MUNI WATCH: Web Site Operator Tackles Dealers On Pricing
By Stan Rosenberg
16 October 2002
16:53 GMT
NEW YORK -(Dow Jones)- A Web site that red-flags price disparities among the
$9.5 billion or so of municipal bonds traded daily in the secondary market
is causing problems for dealers and interdealer brokers.
The web site, municipalbonds.com, takes the point of view that "price
transparency has not been available in the municipal bond market" even
though munibond brokers and dealers are required to report their daily
transactions to a self-regulatory group, the Municipal Securities Rulemaking
Board.
The MSRB releases prices for actively traded bonds - those that trade three
times or more - the next day. Other prices are released a week after the
bonds trade.
But that isn't doing the job, says Kevin Olson, a 40-year-old former
munibond employee on several West Coast trading and underwriting desks. The
market, he says, is `inefficient" and has no real interest in changing the
status quo.
As reported, Olson last month filed a lawsuit against nine of the largest
municipal bond broker-dealers, charging them with setting unfair prices for
municipal bonds and taking excessive markups and fees on munibond trading in
violation of MSRB rules.
The suit alleges that they failed to publicly disclose this "unscrupulous
and fraudulent practice." Additionally, it says, "some defendants included a
phony processing fee or similar box on their standard confirmations and
specified in such box for customer transactions that the fee was relatively
small."
Their motive, according to the suit: to "materially increase by at least
tens if not hundreds of millions of dollars their revenues from municipal
bond transactions."
The suit was filed against Citigroup Inc.'s (C) Salomon Smith Barney Inc.
unit, UBS AG's (UBS) UBS PaineWebber Inc. unit, Bear Stearns Cos. (BSC),
Merrill Lynch & Co. (MER), Morgan Stanley (MWD), Prudential Securities Inc.
(PRU), Charles Schwab & Corp. (SCH), U.S. Bancorp (USB) and Bank of America
Corp. (BAC).
Olson's action says he hasn't been harmed individually, and it doesn't seek
monetary compensation, but it asks for injunctive relief "on behalf of U.S.
residents" to stop the dealers from conducting "further unfair business
practices, including the charging of excessive fees, markups, markdowns and
commissions," which he says harm the public.
Among claims in the suit is that the municipal bond market is "opaque,"
meaning that market prices are "clear and known" to broker dealers, but not
to the general public, presenting opportunities for overcharging. It further
says that compensation for munibond transactions should be "substantially"
less than 1%, but sometimes exceeds 5%, "far in excess of what defendants
charged for equity transactions of similar size, risk and dollar amount."
To underscore his points, Olson set up his site in early 2000 and now
publishes Red Flag Reports and Worst Spread Studies, both of which are based
on a daily feed of MSRB data that he receives and then scrubs through
programs of his own.
The "Worst Municipal Bond Market Spreads For 3rd Quarter 2002" was published
Oct. 2 and is topped by a 70.5 point differential between highest bid and
lowest offer on July 25 for a Chicago, Ill., O'Hare International Airport
special facilities revenue refunding bond for United Air Lines (UAL).
The Red Flag Reports are columnar listings of trades in which red flags
indicate a bid or offer side with more than a 1-point spread between lowest
and highest bid or lowest and highest offer, as well as a more than 4-point
spread between bid and offer. A recent modification also now considers the
worst lowest bid against the worst highest offer.
The site also allows users to access prices by state and to receive free
daily e-mails of Yesterday's Worst Ten Market Spread Offenders.
Responses to Olson's suit are due Friday, according to Stanley S. Mallison,
an attorney with Milberg Weiss Bershad Hyndes & Lerach LLP, San Francisco.
That firm specializes in class action suits and represents Olson in the suit
filed in state superior court in San Francisco County.
Most of the firms charged in Olson's suit either wouldn't comment or didn't
respond to phone calls seeking comment. A spokesman for Merrill Lynch,
however, said the firm believes the suit to be "without merit" and will
"aggressively assert our position and vigorously defend it."
-By Stan Rosenberg, Dow Jones Newswires, 201-938-2143;
stan.rosenberg@dowjones.com
Dow Jones Capital Markets Report
English
(Copyright (c) 2002, Dow Jones & Company, Inc.)
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