UBS pays $10 million to resolve SEC 'flipping' charges
UBS Financial Services Inc. must pay more than $10 million to resolve charges that it engaged in a so-called flipping scheme, improperly allocating bonds meant for retail customers to “flippers” who then immediately resold the bonds to other broker-dealers at a profit.
The Securities and Exchange Commission alleges that UBS representatives were involved with “flipping” and they knew or should have known those individuals were not eligible to gain priority in obtaining newly issued bonds, violating multiple municipal securities rules. The SEC also found that UBS representatives facilitated over 2,000 trades with flippers, which allowed UBS to obtain its own inventory, circumventing the priority of orders set by issuers and improperly getting a higher priority in the bond allocation process.
“Retail order periods are intended to prioritize retail investors’ access to municipal bonds and we will continue to pursue violations that undermine this priority,” said LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit.
As a result, UBS violated MSRB Rules G-11 on primary offering practices, MSRB Rule G-17 on fair dealing and MSRB Rule G-27 on supervising, the SEC said.
UBS did not admit nor deny the SEC’s findings.
The priority of orders is set by the issuer and can vary issuer to issuer. It establishes the sequence in which bonds will be allocated. That priority is important since orders for bonds in a primary offering can often exceed the number of bonds available. Orders from individual retail investors have the highest priority.
In a statement, UBS said it was pleased to resolve the matter. It noted that past action predates the launch of UBS’s new public finance business in 2017 and adoption of enhanced systems and procedures.
The SEC also settled proceedings late Monday against UBS registered representatives William Costas and John Marvin, who the SEC said negligently submitted retail orders for muni bonds on behalf of their flipper customers. The SEC also said Costas helped UBS bond traders improperly obtain bonds for UBS’s own inventory through his flipper customer.
Both agreed to settle charges while neither admitting nor denying the SEC’s findings.
The SEC said that between August 2012 and June 2016, UBS violated retail order period restrictions in new-issue muni bond offerings it distributed by allocating bonds intended for retail customers to customers known as “flippers.” UBS improperly allocated bonds to flippers on hundreds of retail orders, the SEC said.
UBS also improperly negotiated new-issue bonds for UBS’s inventory by indicating interest with flippers who then placed customer orders with the underwriting syndicate. That was instead of UBS submitting dealer orders directly with the syndicate on its own behalf. Therefore they circumvented the priority of orders and gave UBS access to a higher priority in the bond allocation process, the SEC said.
From August 2012 to June 2016, UBS allocated bonds to flippers on hundreds of retail orders from Core Performance Management LLC, which dissolved in 2016, and RMR Asset Management Company for new-issue bonds distributed by UBS.
During that time, Chris Rosenthal, a UBS representative, allegedly submitted the majority of ineligible retail orders on behalf of CPM and RMR, when he knew, or was reckless in not knowing, those orders did not qualify for retail priority, the SEC said.
“Rosenthal knew CPM and RMR were engaged in flipping new issue municipal bonds,” the SEC wrote in the order. “Rosenthal often included zip codes with the retail orders for CPM and RMR that were not associated with the relevant CPM or RMR account. Rosenthal would either receive the fraudulent zip code from CPM and RMR, or, in some instances, would look up a zip code on his own that would meet the issuer’s definition of retail priority.”
Two other former UBS registered representatives, Costas and Marvin, submitted ineligible retail orders on behalf of CPM, the SEC said.
Between April 2015 and June 2016, Jerry Orellana, a former executive director and municipal bond trader at UBS and who worked on the UBS syndicate desk, submitted some of the retail orders from Costas, Marvin and Rosenthal to syndicate members when he should have known those orders were ineligible for retail priority, the SEC said.
From August 2012 to June 2016, UBS made a profit of about $5.2 million from reselling bonds it had obtained through CPM and RMR.
This is one of many actions the SEC has taken regarding flipping. Relative to UBS’s charges, in August, 2018, the SEC charged CPM and RMR and 18 individuals with flipping. In December 2018, the SEC settled proceedings against Rosenthal.
In September 2019, the SEC charged former Wells Fargo Clearing Services trader Thomas Muldoon 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.
Cases thus far brought by the SEC involving flipping have been very specific and involve demonstrable knowledge that something is false, a securities lawyer said. In August 2018, when the SEC charged CPM and RMR, there was concern as to the scope of activity the SEC would pursue.
“People weren’t sure because prior to those cases that were filed in August two years ago, there had not been any precedent for them,” the securities lawyer said. “So the question was how far or how broad would the SEC go in carving out this new territory.”
So far, the SEC has been narrow in cases brought, involving an incorrect statement or knowledge that an incorrect statement has been made, the securities lawyer said.
A team in the SEC’s Division of Enforcement’s Public Finance Abuse Unit remains committed to bringing “flipping” cases, said Kathleen Marcus, a shareholder at Stradling law firm.
“Notably, the enforcement actions brought in August 2018, December 2018, September 2019 and April 2020 involved parties related to the enforcement action ultimately brought against UBS, so this has been a complex, multi-year effort by the SEC staff,” Marcus said.
UBS was held accountable if it knew or should have known about the problematic conduct through compliance measures and supervisory duties, despite their representatives’ efforts to disguise their plot, she said.