Unreasonable Markup and Markdown FINRA Arbitration and Litigation Attorney Russell L. Forkey, Esq.
FINRA Hearing Panel Fines David Lerner Associates $2.3 Million for Selling Municipal Bonds, CMOs to Retail Customers at Unfair Prices, and for Supervisory Violations
Restitution Provided to Customers; Firm’s Head Trader Fined and Suspended
The Financial Industry Regulatory Authority (FINRA) recently announced that a FINRA hearing panel ruled that Long Island-based David Lerner Associates, Inc. (DLA) charged excessive markups on municipal bond and collateralized mortgage obligation (CMO) transactions over a two-year period, causing the firm’s retail customers to pay unfairly high prices and receive lower yields than they otherwise would have received. The panel fined DLA $2.3 million for the markup and related supervisory violations, and ordered the firm to pay restitution of more than $1.4 million, plus interest, to affected customers. The panel also fined its head trader William Mason $200,000 and suspended him for six months from the securities industry. The ruling resolves charges brought by FINRA’s Department of Enforcement in May 2010.
The panel found that from January 2005 through January 2007, DLA and Mason charged retail customers excessive markups in more than 1,500 municipal bond transactions and charged excessive markups in more than 1,700 CMO transactions from January 2005 through August 2007. FINRA rules require that the amount of a markup must be fair and reasonable, taking into account all relevant factors and circumstances, including the type of security involved, the availability of the security in the market and the amount of money involved in a transaction.
The hearing panel decision notes that DLA’s municipal bond and CMO trades reflected a pattern of intentional excessive markups. The municipal bonds and CMOs in the transactions were all rated investment grade or above, and were readily available in the market at significantly lower prices than DLA charged.
The panel noted that DLA charged markups on the municipal bonds ranging from 3.01 percent to 5.78 percent and charged markups on the CMOs ranging from 4.02 percent to 12.39 percent. Regardless of whether a DLA customer bought as much as $225,000 or as little as $8,000 of a CMO, the price was marked up “without consideration for the amount of money involved in the transaction.” The hearing panel concluded that as a result of the unfair markups, the customers received lower yields than they would have received if the markups had been fair and reasonable.
The panel also found that DLA’s supervisory system for its municipal bonds and CMOs was inadequate on several levels. DLA failed to establish and maintain adequate procedures to monitor the fairness of pricing for municipal bonds and CMOs, and failed to have adequate procedures in place to ensure that it recorded the time that the municipal bond orders were received from customers. DLA also failed to record the order receipt time of municipal order tickets.
In determining the sanctions, the panel took into consideration DLA’s relevant disciplinary history. Despite having received a Letter of Caution raising FINRA’s concerns about DLA’s markup practices after a 2004 exam, and after having received a Wells Notices concerning the matter in July 2009, DLA continued its unfair pricing practice. The panel’s decision notes that “in keeping with their unwillingness to accept responsibility, DLA has not taken any corrective measures to improve their fixed income markups policies and practices.”
Unless the hearing panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel’s decision becomes final after 45 days.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2011, members of the public used this service to conduct 14.2 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database.