A recent enforcement action in which the Securities and Exchange Commission charged a former dealer with improperly submitting institutional orders as retail orders underscores the SEC's focus on protecting retail investors and cracking down on the manipulation of retail order periods.
On Tuesday, Eliseo Sampayo, a former broker-dealer at Jefferies LLC., agreed to settle with the SEC on charges that he improperly placed retail orders for new issue municipal bonds on behalf of a registered broker-dealer. Retail priority is important because municipal offerings are often over-subscribed and not all orders are filled. Broker-dealers don’t qualify for retail priority and are typically given lower priority.
Sampayo neither admitted nor denied the SEC’s findings, which were brought as an administrative proceeding. The case is connected to that of Thomas Muldoon, a former Wells Fargo Clearing Services trader, who allegedly placed fraudulent retail orders to get higher priority in primary offerings. Muldoon submitted retail orders to Sampayo. The SEC settled with Muldoon in September 2019.
Sampayo will be suspended from the industry for six months and will pay $20,000. The SEC said Sampayo violated Municipal Securities Rulemaking Board Rule G-11 on primary offering practices, and MSRB Rule G-17 on fair dealing. Half of Sampayo’s fines will be transferred to the MSRB.
Sampayo worked at Jefferies from 2009 to 2017, and was most recently at Mesirow Financial, Inc., from 2017 to 2019 according to BrokerCheck, the Financial Industry Regulatory Authority’s public online database that provides information about brokers and brokerage firms.
Issuers hold retail order periods to give top priority to retail investors looking to invest in new issue muni bonds. Issuers require that retail orders include the customer’s zip code to verify that they live in the issuer’s jurisdiction.
Between October 2016 and August 2017, Sampayo’s role was to market new issue muni bonds to his institutional customers. If his customers wanted the bonds, he would submit those orders to the underwriting desk. During that time, Sampayo improperly submitted orders as retail customer orders when he knew or should have known that they did not qualify for retail priority, the SEC said.
Sampayo also submitted inaccurate zip codes with some of the improper retail orders.
The alleged conduct is similar to that of the several "flipping" cases brought by the SEC over the past two years, in which several firms and multiple individuals were charged with providing inaccurate information in order to obtain priority in new issue allocations.
Sampayo received orders for new issue muni bonds from other institutional customers as well as Muldoon. Muldoon submitted orders for those bonds during retail order periods. Sampayo submitted at least 18 orders that he received from Muldoon during retail order periods as retail customer orders, the SEC found.
“Respondent knew or should have known that Muldoon’s orders were on behalf of Wells Fargo and not an individual, that the orders should have been submitted as stock orders, and that they were not entitled to retail priority, regardless of whether Wells Fargo might re-sell the bonds to its retail customers in the secondary market,” the SEC said.
Jefferies declined to comment.
This case shows the SEC’s focus to protect retail investors, said Phillip Stern, senior counsel at Neal Gerber Eisenberg. Stern worked for the SEC in Chicago for 10 years, spending five years as assistant regional administrator for enforcement.
SEC Chair Jay Clayton’s focus has been on retail investor protection over the last few years. Stern expects the SEC to continue to focus on protecting retail investors, especially during the pandemic.
“The market has been very choppy and they (SEC) will be looking at how the products are being sold to investors and whether they are suitable or not,” Stern said.
