UBS to Pay $10 Million for Violating Rules Which Give Priority To Retail Investors in Municipal Offerings

The Securities and Exchange Commission today announced that UBS Financial Services Inc. has agreed to pay more than $10 million to resolve charges that it circumvented the priority given to retail investors in certain municipal bond offerings. 

According to the SEC’s order, over a four-year period, 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.  The order finds that UBS registered representatives knew or should have known that flippers were not eligible for retail priority.  In addition, the order finds that UBS registered representatives facilitated over 2,000 trades with flippers, which allowed UBS to obtain bonds for its own inventory, thereby circumventing the priority of orders set by the issuers and improperly obtaining a higher priority in the bond allocation process.

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

The SEC 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.

Without admitting or denying the findings, UBS consented to a cease-and-desist order that finds it violated the disclosure, fair dealing, and supervisory provisions of Municipal Securities Rulemaking Board Rules G-11(k), G-17, and G-27, and also failed reasonably to supervise within the meaning of Section 15(b)(4)(E) of the Securities Exchange Act of 1934. The order imposes a $1.75 million penalty, $6.74 million in disgorgement of ill-gotten gains plus over $1.5 million in prejudgment interest, and a censure. 

In related actions, the SEC instituted settled proceedings today against UBS registered representatives William S. Costas and John J. Marvin. The SEC’s order finds 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.  Costas agreed to pay disgorgement and prejudgment interest totaling $16,585 and a civil penalty of $25,000, and Marvin agreed to pay disgorgement and prejudgment interest totaling $27,966 and a civil penalty of $25,000. Both consented to a 12-month limitation on trading negotiated new issue municipal securities.  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’s investigation was conducted by the Division of Enforcement’s Public Finance Abuse Unit, including Joseph Chimienti, Laura Cunningham, Warren Greth, Cori Shepherd, and Jonathan Wilcox, with assistance from Deputy Unit Chief Mark Zehner and Assistant Director Kevin Guerrero.  The investigation was supervised by Ivonia K. Slade.