MILBERG VS. MUNIS
By Kathleen Pender
San Francisco Chronicle
September 26, 2002
MILBERG VS. MUNIS: San Diego law firm Milberg Weiss, best known for suing
Silicon Valley companies on behalf of shareholders, is taking aim at municipal
bond brokers, alleging they charge unjustifiably large, poorly disclosed
commissions in the form of spreads and markups.
Last week, the firm filed a suit in San Francisco Superior Court on behalf
of Kevin Olson of San Francisco, who runs MunicipalBonds.com.
The defendants include Salomon Smith Barney, UBS Paine Webber, Bear Stearns,
Merrill Lynch, Morgan Stanley, Prudential Securities, Bank of America and
Charles Schwab.
The suit alleges that the defendants "systematically employed an
unscrupulous and fraudulent practice of charging markups in excess of 1% and
sometimes greater than 5% and far in excess of what defendants charged for
equity transactions of similar size, risk and dollar amount."
It also says the defendants failed to disclose their profit, another unfair
business practice.
The suit applies only to previously issued bonds trading in the secondary
market, not newly issued bonds, where spreads average just 0.7 percent.
Olson considers himself an advocate for municipal bond investors. His Web
site posts daily pricing information for bonds that traded at least three
times. The data come from the Municipal Securities Rulemaking Board.
For each bond, the site shows the highest and lowest bid (the price at
which a customer sells to a broker) and the highest and lowest offer (the
price at which a customer buys from a dealer). The difference between the bid
and offer is the spread or markup, which is the broker's commission.
Olson puts a red flag next to bonds where the best bid and best ask price
exceed 4 percent. Each day he highlights the 10 highest markups. Wednesday's
10 worst spreads ranged from 6.3 percent to 15.3 percent.
His site also lets investors plug in a bond they bought and get prices for
comparable bonds.
Although municipal bond spreads have come down in recent years, they're
still far higher than they are for other securities.
Better disclosure of muni bond trades has helped, but it's still not good
enough, Olson says. The MSRB data do not include bonds that trade infrequently,
and they do not identify which firms handled the trade.
The MSRB, which regulates muni bond brokers, is run by muni bond dealers.
Olson says he has been badgering brokerage firms to provide better
disclosure and lower commissions, but has run out of patience. So he
approached Milberg Weiss about filing a lawsuit.
Milberg Weiss advertises itself as "the world's leading class action law
firm." But this suit is not a class action. It is called a private attorney
general complaint filed on behalf of the general public.
Olson couldn't file a class-action suit because he's not an injured
plaintiff, and he's not seeking monetary damages. He's asking that the
defendants be enjoined from charging excessive fees and pay his attorney's
fees.
Stan Mallison, Olson's attorney, says it's "quite possible the suit could
be turned into a class action."
Olson would like to see muni bond spreads below 1 percent. "We're going to
show at trial an average spread between 2 and 3 percent," Mallison says.
Zane Mann, publisher of the California Municipal Bond Advisor, would like
to see better disclosure and lower spreads. But he wonders if the suit is a
self-serving attempt by Olson to gain publicity and money and by Milberg Weiss
to recruit plaintiffs for a class-action suit that would generate "a zillion
dollars" in fees.
Olson says he's running the site out of his pocket and would like to get
financing and turn it into a nonprofit organization.
"What I'm doing is for the public benefit," he says.
Glen Mathison, a spokesman for Schwab, says, "We feel the lawsuit is
without merit. We have the controls in place to ensure our bond pricing has
been fair."
Copyright 2002 San Francisco Chronicle
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