The SEC's $1 million flipping settlement
A recent settled enforcement proceeding highlights the Securities and Exchange Commission’s attention to so-called municipal bond flipping more than two years following the announcement of charges linked to a years-long scheme to circumvent the retail order process.
On Monday, Roosevelt & Cross, Inc., as well as its CEO Thomas Vigorito and President William Welsh, agreed to settle with the SEC on charges the firm allocated bonds intended for retail customers to unregistered brokers who then "flipped" them to other dealers.
The defendants neither admitted nor denied the SEC's findings, which were brought as administrative proceedings. This is one of several flipping cases brought since 2018.
Roosevelt consented to a cease-and desist order imposing a censure and requiring it to pay $681,037 in disgorgement, plus $135,978 in prejudgment interest, and a $200,000 civil penalty.
Vigorito was censured, fined $40,000, and is suspended from the industry for one year.
Welsh was censured, fined $25,000, and is suspended from the industry for six months. Both Welsh and Vigorito resigned, but the firm says they are expected to come back after their suspensions.
The SEC said Roosevelt violated the antifraud provisions of Section 17(a)(3) of the Securities Act of 1933, and Section 15B(c)(1) of the Securities Exchange Act of 1934. It also violated MSRB Rule G-11 on primary offering practices, MSRB Rule G-17 on fair dealing, and MSRB Rule G-27 on supervision, the SEC found.
Between March 2014 and May 2017, flippers got allocations of new issue bonds from Roosevelt and then immediately resold, i.e. “flipped” the bonds to other broker-dealers, typically at a profit, the SEC said.
“Although the flippers did not meet the issuer’s eligibility criteria for participation in the retail order period, Roosevelt allocated bonds to them on a retail basis,” the SEC said.
During that time, Roosevelt’s representatives placed retail orders for new bonds on behalf of Core Performance Management also known as Dockside Asset Management, and RMR Asset Management Company, the SEC said.
Between January 2014 and October 2016, some Roosevelt representatives purchased new issue bonds through Dockside and RMR almost 800 times — 187 of which was when Roosevelt was also in the underwriting syndicate for the offering. By doing this, Roosevelt’s orders were given higher priority in the bond allocation process.
“In some cases, the Roosevelt registered representatives submitted Roosevelt’s orders to Dockside or RMR during retail order periods when they should have known that those orders may be submitted to the lead underwriter as retail orders,” the SEC said. “In such circumstances, some legitimate retail customers were denied the opportunity to purchase new issue bonds at the initial offering price.”
Between January 2015 and July 2016, Vigorito placed at least 31 retail orders on behalf of RMR, submitting those orders during retail order periods in some instances. He also submitted inaccurate zip codes and obtained bonds from RMR, the SEC said.
Welsh placed 36 retail orders between March 2014 and May 2017 for new issue bonds on behalf of Dockside and The Murphy Companies LLC, which was affiliated with RMR, submitting those orders during retail periods in some instances.
This settlement is part of the SEC’s multi-year focus on flipping.
In 2018, the SEC charged CPM and RMR and 18 individuals with fraud for participating in a scheme to improperly gain an advantage in obtaining new issue bonds. In September 2019, the SEC charged a former Wells Fargo Clearing Services trader for allegedly placing fraudulent retail orders to receive higher priority in new issue bond allocations on 16 occasions. In April 2020, the SEC settled charges with Boenning & Scattergood, Inc. and two of its registered representatives for improperly obtained new-issue muni bonds. In July, UBS Financial Services Inc. paid $10 million to resolve charges related to flipping.
“The SEC conducted a multiyear investigation into certain unregistered broker-dealers known as flippers,” said Matthew Campolettano, Roosevelt’s chief compliance officer. “Roosevelt & Cross was one of the firms that interacted with them and failed to detect fraudulent misrepresentations. These dealings were a very small part of our business and took place between three and six years ago. We’ve cooperated with the SEC and took proper action, and we’re pleased to put the matter behind us.”