The Securities and Exchange Commission today announced enforcement actions against 36 municipal underwriting firms for violations in municipal bond offerings. The cases are the first brought against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.
The Enforcement Division initiative announced in March 2014, offered favorable settlement terms to municipal bond underwriters and issuers who self-reported securities law violations. The first issuer charged under the initiative settled with the SEC in July 2014.
“The MCDC initiative has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers’ disclosure obligations and enhanced disclosure policies and procedures,” said SEC Chair Mary Jo White. “This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors.”
In today’s actions, the SEC alleged that between 2010 and 2014 the 36 firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The underwriting firms also allegedly failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their customers.
“The MCDC initiative highlights the importance of continuing disclosure in the municipal bond market and due diligence in the underwriting process,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “The initiative has brought much needed attention to these issues and has already improved the behavior of participants in the $3.7 trillion municipal bond market.”
Continuing disclosure provides municipal bond investors with information, including annual financial reports, on an ongoing basis. The SEC’s 2012 Municipal Market Report identified issuers’ failure to comply with their continuing disclosure obligations as a major challenge for investors seeking information about their municipal bond holdings.
“The settlements announced today reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward,” said LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit. “Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure.”
The 36 firms, which did not admit or deny the findings, agreed to cease and desist from such violations in the future. Under the terms of the MCDC initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm. The maximum penalty imposed is $500,000. In addition, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting.
The MCDC initiative, which is continuing, is being coordinated by Kevin Guerrero of the Enforcement Division’s Municipal Securities and Public Pensions Unit. The cases announced today were investigated by members of the unit, including Michael J. Adler, Eric A. Celauro, Joseph O. Chimienti, Kevin Currid, Susan E. Curtin, Peter J. Diskin, Keshia Ellis, Brian D. Fagel, Sally J. Hewitt, Jason A. Howard, Brian P. Knight, Robbie L. Mayer, Heidi Mitza, Cary S. Robnett, Ivonia K. Slade, Steven Varholik, Jonathan Wilcox, Monique C. Winkler, and Deputy Unit Chief Mark R. Zehner, with assistance from Ferdose al-Taie, Peter Moores, and Jeremiah Roberts.
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Link to the SEC’s orders and penalty amounts:
• The Baker Group, LP – $250,000
• B.C. Ziegler and Company – $250,000
• Benchmark Securities, LLC – $100,000
• Bernardi Securities, Inc. – $100,000
• BMO Capital Markets GKST Inc. – $250,000
• BNY Mellon Capital Markets, LLC – $120,000
• BOSC, Inc. – $250,000
• Central States Capital Markets, LLC – $60,000
• Citigroup Global Markets Inc. – $500,000
• City Securities Corporation – $250,000
• Davenport & Company LLC – $80,000
• Dougherty & Co. LLC – $250,000
• First National Capital Markets, Inc. – $100,000
• George K. Baum & Company – $250,000
• Goldman, Sachs & Co. – $500,000
• Hutchinson, Shockey, Erley & Co. – $220,000
• J.P. Morgan Securities LLC – $500,000
• L.J. Hart and Company – $100,000
• Loop Capital Markets, LLC – $60,000
• Martin Nelson & Co., Inc. – $100,000
• Merchant Capital, L.L.C. – $100,000
• Merrill Lynch, Pierce, Fenner & Smith Incorporated – $500,000
• Morgan Stanley & Co. LLC – $500,000
• The Northern Trust Company – $60,000
• Oppenheimer & Co. Inc. – $400,000
• Piper Jaffray & Co. – $500,000
• Raymond James & Associates, Inc. – $500,000
• RBC Capital Markets, LLC – $500,000
• Robert W. Baird & Co. Incorporated – $500,000
• Siebert Brandford Shank & Co., LLC – $240,000
• Smith Hayes Financial Services Corporation – $40,000
• Stephens Inc. – $400,000
• Sterne, Agee & Leach, Inc. – $80,000
• Stifel, Nicolaus & Company, Inc. – $500,000
• Wells Nelson & Associates, LLC – $100,000
• William Blair & Co., L.L.C. – $80,000