UBS has agreed to pay more than $10 million following SEC charges the firm violated municipal bond securities rules.
The SEC complaint alleged that UBS allowed two unregistered entities, Core Performance Management in Boca Raton, Fla., and RMR Asset Management in Chula Vista, Calif., to flip bond offerings over a four-year period. Flipping is the process whereby firms improperly allocate bonds intended for retail investors to other parties who then 'flip' the bonds and sell them to other broker/dealers for a profit.
In addition, the SEC alleged that UBS registered representatives knew or should have known that flippers were not eligible for retail priority and that UBS registered representatives facilitated over 2,000 such trades, allowing UBS to fill its own inventory with such bonds.
The complaint named four UBS employees involved in the case, including registered representatives William Costa, 55, of Oak Park, Calif., and John Marvin, 59, of North Palm Beach, Fla., In related actions, the SEC settled with former UBS executives Jerry Orellana, 43 of Paramus, N.J. and Chris Rosenthal, 56, of Pepper Pike, Ohio, who is now barred from FINRA.
UBS is a distributor for broker-dealers who underwrite municipal bonds. Its registered agents fulfill retail and institutional requests for the bond offerings by submitting those orders to UBS’ “syndicate desk.” The person who mans the desk takes those orders and sends them to the underwriting broker/dealer.
Institutional orders for negotiated municipal bonds are considered a low priority, they tend to go unfilled, according to the SEC. Thus flippers whose business comes from flipping bonds try to get higher priority status for their orders.
Rosenthal started submitting orders from CPM and RMR as retail orders in August 2012. According to the complaint, he often changed the zip codes for the flippers to ensure the orders received retail priority, indicating that he was aware that the two companies were indeed flippers. In 2015, Marvin began to do the same, also changing the zip codes. The SEC found two written communications where Marvin described CPM as a “flipper,” showing his awareness. Then, in April 2016, Costas started putting in orders for CPM.
Orellana, who manned the syndicate desk, accepted orders for new issue bonds from the UBS reps between April 2015 and June 2016 and then submitted them to the underwriting broker/dealers. Even though the reps did not disclose to Orellana that CPM and RMR were flippers, the complaint states that Orellana was aware of their business because he traded with them in 2012 and 2014 when he was a UBS bond trader.
In those four years, UBS brought in $1.54 million from its transactions with CPM and RMR. It also acquired 2,382 new issue bonds from CPM and RMR at a marked up price. The firm made $5.2 million from reselling the bonds it bought from CPM and RMR.
In the SEC investigation into UBS’s policies and procedures it found no sign of written guidance concerning retail order period and its restrictions.
Orellana was charged in April. Without admitting or denying the charges, he consented to a six-month suspension from the industry and penny stock bar. He also has to pay a $25,000 civil penalty.
In addition to being barred for five years, Rosenthal is to pay $284,080 in disgorgement, $15,128 in prejudgement fees and a $75,000 civil penalty.
Costas, also without admitting or denying the charges, agreed to pay $16,585 for prejudgement interest in addition to a civil penalty of $25,000. And Marvin agreed to $27,966 in disgorgement and prejudgment interest along with a $25,000 civil penalty. Costas and Marvin are suspended from trading negotiated new issues municipal securities for 12 months.
UBS’ $10 million settlement includes $6,740,000 in disgorgement, a civil penalty of $1,750,000 and $1.5 million in prejudgment interest.