UBS Financial Services Inc. has agreed to pay over $10 million to resolve charges brought by the Securities and Exchange Commission for circumventing the priority given to retail investors in certain municipal bond offerings.
The SEC filed an order claiming that over a period of four years, UBS improperly allocated bonds intended for retail customers to parties known in the industry as “flippers”. Then they immediately resold or “flipped” the bonds to other broker-dealers at a profit.
SEC alleges that UBS registered representatives knew that flippers were not eligible for retail priority. SEC’s order also finds that UBS registered representatives assisted more than 2,000 trades with flippers, allowing UBS to obtain bonds for its own inventory, thereby circumventing the priority of orders set by the issuers and improperly obtaining a higher priority in the bond allocation process.
LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit said:
Retail order periods are intended to prioritize retail investors’ access to municipal bonds and we will continue to pursue violations that undermine this priority.
SEC has previously brought similar charges of municipal bond offering “flipping” and retail order period abuses in August 2018, December 2018, September 2019 and in April 2020.
UBS did not admit nor deny the findings but agreed to a cease-and-desist order. The order also imposes a $1.75 million penalty, $6.74 million in disgorgement of ill-gotten gains and more than $1.5 million in prejudgment interest and a censure.
SEC also set in motion proceedings against UBS registered representatives William S. Costas and John J. Marvin. The US watchdog found that Costas and Marvin submitted retail orders for municipal bonds on behalf of their flipper customers. The SEC also found that Costas helped UBS bond traders improperly obtain bonds for UBS’s own inventory through his flipper customer. Costas and Marvin agreed to pay prejudgment interest in the amount of $16,585 and a civil penalty of $25,000. Marvin also agreed to pay disgorgement and prejudgment interest of $27,966 and a civil penalty of $25,000. Both of them agreed to a 12-month limitation on trading negotiated new issue municipal securities.
Prior to that, the SEC settled charges against former UBS Executive Director, Jerry E. Orellana, for submitting retail orders to the underwriting syndicate from certain UBS customers who were flippers.
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