The SEC has filed charges against two unregistered firms and 18 individuals for allegedly posing as retail investors to "flip" new issue municipal bonds to broker-dealers in exchange for kickbacks. The SEC claims that from at least 2009 to 2016, Core Performance Management LLC, RMR Asset Management Co., their principals, and certain associates misrepresented their identities to gain priority in municipal bond allocations. The SEC also charged NW Capital Markets Inc., a municipal underwriter and an SEC- registered broker-dealer, with accepting kickbacks from one of the flippers (SEC v. Core Performance Management, LLC, August 14, 2018).
"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 G. Gaunt, who heads the SEC Enforcement Division’s Public Finance Abuse Unit. "We are continuing our investigation to determine whether other market professionals had a role in these improper practices."
The SEC’s complaints against Core Performance Management and RMR Asset Management allege that the firms exploited a set of issuer-approved rules known as the "priority of orders," which typically require underwriters to give retail investor orders the highest priority when allocating new issue municipal bonds. To circumvent the priority of orders, the defendants acted as intermediaries by taking orders for new issue bonds from broker-dealers who were typically unable to purchase those bonds directly because of their low priority. The defendants then filled those orders with bonds obtained by misrepresenting their identities to the underwriters of the offerings. According to the SEC, these defendants used fictitious business names, falsely linked their orders to ZIP codes within the issuer’s jurisdiction, and split orders among dozens of accounts.
The SEC alleges that between 2012 and 2016, participants in the scheme allegedly executed over 50,000 trades on behalf of RMR Asset Management and over 35,000 trades on behalf of Core Performance Management. The firms then quickly sold or flipped those bonds to their own broker-dealer customers for a commission, usually within the same day, generating millions of dollars in profits.
In a related action, the SEC instituted settled proceedings against Charles Kerry Morris, the former head of municipal underwriting at NW Capital Markets Inc. The SEC found that Morris took kickbacks from Core Performance Management’s founder, James P. 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 found that Morris and NW Capital were a cause of Scherr and Core Performance acting as unregistered broker-dealers. The Commission also found that Morris’s supervisor, James A. Fagan, failed reasonably to supervise Morris’s activities.
The case is No. 18-cv-81081.
MainStory: TopStory BrokerDealers Enforcement FraudManipulation MunicipalSecuritiesNews CaliforniaNews FloridaNews
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