Brokerage firm David Lerner Associates Inc. was ordered to pay more than $3.7 million in fines and restitution for overcharging retail customers on sales of more than 1,500 municipal bonds and 1,700 transactions involving collateralized-mortgage obligations.
A Financial Industry Regulatory Authority Inc. hearing panel found that the firm charged excessive markups on the transactions from January 2005 through January 2007, resulting in customers incurring “unfairly high prices” and lower yields than they should have received.
The panel also suspended the firm's head trader, William Mason, from the securities industry for six months and fined him $200,000.
He and David Lerner Associates plan to appeal the decision, Joseph Pickard, the firm's general counsel, said in a statement.
He said Finra's ruling “is simply wrong” and ignores “the relevant facts and fails to follow the law.” He also stated that Finra didn't challenge “the other 95% of the transactions which occurred during the same period.”
“The hearing panel decision re-flects Finra's at-tempt to unfairly seize funds from a broker-dealer by making allegations which are simply not based on facts, recognized industry standards or current law,” Mr. Pickard said.
The Finra panel contends that the firm's trades “reflected a pattern of intentional excessive markups” in investments that were available at “significantly lower prices” than the firm charged. The investments themselves were rated investment-grade or above, it said.
David Lerner Associates continued with its unfair pricing practices even after receiving a letter of caution about its markups following a 2004 exam and after receiving Wells notices about the issue in July 2009, according to Finra. The panel said it took this history, including that the firm “has not taken any corrective measures to improve their fixed-income markup policies and practices” into consideration when setting the sanctions.
RESTITUTION
The decision, which resolves charges Finra brought in May 2010, includes a $2.3 million fine and restitution to affected customers of $1.4 million, plus interest.
“Finra takes offense when it or the [Securities and Exchange Commission] has spotted the conduct and provided warnings in the past,” said Andrew Stoltmann, a plaintiff's attorney who represents about 15 claimants in other legal actions against David Lerner Associates.
Last week's decision is not the end of the brokerage's disciplinary dealings with Finra. In a separate case filed in May 2011, the industry regulator alleged that David Lerner Associates sold $300 million worth of Apple real estate investment trusts to unsophisticated investors without considering whether they were suitable. The firm denies the allegations.
In January, Finra amended the complaint against the firm to allege that it and founder David Lerner himself continued to pitch nontraded REITs improperly through at least November 2011.
In the decision issued last Wednesday, the panel said markups on the muni bonds ranged from 3.01% to 5.78% and markups charged on the CMOs ranged from 4.02% to 12.39%.
FAIR AND REASONABLE
The markup was charged whether the customer bought as much of the CMO as $225,000 or as little as $8,000. Finra rules require that markups be fair and reasonable, taking into account all relevant factors, such as the amount of money involved in a transaction and the availability of the security in the marketplace.
The firm's supervisory system for these products also was inadequate and it failed to establish and maintain procedures to monitor the fairness of pricing of munis and CMOs, the panel decision stated.
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