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Regulation and Compliance > Federal Regulation > SEC

SEC Charges 18 People in Bond Flipping, Kickback Scheme

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The Securities and Exchange Commission on Tuesday charged two firms and 18 individuals in a scheme to improperly divert new issue municipal bonds to broker-dealers at the expense of retail investors.

The SEC alleges that from at least 2009 to 2016, Core Performance Management LLC, RMR Asset Management Co., their principals, and certain of their associates, misrepresented their identities to gain priority in new issue municipal bond allocations.

The defendants – known in the industry as “flippers” – purchased new issue municipal bonds, often by posing as retail investors to gain priority in bond allocations, according to the SEC’s complaint.

“The defendants then ‘flipped’ the bonds to broker-dealers for a fee,” the SEC said.

The SEC also charged a municipal underwriter for accepting kickbacks from one of the flippers.

“By improperly placing retail orders on behalf of broker-dealers, we allege the flippers prevented true retail investors from receiving priority in municipal bond offerings,” said LeeAnn Gaunt, chief of the Division of Enforcement’s Public Finance Abuse Unit, in a statement.  “We are continuing our investigation to determine whether other market professionals had a role in these improper practices.”

Core Performance and Managing Director James Scherr, along with RMR and its president, Ralph Riccardi, and 13 of their associates settled the SEC’s charges without admitting or denying the allegations, agreeing to injunctions, to return allegedly ill-gotten gains with interest, pay civil penalties, be subject to industry bars or suspensions, and to cooperate with the SEC’s ongoing investigation.

The settlements are subject to court approval.

The SEC’s charges against RMR associates Richard C. Gounaud, Jocelyn M. Murphy, and Michael S. Murphy will be litigated in U.S. District Court for the Southern District of California.

In a related action, the SEC instituted settled proceedings against Charles Kerry Morris, the former head of municipal underwriting at broker-dealer NW Capital Markets Inc.

Morris took kickbacks from Scherr and engaged in a parking scheme in which Morris allocated new issue bonds to Scherr with the understanding that Morris would repurchase them, the SEC states.

As a result of this trading, the SEC said that it found that Morris and NW Capital “caused Scherr and Core Performance’s improper unregistered broker activity. The SEC found that Morris’s supervisor, James A. Fagan, failed reasonably to supervise Morris’s activities.”

Morris, NW Capital and Fagan agreed to settle the charges without admitting or denying the SEC’s findings.

Morris agreed to pay a total of $254,009 and to consent to an industry bar.

NW Capital agreed to be censured and pay a total of $87,065 and Fagan agreed to pay a $10,000 penalty and to consent to a six-month supervisory suspension.


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