Thursday, September 27, 2007
The SEC instituted settled enforcement actions against two broker-dealers and their CEOs for fraudulent auction practices in the municipal bond market. The Commission issued Orders against Philadelphia-based Regional Brokers, Inc., and its CEO Patrick Lubin; and against Cherry Hill, N.J.-based D.M. Keck & Company, Inc. (doing business as Discount Munibrokers), CEO Donald Michael Keck, and a supervisor, Patricia Ann Sealaus. The firms served as "broker's brokers" in auctions by providing brokerage services exclusively for municipal securities dealers.
The Orders make the following findings:
Regional was placing bids on municipal bonds in auctions where Regional was acting as the broker's broker, without the intent of ever purchasing the bonds. Often, these bids were placed as the second highest bid, known as the "cover bid," after the high bid had already been made, and right before the close of the auction. Regional deceived its customers by fraudulently giving the appearance that Regional was conducting municipal bond auctions with tighter spreads and by creating the illusion of additional interest in the bonds.
Regional consistently accepted late bids in "Sharp Time" auctions with knowledge that the bidding broker-dealer's late bid was the highest — and therefore the winning — bid in the auction. This conduct favored the late bidder and disadvantaged other auction participants who had submitted their bids within the required Sharp Time and who had less time to prepare their bids in accordance with the explicit terms of the auction.
Similar to the conduct at Regional, Discount Munibrokers disseminated fake bids in auctions it conducted in an effort to convince the high bidders that the auctions were more competitive than they really were or to meet minimum bid requirements imposed by certain broker-dealers attempting to sell securities through the auction process.
Discount Munibrokers also engaged in an "adjusted trading" scheme with a municipal securities trader at another broker-dealer. Specifically, on certain municipal bond sales brokered by Discount Munibrokers the firm paid the other broker-dealer proceeds from sales that were substantially greater than the actual prices paid by the purchasers in those transactions. To make up Discount Munibrokers' losses on those transactions, on other sales, the same selling broker-dealer received proceeds that were substantially less than what was paid by the purchasers. Discount Munibrokers reported the fictitious prices used in the adjusted trading scheme to the market as the actual prices paid on the transactions.