June 30, 2004

New York Times: 8 Investment Firms Are Fined in Sales of Municipal Bonds

By Bloomberg News
UBS, Merrill Lynch and six other investment firms were ordered yesterday to pay a total of $610,000 in fines and restitution after securities regulators found that investors received below-market prices for their municipal bonds.

NASD said the firms bought bonds from customers that were later resold by other dealers at "markedly higher prices," in violation of Municipal Securities Rulemaking Board rules. The rules require municipal bond dealers to deal fairly with customers and to buy and sell bonds at fair prices, NASD said.

Kevin Olson, 43, a former trader, said that while the fines did not seem significant, what is important was "that NASD is starting to look at the data and make judgments and enforce on that."

Since 2000, Mr. Olson has sent reports about large price differences in the municipal bond market to regulators.

NASD also fined Charles Schwab & Company; Edward Jones & Company; First Trust Portfolios of Lisle, Ill.; Morgan Stanley; Prudential Financial Inc.; and the Wachovia Corporation. A spokeswoman for Wachovia, Mary Eshet, declined to comment and referred all calls to NASD.

A Merrill spokesman, Mark Herr, and a Morgan Stanley spokesman, Mark Lake, also declined to comment.

The NASD inquiry, which took place from July 2002 to June 2003, focused on 60 transactions worth $1.4 million at par value, and found that customers received prices that were below fair market value by 6.57 percent to 142.55 percent.

The customers lost $300,029.95 in the transactions, NASD said. The smallest amount of bonds traded was $5,000 in par value and the largest lot traded was $200,000, NASD said.

The securities firms were asked by customers to sell municipal bonds for them. The firms contacted a so-called broker's broker for a bid. The firms bought the bonds from the customers and resold them to the inter-dealer broker for "a nominal gain," NASD said.

NASD is examining the role of the inter-dealer brokers in the transactions, and is looking at municipal bond transactions at other firms, said Barry Goldsmith, NASD executive vice president for enforcement.

The firms, which did not admit or deny the NASD findings, agreed to pay $310,000 in fines and $300,000 in restitution. UBS, the second-biggest underwriter of municipal debt last year, after Citigroup, will pay the most in fines and restitution, $200,666.