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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES ACT OF 1933
Rel. No. 8265 / August 15, 2003

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 48352 / August 15, 2003

Admin. Proc. File No. 3-9499


In the Matter of

MARK DAVID ANDERSON
Marina Del Rey, California


OPINION OF THE COMMISSION

BROKER-DEALER PROCEEDINGS
CEASE-AND-DESIST PROCEEDINGS

Grounds for Remedial Action

Excessive Markups and Markdowns

Associated person of registered broker-dealers charged customers excessive markups and markdowns. Held, it is in the public interest to require respondent to disgorge ill-gotten profits, to pay a civil money penalty, and to cease and desist from committing or causing any violations or any future violations of the provisions he was found to have violated or to have caused.

APPEARANCES:

Michael R. Wilner and Thomas A. Zaccaro, for the Division of Enforcement.

H. Thomas Fehn, Gregory J. Sherwin, and Elizabeth Lowery, of Fields, Fehn & Sherwin, for Mark David Anderson.

Appeal filed: May 20, 2002
Last brief filed: September 12, 2002

I.

The Division of Enforcement appeals from the decision of an administrative law judge dismissing proceedings against Mark David Anderson. From December 1992 through December 1994, Anderson was president and owner of Annandale Securities, Inc., a former registered broker-dealer.1 From at least 1995 through 1997, Anderson was president of Armscott Securities, Ltd., a registered broker-dealer. 2

The Division alleged that Anderson willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 3 by charging undisclosed and excessive markups and markdowns in trades with retail customers. The Division further alleged that Anderson aided and abetted and caused Armscott's violations of Exchange Act Sections 15(c)(1) and 15B(c)(1), Exchange Act Rule 15c1-2, 4 and Rules G-17 and G-30 of the Municipal Securities Rulemaking Board (the "MSRB"). 5 We base our findings on anindependent review of the record, except with respect to those findings not challenged on appeal.

II.

A. Anderson's Practices. The relevant facts of this case, including the amount of the markups and markdowns charged (on a percentage and dollar basis), are undisputed. 6 From December 1992 through March 1997, while associated with Annandale and/or Armscott, Anderson engaged in the 96 securities trades at issue here in which he charged retail customers either an undisclosed markup, if the customer was purchasing securities, or an undisclosed markdown, if the customer was selling securities. 7

Neither firm acted as a market maker in any of the securities at issue. Anderson admits that he executed these trades "on a 'riskless principal' basis." In the case of a customer purchase, he bought "securities only to fill an order already in hand from a customer, and then [sold] the securities to the customer."

Anderson testified that, at some point in time, he owned a bond yield calculator, but it broke and he never replaced it. Anderson also did not subscribe to the leading sources of financial data regarding the bond market including Bloomberg LP, Thompson Financial, Muni Fax, The Bond Buyer, or the Blue Sheets.

Anderson was unable to recall "[s]pecific" details regarding particular transactions. He retained no notes regarding his trades. 8 He explained that he "never thought [he would] need them and it's a very . . . paper intensive business and . . . [his] files [were] stuffed already."

Anderson, however, testified concerning his general method of pricing bonds. He would identify a bond that might be of interest to one or more of his customers. He would then discuss with the selling trader what the resulting yield on the bond would be based on different markups. After assuring himself that the bond was available at a certain wholesale price, Anderson would negotiate with his customer regarding the yield. Anderson would then add a markup that would give the customer the agreed-upon yield.

Anderson further testified that he used a yield matrix published by Thompson that showed the average yields for municipal bonds based on the subject bond's rating and maturity, e.g., all bonds rated Baa maturing in 2003. He then added markups that reduced the yields of the bonds he was selling to levels consistent with the average yields for that grade and maturity of bonds shown on the Thompson matrix.

Certain of the municipal bonds at issue were "callable," i.e., they could be redeemed at the issuer's option before the final maturity date. If the issuer calls a bond before its final maturity date, its yield can be adversely affected. Anderson conceded that "[y]ou are supposed to price [callable bonds] to the worst possible circumstance." However, he also asserted that a call feature can be "ignore[d] if "you don't think it's going to happen." Thus, Anderson "would price the bond to what [hethought] the ultimate maturity of that bond [was] going to be." 9

Anderson's testimony focused on municipal bonds. When he was asked about his methodology for setting markups and markdowns on instruments other than municipal bonds, he stated that he "did the same thing with them." 10

Anderson executed many of these trades, acting as both registered representative and trader, for his own customers. Anderson also executed other trades as a trader on behalf of clients of A. Morgan Maree ("AMM"), a registered investment adviser. 11 Anderson testified that, when he executed on behalf of AMM, he shared 80% of the markups and markdowns with AMM, and retained the remaining 20%.

B. Anderson's Trades in Municipal Securities. Anderson charged markups ranging from 1.42% to 5% in 50 sales of municipalbonds to retail customers in 1993 through early 1996. He also charged markdowns ranging from 3.02% to 5.64% in purchasing municipal bonds from retail customers in 10 transactions during 1993 through 1995. In total, Anderson charged $128,268 in markups and $25,956 in markdowns in the 60 trades at issue.

The Division called Peter C. McCabe as an expert to review Anderson's municipal bond trades. 12 McCabe analyzed each of these trades by consulting widely-used financial data produced by Bloomberg Financial detailing the security's investment characteristics and history. He also discussed the trades with "peers in the securities business." McCabe considered various factors, including the nature of the market for the security (whether it was actively traded), its rating, its maturity date, whether it was subject to an early call date, and the resulting yield to the customer. 13

McCabe expressed the opinion that these markups and markdowns substantially exceeded accepted industry practice. For example, in September 1993, Anderson purchased from a retail customer a $25,000 block of Anaheim, California municipal bonds at 101.89, which he contemporaneously resold for 106.29, a 4.32% markdown or $44 per bond. 14 The issuer had prerefunded this bond, which meant that it would be paid off early on a specified date, in this case less than a year later on August 1, 1994. 15 McCabe calculated that Anderson's markdown reduced the customer's yield "by 517 basis points or slightly over 5 percent."

According to McCabe, $5 to $15 per $1,000 bond, roughly equivalent to .5% to 1.5%, was the appropriate markdown for this bond. 16 Using a "generous" standard, McCabe determined that the maximum markdown Anderson could have charged was $375, rather than the $1,100 markdown charged by Anderson. He concluded that, since the bond had less than a year to maturity, the markdown "was way, way, in excess of industry standards at the time of this trade in 1993." McCabe explained that typically markdowns on municipal securities are less than markups. In a sale to a customer, a dealer frequently will be required to research the bond and locate a dealer willing to sell it. Where, as here, a dealer purchases a security from a customer and immediately resells it, little or no research is required.

McCabe also testified about Anderson's March 1994 purchase from a retail customer at 100.775 of a $150,000 block of "California State G/O Var Purp" bonds, which he immediately resold for 104.78. 17 These were general obligation bonds, rated A-1, i.e., high quality, by Moody's. Anderson's charge of $6,000 represented a 3.97% markdown. According to McCabe, the markdown had the effect of reducing the customer's yield to maturity by 55 basis points or roughly .5% on an annual basis. McCabe found this markdown to be much higher than industry practice, explaining that it was "a relatively short term bond, less than 10 years" and very marketable. McCabe stated that the highest markdown Anderson properly could have charged for this trade would have been $2,250.

McCabe also opined that Anderson charged markups that exceeded industry practice. In February 1994, for example, Anderson sold a $75,000 block of a San Dimas, California bond for 119.44. He had purchased the block contemporaneously for 113.75. 18 The bond was rated AAA. Although this bond had a maturity date of September 2016, it was callable on September 1, 2001. Anderson charged a markup on this trade of 5%, or $4,268, which McCabe calculated reduced the yield to call by 81 basis points, or roughly 3/4 of one percent per year. McCabe concluded that the maximum Anderson should have charged was $2,250.

In September 1995, Anderson sold a retail customer for 110.745 a $25,000 block of a Los Angeles California Regional Airport bond which he had purchased for 107. 19 Anderson charged $936 for the trade or 3.5%. According to McCabe, however, because the bond had a call date of November 1, 1995, the resulting yield to the customer was -42.95%. McCabe considered this trade to be highly unusual because "nobody buys bonds with a negative return to maturity, at least not on purpose." 20

McCabe concluded that, over these 60 trades, Anderson overcharged his municipal bond clients by a total of $68,386. 21

C. Anderson's Trades in Government and Mortgage-Related Securities. Robert M. MacLaverty testified as an expert regarding trades involving government and mortgage-related securities. 22 MacLaverty testified that markups and markdownsin Treasury securities are "driven by th[e] bid-ask spread," that is "the difference between the price at which a dealer can be expected to buy such security from a competitive seller (the 'bid' price level), and the price at which it can be expected to sell that same security to a competitive buyer (the 'ask' price level)." MacLaverty opined that the spread incorporates the market's assessment of "[v]olatility, the interest rate environment, supply of the security, face value of the security, credit quality of the security, structure of the security, whether it has imbedded options." 23

i. Treasury Notes. Anderson charged markdowns ranging from 2.75% to 3.87% on the sale of twelve United States Treasury Notes by a single customer on December 15, 1992. 24 The dollar amount of the markdowns ranged from $3,000 to $11,250 and totaled for all twelve trades $80,062.

The Treasury Note market is extremely liquid and such securities carry an implied rating of AAA, the highest rating available. MacLaverty testified that, during the period at issue, the bid/ask spread for Treasury Notes ranged between 1/32 and 2/32 of a point (which equals a dollar value of $312 to $624 for each $1 million face amount of notes priced at par),depending on various factors, including market volatility and the type of issue involved. MacLaverty testified that, while the spread is generally used to establish the markups and markdowns on institutional trades and many retail trades, in evaluating the trades at issue here, he "doubled what was custom and the practice in the industry."

MacLaverty concluded that, on December 15, 1992, when Anderson purchased the twelve Treasury Notes from the retail customer, the prevailing spread justified markdowns of between .25% and .5%. Using the high end of that range (.5%), Anderson overcharged his customer by $66,975. MacLaverty considered Anderson's markdowns an "extreme deviation from industry practice." MacLaverty concluded that, in setting these markdowns, Anderson failed to consider: (i) the nature and wide availability of Treasury Notes in the market; (ii) the negligible execution risk involved; (iii) the size of the orders; and (iv) the adverse effect of the markdowns on the customer's yield.

MacLaverty compared Anderson's markdowns to the commissions charged by Anderson on a similar Treasury Note trade executed on an agency basis. Where Anderson charged a commission, which was fully disclosed to the customer, the charge ($100 per $50,000 in bonds) was substantially less than the markdowns on the purchase of the twelve Treasury Notes. MacLaverty added that Anderson's commission corresponded to what is charged in the industry.

MacLaverty also considered whether any special circumstances in the market for Treasury securities justified Anderson's higher charges. He researched market activity for each of the days on which Anderson's trades occurred and checked with different "market scenarios" to see if any there were any justification for Anderson's charges. He did not find any special market condition that justified this level of markdowns.

In response, Anderson testified that he made what he described as "herculean efforts" to execute these trades. According to Anderson, these notes had to be liquidated immediately because of significant tax considerations arising from the customer's failing health. Anderson further asserted that executing these trades was complicated because of unusual weather conditions affecting traders on the East Coast of the United States. Anderson admitted, however, that, despite theasserted challenges, the twelve trades were executed by him within a single hour. 25

ii. Treasury Strips. 26 Anderson charged markups ranging from 2.99% to 4.01% on four sales of Treasury strips during 1994. The dollar amount of the markups ranged from $1,946 to $3,756, for total markups of $11,489.

According to MacLaverty, strips, like Treasury Notes, trade in "comparable 1/32 bid-ask spread increments." MacLaverty established a markup/markdown standard for strips by doubling the amount of the spread, which permitted Anderson in MacLaverty's view "a rather generous profit." Using this standard, Anderson overcharged his customers by $9,895. MacLaverty could find no extraordinary circumstances that might have justified Anderson's markups.

iii. Agency Specified Pool Securities. Anderson charged markups ranging from 2.29% to 4.07% on twelve sales of agency specified pool securities during 1994 and 1995. 27 The dollar amount of these markups ranged from $1,026 to $6,528 and totaled $35,485.

According to MacLaverty, these securities are highly rated with a spread "usually no wider than 4/32 or 6/32." 28 MacLaverty noted that these securities also are "more 'back office intensive' to settle with a counterparty. That is, for the same amount of bonds, mortgage[] [backed securities] are a higher dealer cost security than treasuries . . . ." Accordingly, MacLaverty opined that a 1% markup standard should be used to evaluate Anderson's pricing. Using this standard, Anderson overcharged his customers by $25,633. MacLaverty could find no basis for Anderson's markups.

iv. Collateralized Mortgage Obligations. Anderson charged markups ranging from 1.42% to 4.04% on eight sales of collateralized mortgage obligations" or "CMOs" during 1994, 1995, and 1997. 29 The dollar amount of the markups ranged from $1,354 to $9,634 and totaled $26,604.

The CMOs at issue here generally traded in bid-ask spreads of "less than one-half of one point, or less than $5,000 per million dollars face amount." 30 In setting a markup standard, MacLaverty doubled the spread. Using this standard, Anderson overcharged his customers by $17,161. As with the other securities trades he considered, MacLaverty opined that there were no extraordinary circumstances present to justify Anderson's deviation from industry standards.

MacLaverty found that, in a total of 36 trades in government, agency-specified securities and CMOs, Anderson charged markups and markdowns that "did not conform" to the criteria that are "widely known and practiced in the industry," and that Anderson's excessive charges totaled $119,664. Except for the December 1992 Treasury Note trades, Anderson did not specifically address any of these trades during his testimony or in his briefs.

III.

Courts have recognized that "sales of securities by broker-dealers carry an implied representation that the prices charged are reasonably related to the prices charged in an open and competitive market." 31 We have long held that "a dealer violates antifraud provisions when he charges retail customers prices that are not reasonably related to the prevailing market price at the time the customers make their purchases." 32 The prevailing market price is "the price at which dealers trade with one another." Where, as here, the dealer is not a market maker in the security and there is no countervailing evidence, the best evidence of the current market is the dealer's own contemporaneous cost to acquire the security at issue. 33 Moreover, trades executed on a riskless principal basis "should be treated similarly to an agency transaction, in which a firm may retain no more than a commission computed on the basis of its cost." 34

We find that Anderson's markups and markdowns were not reasonably related to the prevailing market prices for these securities. We have observed "that a significantly lower markup is customarily charged in the sale of debt securities than in transactions of the same size involving common stock." 35 It iswell-settled, for example, that markups and markdowns on municipal securities may be excessive although they are substantially below 5%. 36 Indeed, we previously have observed that "markups on municipal securities are often as low as one ortwo percent in frequently traded issues . . . ." 37 In 1988, we noted that the then "common industry practice" was "to charge a mark-up over the prevailing inter-dealer market price of between 1/32% and 3 1/2% (including minimum charges) for principal sales to customers of conventional or 'straight' Treasuries." 38

Markdowns generally are lower than markups. 39

The price Anderson's customers paid or received, Anderson's cost to acquire the security or the price he received in reselling it, and the resulting markup or markdown are undisputed. The Division introduced expert testimony which supported its contention that Anderson's pricing was "well above what professionals in the business would generally charge for the transactions in question" 40 and not warranted by any extraordinary circumstances.

Based on the Division's evidence, a prima facie case that Anderson's prices were not reasonably related to the prevailingmarket price has been established. 41 At that point, the burden of going forward shifted to Anderson "to explain why, notwithstanding the evidence to the contrary, [this] pricing was fair." 42

Anderson does not dispute the trading data regarding the amount of his markups and markdowns. Nor does he challenge the opinions of the Division's two experts that his pricing did not conform to industry standards. 43 The law judge found, based onthat expert testimony, that Anderson's markups were at least two to three times greater than prevailing industry practice. Anderson asserts, however, that industry practice is merely one of many factors to be considered and that, based on all the relevant factors, his pricing was appropriate.

MSRB Rule G-30 identifies the following factors as relevant to determining a "fair and reasonable" price for a municipal security: "the best judgment of the broker, dealer or municipal securities dealer as to the fair market value of the securities at the time of the transaction . . . , the expense involved in effecting the transaction, the fact that the broker . . . is entitled to a profit, and the total dollar amount of the transaction." 44 Anderson relies on an MSRB Interpretative Notice which states that, "[o]f the many possible relevant factors . . . the resulting yield to a customer is the most important . . . ." 45 According to the MSRB Notice, "[s]uchyield should be comparable to the yield on other securities of comparable quality, maturity, coupon rate, and block size then available in the market."

Anderson asserts that he based all of his markup and markdown percentages on yield calculations, a practice which he believed was consistent with what others in the industry did. As noted, Anderson could not recall "[s]pecific" details regarding particular transactions. Anderson claimed that he "backed into" a markup after determining the yield, i.e., he took "what was left over" after providing "whatever [he] thought was competitive and would sort of excite the client to say yeah, I want to buy it, because it's a good yield . . . ." 46

Anderson asserts that "he knew he was selling bonds to his clients at competitive rates because he compared his customers' yields to publicly available reporting services." Anderson claims that he determined these competitive rates by using an industry matrix which provided the average yield for a particular grade of security with a specified maturity. Anderson would then locate a municipal bond which would generate that yield after he factored in his markup.

Anderson used a small number of his trades to illustrate his methodology. 47 For example, Anderson noted that his customers received a 5.96% yield on Santa Margarita, California bonds that they purchased from him on December 27, 1993. He asserts that this yield compared favorably with the 4.85% to 5.00% average yields listed, as of December 23, 1993, 48 for bonds of the same grade and maturity on the industry matrix he used. However, Anderson paid 104.55 for the bonds and sold them in riskless principal transactions at 109.55, generating a markup of 4.78%. We note that McCabe found that the markup converted to a charge of 91 basis points to the first call date. As a result of Anderson's markups, the yield on the bonds fell from 6.87% to 5.96%.

Accepting Anderson's testimony regarding his approach to setting the markups and markdowns at issue, we find his conduct to be, at a minimum, highly unreasonable. Anderson's reliance on such an industry matrix did not by itself fulfill his responsibilities as set forth by the MSRB. Although the matrix provided general information about average yields for bonds of the same grade with similar maturities, it provided insufficient data to permit a meaningful evaluation of the appropriate yields for the municipal bonds Anderson sold. 49

In setting his markups, Anderson failed to consider various factors identified by the MSRB other than yield, including the fair market value, the bonds' coupon rates, and the block size involved. Anderson also admittedly ignored call dates in calculating the resulting yields when he believed that the instrument was unlikely to be called on such dates. Although his markdowns on municipal securities ranged as high as 5.64%, Anderson provided no justification for them at all.

The MSRB guidelines do not apply to the Treasury and government agency securities. Anderson offered no particularized justification for the markups or markdowns he charged in trades involving Treasury strips, CMOs, or agency-specified pool securities. While Anderson claimed that there were special circumstances surrounding his purchase of Treasury securities in December 1992 described above, the expert testimony regarding the liquidity of those securities and the fact that he was able to make all twelve trades for the customer within one hour indicates that the effort he made was in no way extraordinary.

Anderson asserts that, for at least a portion of the period at issue, he attempted to comply with what he believed to be NASD pricing guidelines. Anderson introduced a copy of an NASD exit interview report completed by an NASD staff member following an examination of Annandale in 1993. The examiner identified municipal bond trades with markups and markdowns between 5% and 5.3%. Anderson testified that, at that time, he explained to the examiner that he understood that 5% was the then-current NASDguideline and that Anderson exceeded this guideline by mistake. Anderson testified that he provided rebates to customers who had been charged markups or markdowns exceeding 5%, and provided proof of such rebates to the NASD. 50

In 1995, following a subsequent examination, the NASD informed Anderson that his markups and markdowns on municipal bond trades ranging from 4.32% to 5.64 "appear[ed] to be excessive and an apparent violation" of the NASD's Rules of Fair Practice. After discussions with the NASD, Anderson and the NASD agreed that Anderson would rebate markups and markdowns of 5% and above. The record established that, at this time, Anderson was informed that the NASD's "internal guidelines" provided that markups and markdowns of 3.0% to 3.5% could be excessive, depending on circumstances. 51 Although we do not necessarily agree with the NASD guidelines to which Anderson refers, 52 his apparent reliance on them mitigates against a finding that he acted with scienter. 53

Nonetheless, the evidence clearly establishes that Anderson's markups and markdowns deviated significantly from industry norms. Based on his own testimony, Anderson approached pricing in a way that was not consistent with the pricing principles we have long enunciated. We believe that Anderson'sconduct in pricing these transactions demonstrates at least negligence.

Securities Act Section 17(a)(2) makes it unlawful for any person, in the offer or sale of any security, to make an untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Section 17(a)(3) prohibits any person, in connection with the offer or sale of any security, from engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. These two sections may be violated without evidence of scienter. 54 Under the circumstances, we find that Anderson willfully violated Securities Act Sections 17(a)(2) and 17(a)(3) as a result of his charging the undisclosed markups and markdowns at issue here. We further find that, as a result of his actions, Anderson caused Armscott's violations of Exchange Act Sections 15(c)(1) and 15B(c)(1), Exchange Act Rule 15c1-2, and MSRB Rules G-17 and G-30. 55 Although we have declined to find that Anderson acted with scienter because of possible uncertainty regarding the applicable standards during the period at issue, we nevertheless expect that, to the extent those standards were ambiguous, they have now been clarified. 56

IV.

The Commission has broad discretion to set sanctions in administrative proceedings. 57 In determining the need to impose sanctions, we are guided by the following factors:

[T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. 58

Anderson charged excessive markups and markdowns in 96 transactions over several years, generating close to $200,000 in illegal profits. Moreover, Anderson, who remains employed in the industry, appears not to appreciate his obligation to give his customers prices that are reasonably related to the prevailing market price. We also note that, in 1991, Anderson and Annandale settled earlier NASD allegations of unfair pricing by each agreeing to be censured, to pay a joint and several fine of $5,000 and to reimburse customers for excessive markups. 59

Under the circumstances, we believe that Anderson's conduct warrants a significant civil money penalty. Section 21B of the Exchange Act authorizes the imposition of civil money penaltieswhere it is in the public interest to do so. 60 That section authorizes a money penalty of up to $5,000 for each of Anderson's violative transactions. We believe that it is appropriate that Anderson pay a civil money penalty of $1,000 for each of the 96 trades at issue.

We also believe that it is appropriate that Anderson pay disgorgement. Exchange Act Section 21C(e) authorizes disgorgement in this proceeding. 61 Disgorgement requires a wrongdoer to relinquish proceeds "causally related" to his misconduct. 62 The Division has the initial burden of showing that its disgorgement figure reasonably approximates the amount of unjust enrichment. 63 Once the Division has made this showing, the burden shifts to the respondent to demonstrate that the requested disgorgement amount is not a reasonable approximation. 64

The Division introduced evidence to establish that Anderson should disgorge $182,195 in illegal profits based on his excessive markups and markdowns. 65 Anderson introduced evidence that he paid $115,504 of those markups and markdowns to AMM, the adviser on the trades, pursuant to an agreement. The law judge made findings in support of Anderson's assertion, and those findings were not appealed. 66 Consequently, we will order Anderson to pay disgorgement of $66,691, plus interest.

With respect to the remedy of a cease and desist order, "evidence showing that a respondent violated the law once probably also shows a risk of repetition that merits our ordering him to cease and desist." 67 Here, Anderson's serious and repeated misconduct over an extended period, along with his disciplinary history, raise at least "some risk" of future violations. This risk is heightened by Anderson's unwillingness to accept the wrongfulness of his conduct.

An appropriate order will issue. 68

By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, and ATKINS); Commissioner CAMPOS not participating.

Jonathan G. Katz
Secretary

 

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933
Rel. No. 8265 August 15, 2003

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 48352 August 15, 2003

Admin. Proc. File No. 3-9499


In the Matter of

MARK DAVID ANDERSON
Marina Del Rey, California


ORDER IMPOSING REMEDIAL SANCTIONS

On the basis of the Commission's opinion issued this day, it is

ORDERED that Mark David Anderson cease and desist from committing or causing any violation or any future violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and Sections 15(c)(1) and 15B(c)(1) of the Securities Exchange Act of 1934 (due to a violation of Rules G-17 or G-30 of the Municipal Securities Rulemaking Board), due to the charging of excessive and undisclosed markups or markdowns on securities trades involving retail customers; and it is further

ORDERED that Mark David Anderson disgorge $66,691, plus prejudgement interest determined in conformity with 26 U.S.C. § 6621(a)(2) from March 5, 1997, the date of the last transaction at issue in this matter, to the date of this order, and it is further

ORDERED that Mark David Anderson pay to the United States Treasury a civil money penalty of $96,000, pursuant to Section 21B of the Securities Exchange Act of 1934, within 21 days of the issuance of this Order. Such payment shall be: (i) made by United States postal money order, certified check, bank cashier'scheck, or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) delivered by hand or courier to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (iv) submitted under cover letter which identifies the respondent in these proceedings, and the file number of these proceedings. A copy of this cover letter and check shall be sent to Thomas A. Zaccaro, counsel for the Division of Enforcement.

By the Commission.

Jonathan G. Katz
Secretary

 

APPENDIX

A. Treasury Notes

  SECURITY SETTLE.
DATE
PURCH.
PRICE
SALE
PRICE
VALUE
OF
SEC.
%
MARK-
DOWN
$
MARK-
DOWN
1 US Treas Note 8/15/97 Dec 15 92 105.9062 109.906 $250,000 3.78% $10,000
2 US Treas Note 4/15/95 Dec 15 92 103.3125 107.313 $250,000 3.87% $10,000
3 US Treas Note 11/15/98 Dec 15 92 108.6562 111.656 $250,000 2.76% $ 7,500
4 US Treas Note 2/15/99 Dec 15 92 108.9687 111.969 $250,000 2.75% $ 7,500
5 US Treas Note 11/15/94 Dec 15 92 103.1875 106.188 $250,000 2.91% $ 7,500
6 US Treas Note 9/30/93 Dec 15 92 100.3437 103.344 $250,000 2.99% $ 7,500
7 US Treas Note 7/15/97 Dec 15 92 106.25 109.25 $125,000 2.82% $ 3,750
8 US Treas Note 8/15/95 Dec 15 92 104.9062 107.906 $100,000 2.86% $3,000
9 US Treas Note 11/15/00 Dec 15 92 107.5 110.5 $100,000 2.79% $ 3,000
10 US Treas Note 12/31/94 Dec 15 92 102.125 105.125 $100,000 2.94% $3,000
11 US Treas Note 5/15/02 Dec 15 92 101.4375 104.469 $200,000 2.99% $6,062
12 US Treas Note 10/15/96 Dec 15 92 104.3125 107.313 $375,000 2.88% $11,250

B. Treasury Strips

  Security Settle. Date Purch. Price Sale Price Par Value % Markup $ Markup
  Markups - U.S. Treasury Securities            
1

Strips TINT 11/15/04

Apr 25 94

47.25

49.14

$155,000

4.00%

$2,930

2

Strips TINT 11/15/09

Apr 25 94

31.71

32.98

$225,000

4.01%

$2,857

3

US Treas Sec Stripped Int 11/15/99

Apr 25 94

69.52

72.3

$ 70,000

4.00%

$1,946

4

Strips - TINT due 11/15/96*

Jun 27 94

86.53

89.12

$145,000

2.99%

$3,756

 

*Trade executed for multiple clients

           

C. Agency Specified Pool Securities

 

SECURITY

SETTLE.

DATE

PURCH. PRICE

SALE

PRICE

PAR VALUE OF BONDS

% MARK-UPS

$ MARK-UPS

1

GNMA Pass Thru Pool 392228X

Jun 21 94

94.75

98.55

$ 50,000

4.01%

$1,900

2

GNMA Pass Thru Pool 392339X *

Jun 30 94

93.25

96.98

$175,000

4.00%

$6,528

3

GNMA Pass Thru Pool 380752X Western Mort Corp

Jul 21 94

96.75

100

$ 47,912

3.36%

$1,557

4

GNMA Pass Thru Pool 392343X Countrywide Funding Corp *

Jul 19 94

92.0625

95.81

$125,000

4.07%

$4,684

5

GNMA Pass Thru Pool 392344X *

Jul 19 94

95.125

98.93

$ 50,000

4.00%

$1,903

6

GNMA Pass Thru Pool 392392X *

Jul 19 94

96.125

99.97

$150,000

4.00%

$5,768

7

GNMA Pass Thru Pool 392344X

Jan 25 95

90.0625

92.125

$ 49,758

2.29%

$1,026

8

GNMA Pass Thru Pool 163866X Pioneer Mort Corp

Mar 23 95

100.25

103.25

$ 56,773

2.99%

$1,703

9

GNMA Pass Thru Pool 196002X Home Mort of El Paso

Mar 23 95

100.25

103.25

$ 49,504

2.99%

$1,485

10

GNMA Pass Thru Pool 352669X Temple-Inland Mort Corp

Sep 12 95

96.25

99.618

$ 38,083

3.50%

$1,283

11

GNMA Pass Thru Pool 377732X *

Sep 12 95

96.25

99.618

$155,798

3.50%

$5,247

12

Fed Nat Mort Assn Remic Pass Thru Ctf Tr 1993-32 C1 K *

Nov 17 95

95.5

98.36

$ 83,948

2.99%

$2,401

 

* Trade executed for multiple clients

D. Collateralized Mortgage Obligations

 

SECURITY

SETTLE.

DATE

PURCH. PRICE

SALE

PRICE

PAR VALUE OF BONDS

% MARK-UPS

$ MARK-UPS

1

Fed Home Loan Mort Cor CMO/Series 1412*

Jun 21 94

91.3125

95

$ 58,000

4.04%

$2,139

2

Fannie Mae Remic Trust Series CMO/1992-162 *

Sep 11 95

95.625

98.97

$288,000

3.50%

$9,634

3

Fannie Mae Remic Trust CMO/Series 1993-G31 *

Sep 13 95

97.5

100.91

$ 86,953

3.50%

$2,965

4

Fannie Mae Remic Trust CMO/Series 1992-188 *

Nov 13 95

98.125

100

$100,000

1.91%

$1,875

5

Fannie Mae Remic Trust CMO/Series 1994-042 *

Nov 13 95

98

100

$ 96,144

2.04%

$1,923

6

Fed Home Loan Mort Corp MLTCL Mtg Partn Series G043 CL OB*

Nov 14 95

96.63

98

$98,808

1.42%

$1,354

7

Fed Home Loan Mort Corp MLTCL Mtg Part Ser 1804 C1 B

Dec 6 95

95.875

98.27

$100,000

2.50%

$2,395

8

Fed Home Loan Mort Corp MLTCL Mtg Part Ser 1461

Mar 5 97

99

101.9

$148,948

2.93%

$4,319

 

* Trade executed for multiple clients

E. Municipal Securities (Markups)

 

ISSUER

SETTLE.

DATE

PURCH. PRICE

SALE

PRICE

PAR VALUE OF BONDS

% MARK-UP

$ MARK-UP

1

LA Reg Airpt Western Air

May 20 93

117.5

121.5

$ 50,000

3.40%

$2,000

2

Los Angeles Cty CA Met Trans Auth Sales Tax Rev Ref

May 25 93

91.25

95.25

$ 50,000

4.38%

$2,000

3

Sacramento CA Imp Bd Act Sunrise Corridor

Jul 7 93

100.25

104.25

$ 50,000

3.99%

$2,000

4

Orange Cty CA Comty Fac Dist 87-7 Ser A

Sep 29 93

109

114

$ 25,000

4.59%

$1,250

5

Pico Rivera CA Redev Agy Tax Alloc Proj 1

Sep 29 93

102.5

107.5

$ 25,000

4.88%

$1,250

6

LA Reg Airpt Western Air

Nov 30 93

118

122

$ 15,000

3.39%

$600

7

LA Reg Airpt Western Air

Dec 16 93

118

123

$ 40,000

4.24%

$2,000

8

Cal Health Fac Auth Presb Hosp

Dec 21 93

104

109

$ 50,000

4.81%

$2,500

9

LA Reg Airpt Western Air

Dec 21 93

118

123.5

$180,000

4.66%

$9,900

10

Bay Area Gov Assn CA Fremont Lid 23R-Ser F*

Dec 27 93

99.5

103

$125,000

3.52%

$4,375

11

Santa Margarita CA WD 7A Ser A*

Dec 27 93

104.55

109.55

$110,000

4.78%

$5,500

12

Wilkins Area PA Ind Dev Auth Oakmont Inc

Dec 28 93

100.5

105

$ 25,000

4.48%

$1,125

13

NYS Urban Dev Corp Correctional Cap Ser 4

Dec 30 93

95.7

100

$100,000

4.49%

$4,300

14

NYC G/O Ser A FSA TAGSS-ETM

Dec 30 93

106.68

110.68

$ 50,000

3.75%

$2,000

15

Cornwall Lebanon PA Sch Dist

Jan 11 94

106.6

110.6

$50,000

3.75%

$2,000

16

West Chester PA G/O

Jan 26 94

108.9

113

$ 50,000

3.76%

$2,050

17

Orange Cty CA IMOT Bd Assmt Dist 88-1 Ser A

Jan 20 94

101

105

$ 50,000

3.96%

$2,000

18

North Huntington Twp PA Swr Rev Ref

Jan 12 94

111

115

$ 50,000

3.60%

$2,000

19

San Bernardino CA Hosp Rev *

Jan 27 94

104

108

$ 25,000

3.85%

$1,000

20

Santa Margarita CA WD 7A Ser A

Jan 7 94

105.46

109.46

$ 25,000

3.79%

$1,000

21

Palo Alto Hlth Care Fac Lytton Gardens

Feb 4 94

107.73

112

$100,000

3.96%

$4,270

22

Cal St Pub Wks Bd Lease Rev Calif St Univ 1992 Pjs A

Feb 7 94

111

115.5

$ 50,000

4.05%

$2,250

23

Orange Cty Comm Fac Dist 88-2 Lomas Laguna

Feb 9 94

110

114.5

$ 50,000

4.09%

$2,250

24

San Dimas CA RDA Tax Alloc Ref Creative Grth Proj Ser A

Feb 15 94

113.75

119.44

$ 75,000

5.00%

$4,268

25

Santa Margarita CA WD 7A Ser A

Feb 15 94

107.5

112.88

$ 50,000

5.00%

$2,690

26

Santa Margarita CA WD 7A Ser A

Feb 24 94

107.33

111.33

$ 25,000

3.73%

$1,000

27

LA Reg Airpt Western Air

Mar 2 94

115.5

119.25

$ 50,000

3.25%

$1,875

28

NYS Loc Govt Asst Corp Ser A

Mar 18 94

112.125

116.525

$150,000

3.92%

$6,600

29

Port Auth NY/NJ Cons 67th Ser

Mar 18 94

109.5

113.8

$125,00

3.93%

$5,375

30

San Francisco CA Cty RDA South Beach Proj

Apr 5 94

95.628

99.125

$ 30,000

3.66%

$1,049

31

Puerto Rico Commw Hwy Transp Rev Ser W

Apr 6 94

93.25

97.25

$130,000

4.29%

$5,200

32

Garden Grove CA Part Bahia Vlg Emerald Isle FSA

Apr 8 94

95

99

$ 50,000

4.21%

$2,000

33

San Marcos CA Pub Fin Auth Ser A

Apr 28 94

99.5

103.48

$ 25,000

4.00%

$995

34

San Bernardino CA Hosp Rev *

May 11 94

101

105.3

$ 50,000

4.26%

$2,150

35

Santa Margarita CA WD 7A Ser A

May 11 94

103.25

107.5

$ 50,000

4.12%

$2,125

36

PA St Tpk Commn Oil Franchise Tax

May 12 94

99

103

$ 25,000

4.04%

$1,000

37

Cal Health Fac Ref Cath Hosp *

May 12 94

87

90.74

$100,000

4.30%

$3,740

38

Port Oakland CA Rev Ser A*

May 12 94

108.77

113.44

$100,000

4.29%

$4,670

39

Central CA Jt Power Hlth Fin Auth Cops Comm Hosp Proj *

May 17 94

86.57

90.29

$100,000

4.30%

$3,720

40

Cal St Pub Wks Bd Leas Rev Univ Calif Proj Ser B

May 19 94

90.5

94.4

$ 50,000

4.31%

$1,950

41

Los Angeles Airport Laxfuel Corp

May 19 94

100

104.3

$ 50,000

4.30%

$2,150

42

Sta Margarita Ca WD 7A Ser A

Jun 30 94

102.5

106.6

$ 50,000

4.00%

$2,050

43

San Diego CA RDA Orchard II Ser A

Jul 21 94

104.5

108.68

$ 55,000

4.00%

$2,299

44

Fontana Ca Pub Fin Auth North Fontana Redev Proj A

Jul 21 94

91.19

94.83

$ 45,000

3.99%

$1,638

45

LA Reg Airpt Western Air *

Mar 1 95

107

109

$200,000

1.87%

$4,000

46

Local Govt Fin Auto CA Hoover Rdv Pj-Sub Fin

Sep 13 95

103.5

107.125

$ 50,000

3.50%

$1,813

47

LA Reg Airpt Western Air

Sep 15 95

107

110.745

$ 25,000

3.50%

$936

48

LA Reg Airpt Western Air

Oct 20 95

105.35

109

$ 50,000

3.46%

$1,825

49

LA Reg Airpt Western Air

Nov 17 95

106

109.71

$ 20,000

3.50%

$742

50

LA Reg Airpt Western Air

Mar 12 96

105.75

108.9

$ 25,000

2.98%

$788

 

* Trade executed for multiple clients

F. Municipal Securities (Markdowns)

 

ISSUER

SETTLE.

DATE

PURCH. PRICE

SALE

PRICE

PAR VALUE OF BONDS

% MARK-DOWN

$ MARK-DOWN

1

Anaheim CA RDA Tax Alloc Alpha Proj Ser D

Sep 24 93

101.89

106.29

$ 25,000

4.32%

$1,100

2

Anaheim CA COPS Area Land Acquis

Sep 24 93

100.25

105.25

$ 25,000

4.99%

1,250

3

Los Angeles Cty CA Met Trans Auth Sales Tax Rev Ref

Sep 24 93

88.655

93.655

$ 50,000

5.64%

$2,500

4

Industry CA Urban Dev Agy Pj 1

Sep 24 93

106.07

111.07

$ 50,000

4.71%

$2,500

5

Sacramento CA Imp Bd Act Sunrise Corridor

Sep 24 93

96.943

101.94

$ 50,000

5.16%

$2,500

6

Oakland CA Redev Agy Cent Dist Redev Proj

Sep 24 93

110.638

115.64

$ 25,000

4.52%

$1,250

7

Redlands CA CTES Partn Domestic Water

Sep 24 93

102.794

107.76

$ 25,000

4.83%

$1,243

8

Cal St G/O

Mar 21 94

100

103.02

$200,000

3.02%

$6,038

9

Cal St G/O Var Purp

Mar 21 94

100.775

104.78

$150,000

3.97%

$6,000

10

LA Reg Airpt Western Air

Sep 28 95

106.5

110

$45,000

3.29%

$1,575

 

Note - Anderson executed trades before January 1995 through Annandale Securities.

Anderson executed subsequent trades through Armscott Securities.

 


1 In January 1995, Annandale filed a Form BDW to withdraw from registration with the Commission.

2 Armscott consented, without admitting or denying the findings, to the entry of a cease and desist order in which the Commission found that Armscott violated antifraud provisions of the securities laws by charging customers undisclosed, excessive markups and markdowns in the sale of government agency and municipal securities in 1995 through 1997. See Armscott Securities, Ltd., Exchange Act Rel. No. 7482 (Dec. 4, 1997), 65 SEC Docket 3022. Armscott also agreed to pay disgorgement and to withdraw its registration as a broker-dealer.

3 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b); 17 C.F.R.

    § 240.10b-5.

4 15 U.S.C. §§ 78o(c)(1) and 78o-4(c)(1); 17 C.F.R. § 240.15c1-2. Section 15(c)(1) and Rule 15c1-2 prohibit any broker-dealer and any municipal securities dealer from inducing the purchase or sale of securities or municipal securities by means of any manipulative, deceptive, or other fraudulent device or contrivance. Section 15B(c)(1) prohibits a broker-dealer from violating MSRB rules.

5 MSRB Rule G-17 provides that, in conducting its municipalsecurities business, a dealer must "deal fairly with all persons" and "not engage in any deceptive, dishonest or unfair practice." Rule G-30 requires a dealer to sell municipal securities to a customer at an aggregate price that is "fair and reasonable taking into consideration all relevant factors . . . ."

    Although the subject transactions occurred at both Annandale and Armscott, the Order Instituting Proceedings alleges only that Anderson's conduct aided, abetted, and was a cause of Armscott's violations.

6 The parties executed a series of stipulations regarding the case prior to the hearing.

    The individual trades, along with the data needed to calculate the resulting markup or markdown, are presented in an appendix to this opinion.

7 According to Anderson, prior to 1995, Armscott "subcleared" through Annandale, which provided broker-dealer services to Armscott's customers. Armscott signed a clearing agreement with Bear Stearns, Annandale's clearing firm, when Annandale withdrew its registration, and, according to Anderson, he "just moved over to Armscott."

8 Anderson testified that he disposed of his "working notes, my faxes from other dealers, my rate yield tables" when he was "through with the transaction."

9 Compare text accompanying n.20 infra.

10 According to Anderson, "[I]ts yield. Again, it's the same as in municipals. It's yield based."

    Anderson added, with respect to government agency securities, that

You've got to buy the right tranche, you've got to buy the right payment history. You've got to look for the Ginnie Mae's that are either seasoned, unseasoned. You've got to figure what the paydown history of the mortgages may be, where interest rates you think are going. You get hypothetical values done and you do the same amount of work, it's just a different security.

11 AMM and its owner consented, without admitting or denying findings, to the entry of a cease and desist order in which the Commission found that the respondents had violated various provisions of the Investment Advisers Act of 1940 in connection with 75 municipal and government agency bond trades executed by Annandale and Armscott in 1994 and 1995. See A. Morgan Maree & Associates, Inc., Advisers Act Rel. No. 1718 (Apr. 27, 1998), 67 SEC Docket 49. Prior to 1995, Anderson testified that "[a]ll of Armscott's clients were from [AMM], not from [Anderson] or not from Annandale."

12 McCabe, at the time of his testimony, was a managing director of Securities Corporation of Iowa, which he described as a full service brokerage firm which underwrites between 100 and 200 separate municipal bond issues annually and engages in extensive municipal bond trading in the secondary market. With close to forty years of experience in the securities industry, McCabe was responsible, among other things, for supervising his firm's municipal bond traders.

13 McCabe stated that he was asked to review over 100 trades for excessive charges, but characterized a charge as excessive only where it was "extremely higher than the industry norm." McCabe determined not to classify as excessive charges that were merely slightly above industry norms.

14 Trade Number 1 in Chart F of the Appendix to this opinion.

15 McCabe explained that, as a result of the proposed pre-refunding, the bonds were secured by U.S. Treasury securities.

16 McCabe stated that the appropriate range for this trade should have been "between 57 basis points and 184 basis points."

    McCabe testified that he sought to "quantify" what this markup "meant in terms of yield" to the customer. He explained that "[a]ll muni's are traded in terms of yields of maturity or yield to the call."

17 Trade Number 9 of Chart F. The bond was non-callable.

18 Trade Number 24 in Chart E of the Appendix.

19 Trade Number 47 in Chart E.

20 According to Anderson, he "made the calculated gamble" "after talking with the company" and to the paying agent that the bond would not be called because it was "a very high coupon, 11 3/4." While asserting that the bond made money for several of his customers, Anderson conceded that this customer lost money on the bond.

21 McCabe stated that he had reviewed Anderson's extensive investigative testimony for any indication that Anderson did "something special" for these customers to "justify his markups." McCabe found no such justification.

22 MacLaverty, a financial analyst and consultant, hadextensive experience trading and selling government securities.

23 Whenever MacLaverty felt that the charge Anderson assessed could have been warranted by circumstances, he excluded it from the group he considered excessive. At the Division's request, MacLaverty evaluated over 100 trades in which Anderson bought from or sold to retail customers. With respect to roughly 75 trades out of the over 100 trades evaluated, MacLaverty concluded that there might "have been a way to justify the extent of the markup" as a result of "extenuating circumstances."

24 Anderson charges that the Order Instituting Proceedings ("OIP"), which was dated December 4, 1997, "was issued five years after some of the trades at issue." Anderson does not specify the trades to which he is referring, but the earliest trades at issue are Anderson's purchase of these twelve Treasury Notes, which settled on December 15, 1992. Consequently, the general five year federal statute of limitations for penalty claims does not apply. See 28 U.S.C. § 2462.

25 When Anderson was asked whether the trades took one hour, he testified: "I had one hour to do it, but I still had -- the trade still had to be settled, you still had to get the bonds from the other place . . . ." He added that, in addition to these Treasury notes, Anderson also had to liquidate "thirty or so common stocks for her."

26 MacLaverty described a "U.S. Treasury strip" as a "U.S. Treasury note that's had a coupon stripped off of it and sold." Thus, a strip holder receives a principal payment only.

27 MacLaverty described "agency specified pools" as "pools of single-family home owner mortgages that get bundled together into federal agency-backed pools." These agencies include the Government National Mortgage Association ("Ginnie Mae") and the Federal National Mortgage Association ("Fannie Mae").

28 MacLaverty stated that, because these securities are subjectto prepayment risk, i.e., the risk that borrowers on the underlying mortgages will prepay principal, "there is also a commensurate adjustment in the willingness of dealers (fewer in number than for treasuries) to purchase and sell at prices too close to each other."

29 MacLaverty described CMOs as "pools of specified pools, if you will, which then have their cash flows carved up into different bonds or tranches for different investor types."

30 MacLaverty also testified that these particular CMOs "trade in bid-ask spreads of anywhere between 1/4 of a point and 3/4 of a point."

31 Grandon v. Merrill Lynch & Co., Inc., 147 F.3d 184, 192 (2d Cir. 1998). See also Meyer Blinder, 50 S.E.C. 1215, 1228 (1992) ("Broker-dealers have a duty to deal fairly with the public, which includes the implied representation that the price a firm charges bears a reasonable relationship to the prevailing market price.").

32 Alstead, Dempsey & Co., Inc., 47 S.E.C. 1034, 1035 (1984).

33 Alstead, Dempsey, 47 S.E.C. at 1035. See also Edward J. Blumenfeld, 47 S.E.C. 189, 191-92 (1979) (holding that prices paid for a security by a dealer in actual transactions closely related in time to his retail sales are normally a highly reliable indication of prevailing market price).

34 Kevin B. Waide, 50 S.E.C. 932, 935 (1992).

35 Investment Planning, Inc., 51 S.E.C. 592, 595 (1993) (citing Exchange Act Rel. No. 24368 (Apr. 21, 1987), 38 SEC Docket 234, 236 (advising broker-dealers that "what might be anappropriate mark-up for the sale of an equity security may be an excessive mark-up for a debt security transaction of the same size")). See also First Honolulu Securities, Inc., 51 S.E.C. 695, 697 (1993) (significantly lower markup is customarily charged in the sale of debt securities than in transactions of the same size involving common stock) and 699 n.14 ("mark-ups on government securities, like mark-ups on corporate and municipal debt securities, usually are smaller than those on equity securities"); NASD Manual IM-2440(b)(1) (noting that "a higher mark-up customarily applies to a common stock transaction than to a bond transaction of the same size"); Zero-Coupon Securities, Exchange Act Rel. No. 24368 (Apr. 21, 1987), 38 SEC Docket 234, 235 n.15 ("it is the industry practice, in general, for broker-dealers in principal transactions to charge retail customers mark-ups on sales of debt securities that are measurably lower than those charged on sales of equity securities").

36 See First Honolulu Securities, Inc., 51 S.E.C. at 698-99 ("[A]lthough some markups on municipal bonds may reach 5%, that figure might be acceptable in only the most exceptional cases.") (citing SEC v. Charles A. Morris & Assoc., Inc., 386 F.Supp. 1327, 1334 n.5 (W.D. Tenn. 1973) ("It is the practice in the municipal bond industry to charge retail customers a price which is no more than one quarter of one per cent to five per cent over a bond's current market price.")); Staten Securities Corp., 47 S.E.C. 766, 767 (1982) ("As a general rule, markups on municipal bonds are significantly lower than those for equity securities."). In First Honolulu, we noted that "markups on municipal debt securities . . . below four percent may well have been unfair" although, in that case, evidence did not "establish the unfairness of markups at th[o]se levels." Id. at 701. See also Investment Planning, Inc., 51 S.E.C. at 595-96 ("our opinions suggest that although some markups on municipal bonds may reach 5%, that figure might be acceptable in only the most exceptional cases," finding markups from 4% to 5.9% on municipal bonds improper).

37 Staten Securities, 47 S.E.C. at 768 n.9.

38 38 SEC Docket at 235.

39 See, e.g., Shamrock Partners, Ltd., 53 S.E.C. 1008, 1011 (1998) ("Markdowns are generally smaller than markups."). For example, in a landmark study of the Securities Markets, the National Association of Securities Dealers, Inc. (the "NASD") found that "in over 82% of dealer's riskless purchases from customers, markdowns did not exceed 2%; and that in over 17% of the purchases, no markdown was taken or the stocks were purchased at a loss." Hamilton Bohner, Inc., 50 S.E.C. 125, 128 (1989) (citing Thill Securities Corporation, 42 S.E.C. 89, 92-95 (1964)). See also The Report of the Special Study of Securities Markets, H.R. Doc. No. 95, Pt. 2, p. 626, Table VII-23 (1963).

40 Investment Planning, Inc., 51 S.E.C. at 596. We have stated that "expert testimony is generally very helpful when the question to be resolved is the proper pricing of debt securities." F.B. Horner, 50 S.E.C. 1063, 1066 n.11 (1992), aff'd, 994 F.2d 61 (2d Cir. 1993) (per curiam). In Horner, we accepted expert testimony that, at that time, it was industry practice for a firm that was not at risk, to charge markups of 1.8% to 2.9% on certain principal only CMO securities. Id.

41 Donald T. Sheldon, 51 S.E.C. 59, 77 (1992) (Under the Administrative Procedure Act, "[o]nce the Division presented evidence of the[] markups, the burden shifted to [the respondent] to refute that evidence."), aff'd, 45 F.3d 1515 (11th Cir. 1995). Anderson claims that there is no authority for shifting the burden in this way where the respondent is charged, as here, with "federal securities fraud." Sheldon, however, involved allegations of fraud in connection with the retail pricing of municipal and government securities.

    Citing Banca Cremi, S.A. v. Alex Brown & Sons, Inc., 132 F.3d 1017, 1034 (4th Cir. 1997), Anderson also argues that the burden of proving excessive pricing remained with the Division even after it introduced expert testimony that the markups and markdowns were excessive because they exceeded specified percentages. Banca Cremi involved a private litigant and revolved around an element of a private securities fraud action, reliance, which is not at issue in a Commission enforcement proceeding.

    Moreover, the court in Banca Cremi held that the ultimate burden of proving fraud could not be shifted to the defendant based solely upon testimony regarding the excessiveness of the markups. We do not mean to suggest that the burden of proof shifts but merely that the experts' testimony regarding industry practice had the effect of placing with Anderson the burden of producing evidence to support his claim that his pricing was not excessive. As we made clear in Sheldon, the ultimate burden of persuasion remains with the Division.

42 Richard R. Perkins, 51 S.E.C. 380, 383 n.16 (1993).

43 Anderson did not present evidence to challenge the Division's evidence regarding industry practice andexpressly concedes that the Division's experts established that "certain of Anderson's markups deviated from the normal range."

44 The Second Circuit has held that, "[i]n assessing whether markups on municipal bonds are, in fact, excessive . . . courts should begin with the factors set forth under MSRB Rule G-30." Grandon, 147 F.3d at 193.

    The MSRB, in its Report on Pricing, also identifies "a number of other factors which might be relevant in determining the fairness and reasonableness of prices in municipal securities transactions." These factors "include the availability of the security in the market, the price or yield of the security, the maturity of the security, and the nature of the professional's business."

45 In 1980, the MSRB proposed establishing a pricing guideline for municipal securities of "1 point to 2 ½ point." After receiving comments on this proposal, the MSRB determined not to set any numerical guideline. In a 1980 Report on Pricing, the MSRB concluded that such a guideline "would not be feasible" because of "the heterogeneous nature of municipal securities transactions and municipal securities dealers." We previously have expressed our agreement with the MSRB's approach "because to focus on particular percentages might encourage charging markups as high as thespecified figure." Investment Planning, Inc., 51 S.E.C. at 595 n.14.

46 Because he lacked access to the requisite equipment, a bond yield calculator, Anderson relied on contra parties to calculate what markup would produce the desired yield.

47 Anderson claims that he "randomly went through some" of the trades at issue and chose ones to analyze "because they were larger sizes."

48 It is unclear why Anderson employed a yield chart for a date other than December 27.

49 Noting that the guide reflected municipal bond trading across the country, Anderson acknowledged that "bonds in different states all trade differently."

50 A former and a current NASD official testified as expert witnesses regarding general NASD markup and markdown policies. Their testimony supports Anderson's contention that the NASD pricing policy for municipal securities was not entirely clear during the period at issue. Neither witness was familiar with Anderson's conversations with the NASD at the time.

51 Based on the evidence introduced by the Division, his subsequent markups and markdowns did not exceed 3.5%.

52 We note that percentage pricing guidelines do not convey authority to charge the maximum amount. Charges significantly lower than the guidelines can be excessive under particular facts and circumstances

53 Because we have declined to find scienter, we dismiss the the allegations that Anderson violated Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Exchange Act Rule 10b-5, or that he aided and abetted violations of Exchange Act Sections 15(c)(1) and 15B(c)(1), Exchange Act Rule 15c1-2, or MSRB Rules G-17 and G-13.

54 See Sheldon, 51 S.E.C. at 82 n.94 (finding violation of Sections 17(a)(2) and 17(a)(3) based on negligence and citing Aaron v. SEC, 446 U.S. 680, 695-700 (1980)).

55 See, e.g., Sharon M. Graham, 53 S.E.C. 1072, 1085 n. 35 (1998) ("A respondent is a 'cause' of another's violation if the respondent 'knew or should have known' that his or her act or omission would contribute to such violation."), aff'd, 222 F.3d 994 (D.C. Cir. 2000).

56 Anderson complains that, in light of the age of the alleged misconduct, "further prosecution of [the Division's] claim . . . constitutes an abuse of Anderson's due process rights . . . and violates fundamental principles of fairness." Consequently, he argues that the proceeding should be dismissed in its entirety. We disagree.

    We instituted these proceedings in December 1997, less than a year after the alleged violative activity ended. Although Anderson complains that the trades are difficult to remember at this date, he gave investigative testimony regardingthese trades as early as 1995, within three years of the first trades at issue. Under the circumstances, we do not believe Anderson was prejudiced by the delay.

57 See, e.g., Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 188-89 (1973) ("The fashioning of an appropriate and reasonable remedy is for the Secretary [of Agriculture], not the court. The court may decide only whether under the pertinent statute and relevant facts, the secretary made 'an allowable judgement in [his] choice of the remedy.'") (quoting Jacob Siegel Co. v. FTC, 327 U.S. 608, 612 (1946)).

58 Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981).

59 Anderson further testified that, as part of the settlement, he agreed to stop acting as a market maker in stocks.

60 15 U.S.C. § 78u-2(a).

61 15 U.S.C. § 78u-3(e). See SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989) ("Disgorgement is . . . designed to deprive a wrongdoer of his unjust enrichment and to deter others from violations of the securities laws.").

62 Id. at 1231.

63 Id. at 1232.

64 Id.

65 According to the Division, its disgorgement request was reduced by $5,855 because Armscott had already disgorged that amount in a related administrative proceeding. See n.2, supra.

66 Anderson concedes that he received approximately $52,000 in profits from these markups and markdowns.

67 KPMG Peat Marwick LLP, Exchange Act Rel. No. 43862 (Jan. 19, 2001), 74 SEC Docket 384, 430, motion for reconsideration denied, Exchange Act Rel. No. 44050 (Mar. 9, 2001), 74 SEC Docket 1351, petition denied, 289 F.3d 109 (D.C. Cir. 2002).

68 We have considered all of the arguments advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed in this opinion.

 

http://www.sec.gov/litigation/opinions/33-8265.htm


Modified: 08/15/2003