then that the SEC would likely use the fiduciary duty to levy charges, and it has done so repeatedly since it first charged a Kansas-based firm in March 2016.
“Municipal advisors owe a fiduciary duty to their municipal clients, who rely on advisors to make important financial decisions,” said Shamoil T. Shipchandler, director of the SEC’s Fort Worth Regional Office. “Undisclosed conflicts of interest can lead to significant investment losses, and prevent municipal entities from making informed decisions in their selection of municipal advisors. As described in today’s order, Barcelona fell well short of its obligations to this school district client.”
According to the SEC, Hinojosa, the sole employee and owner of Barcelona, began his business in June 2012 at the suggestion of an attorney, Sergio Munoz, Jr., for whom Hinojosa had been performing paralegal and administrative services since 2009.
Munoz Jr.’s firm, Munoz & Frankel, regularly worked as bond counsel including to the La Joya Independent School District (LJISD). Hinojosa continued working for Munoz & Frankel and Barcelona was sharing office space with the law firm, the SEC found. Munoz & Frankel also shared office space with another firm, Munoz & Associates, which was also run by Munoz Jr.
Hinojosa was an employee at Munoz & Frankel from 2009-2014 and at Munoz & Associates from 2012 until the present, the SEC said.
The commission alleged that despite having no advisory experience, Hinojosa produced and circulated to prospective municipal clients a misleading brochure that claimed he had four years of muni finance experience and that the “professionals” at Barcelona had participated in several muni offerings. The brochure also listed Hinojosa’s home address as Barcelona’s office address instead of using its actual location—the office it shared with Munoz & Frankel as well as Munoz & Associates.
Barcelona ultimately served as LJISD’s municipal advisor for three bond refundings -- two that closed in 2013 and one that closed in 2014. LJISD paid Barcelona $386,876.52 in municipal advisory fees on these transactions. Munoz & Frankel was bond counsel on all those transactions, yet the SEC found that Hinojosa never disclosed his continuing employment at the law firm and his resulting financial interest in the deals to the school district.
In addition to violating the Securities and Exchange Act of 1934 as amended by Dodd-Frank, the conduct also violated the MSRB’s Rule G-17 on fair dealing, the SEC said. That rule requires all MSRB registrants to “deal fairly with all persons and “not engage in any deceptive, dishonest, or unfair practice.”
The defendants agreed to disgorge $362,606.91 and prejudgment interest of $19,514.37 to the commission, as well as pay a civil money penalty of $160,000 for Barcelona and $20,000 for Hinojosa.
Hinojosa could not be reached for comment.
Robert Doty, president and proprietor at muni bond consulting firm AGFS, noted that the fiduciary duty is a broad concept, and said that the matters raised by the commission in this enforcement action are important facets of it.
“Accurate advertising is an important issue, and conflicts of issue are an important issue,” Doty said.
The MSRB adopted additional rules on these matters that were not in force at the time of the alleged conduct but aspects of which were considered to be law already under Dodd-Frank. The firm’s Rule G-42 on the duties of non-solicitor municipal advisors provides, among other things, for the disclosure of conflicts of interest and was approved in January 2016. Earlier this week, the SEC approved the MSRB’s proposal for a new muni advisor advertising rule that will become effective on Feb. 7, 2019.