UBS Financial Services Inc. agreed to pay more than $10 million to settle charges filed by the Securities and Exchange Commission (SEC) in connection with its municipal bond offering flipping scheme.
According to the SEC Order, UBS violated certain rules of the Municipal Securities Rulemaking Board (MSRB). The Swiss financial services firm also failed to comply with “retail order period restrictions in new issue municipal bond offerings it distributed by allocating bonds intended to retail customers to certain parties known in the industry as flippers.”
The Commission noted that UBS engaged in the bond-flipping scheme for four years, between August 2012 and June 2016. During the relevant period, the flippers immediately resold or flipped the bond to other broker-dealers at a profit after acquiring it from the Swiss financial services firm.
Additionally, the SEC stated that UBS improperly obtained negotiated new issue bonds for its inventory by placing an indication of interest with the flippers, who then placed customer orders with the underwriting syndicate. The practice allowed UBS to circumvent the priority of order and to improperly gain access to a higher priority in the bond allocation process.
In a statement, SEC Division of Enforcement Public Finance Abuse Unit Chief LeaAnn Gaunt, 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.”
UBS offered to settle with the SEC without admitting or denying the allegations against it. As part of the settlement, the Swiss financial services firm agreed to a cease-and-desist order that finds it violated disclosure, fair dealing, and supervisory provisions of the MSRB, particularly rules G-11(k), G-17, and G-2.
UBS also consented to the order that finds it failed to reasonably supervise its registered representatives within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934.
UBS representatives settle with SEC, to pay civil penalties
In related cases, UBS registered representatives William Costas and John Marvin offered a settlement with the SEC to resolves allegations. They consented to the Commission’s order requiring them to pay civil penalties, disgorgement, and prejudgment interests.
The SEC Orders find that Costas and Marvin negligently submitted retail orders for municipal bonds on behalf of their flipper customers. The orders also find that Costas helped UBS bond traders to improperly obtain bonds for UBS’s own inventory through his flipper customer.
Without admitting or denying the SEC charges, Costas and Marvin agreed to the entry of the orders finding that they violated MSRB Rules G-11(k) and G-17.
Costas agreed to pay disgorgement and prejudgment interest totaling $16,585 and a civil penalty of $25,000. Marvin agreed to pay disgorgement and prejudgment interest totaling $27,966 and a civil penalty of $25,000. They also agreed to a 12-month limitation on trading negotiated new issue municipal securities.
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