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Regulation and Compliance > Federal Regulation > SEC

UBS to Pay Over $10M for Muni Violations

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An illuminated UBS logo sits outside UBS AG’s headquarters in Zurich, Switzerland. (Photographer: Gianluca Colla/Bloomberg)

UBS Financial Services agreed to pay more than $10 million to resolve securities violations related to municipal bond offerings, according to the Securities and Exchange Commission.

The firm “circumvented the priority given to retail investors in certain” muni offerings, the SEC said Monday in announcing the settlement.

UBS did not immediately respond to a request for comment on Tuesday.

According to an SEC order, between August 2012 and June 2016, UBS improperly allocated bonds intended for retail customers to parties known in the industry as “flippers,” who then immediately resold or “flipped” the bonds to other broker-dealers at a profit.

“During the relevant period, UBS improperly allocated bonds to the flippers on hundreds of retail orders when those flippers were not eligible for retail priority,” according to the order.

“In addition, UBS, through certain registered representatives, improperly obtained negotiated new issue bonds for UBS’s inventory by placing indications of interest with the flippers who then placed customer orders with the underwriting syndicate, instead of UBS submitting dealer orders directly with the syndicate on its own behalf,” the order said.

Also, UBS-registered representatives facilitated more than 2,000 trades with flippers, enabling UBS to obtain bonds for its own inventory, circumventing the priority of orders set by the issuers and improperly obtaining a higher priority in the bond allocation process, the SEC alleged.

UBS-registered representatives knew or should have known that flippers were not eligible for retail priority, according to the SEC.

Without admitting or denying the findings, UBS consented to a cease-and-desist order that found it violated the disclosure, fair dealing and supervisory provisions of Municipal Securities Rulemaking Board Rules and also failed reasonably to supervise within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934, according to the SEC.

The order imposed a $1.75 million penalty, $6.74 million in disgorgement of ill-gotten gains and over $1.5 million in prejudgment interest, along with a censure.

In related actions announced Monday, the SEC instituted settled proceedings against UBS registered representatives William S. Costas and John J. Marvin. The SEC’s orders found that Costas and Marvin negligently submitted retail orders for municipal bonds on behalf of their flipper customers and that Costas also helped UBS bond traders improperly obtain bonds for UBS’s own inventory through his flipper customer.

Costas and Marvin agreed to settle the charges without admitting or denying the SEC’s findings, and consented to orders finding they violated MSRB Rules G-11(k) and G-17, the regulator said.  Costas agreed to pay disgorgement and prejudgment interest totaling $16,585 and a civil penalty of $25,000, while Marvin agreed to pay disgorgement and prejudgment interest totaling $27,966 and a civil penalty of $25,000, according to the SEC. Both also consented to a 12-month limitation on trading negotiated new issue municipal securities, the SEC said.

Costas has been registered with UBS since 1997, according to the Financial Industry Regulatory Authority’s BrokerCheck website. Marvin has been registered with UBS since 2007, according to BrokerCheck.

“Retail order periods are intended to prioritize retail investors’ access to municipal bonds and we will continue to pursue violations that undermine this priority,” according to LeeAnn G. Gaunt, chief of the SEC Division of Enforcement’s Public Finance Abuse Unit.

The SEC previously settled charges against Jerry E. Orellana, a former UBS executive director, for submitting retail orders to the underwriting syndicate from certain UBS customers who were flippers.

The SEC also previously brought charges of municipal bond offering “flipping” and retail order period abuses in August 2018, in December 2018, in September 2019, and in April 2020.

The December 2018 order involved a settlement with Chris D. Rosenthal, a former registered representative and municipal bond salesman for UBS Financial Services. The September 2019 order involved a settlement with Wells Fargo Clearing Services trader Thomas C. Muldoon.


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