WASHINGTON — Two defunct firms and 18 individuals have been charged by the Securities and Exchange Commission with engaging in a so-called flipping and kickback scheme to improperly divert newly issued municipal bonds to certain broker-dealers for a fee at the expense of retail investors.
The SEC claims that from at least 2009 to 2016, Core Performance Management LLC and RMR Asset Management Co., as well as their principals and some of their associates, posed as retail investors to gain priority in obtaining the newly issued bonds.
They then quickly resold the munis to broker-dealers, typically for a fixed, prearranged commission. They tried to hide the flipping from the issuers and underwriters by manipulating sales tickets.
“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, chief of the 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.”
“We are committed to investigating and charging individuals, especially where, as here, the alleged misconduct by many of these industry professionals harmed retail investors,” said Stephanie Avakian, co-director of the enforcement division.
Core Performance and its managing director James P. Scherr, RMR and its president, Ralph Riccardi, and 13 of their associates settled the SEC’s charges without admitting or denying the allegations, agreeing to injunctions, to return allegedly ill-gotten gains with interest, to pay civil penalties, and to be subject to industry bars or suspensions. They also agreed to cooperate with the SEC’s ongoing investigation.
The settlements are subject to court approval.
Core Performance was founded by James Scherr in Boca Raton, Fla., and was dissolved as of July 27, 2016. The firm bought and sold new-issue munis but was never registered with the SEC. RMR, based in San Diego, was also an unregistered broker-dealer and was shut down earlier this year.
The SEC plans to litigate its charges against RMR associates Richard C. Gounaud, Jocelyn M. Murphy, and Michael S. Murphy in U.S. District Court for the Southern District of California.
In a related action, the SEC instituted settled proceedings against Charles Kerry Morris, the former head of municipal underwriting, sales and trading at broker-dealer NW Capital Markets Inc. The firm is based in Hoboken, N.J., and is registered at the SEC as a broker-dealer.
The SEC found that Morris took kickbacks from Scherr and engaged in a parking scheme under which Morris allocated new-issue bonds to Scherr with the understanding that Morris would repurchase them. As a result of this trading, the
SEC found that Morris and NW Capital caused Scherr and Core Performance’s improper unregistered broker activity.
The SEC also found that Morris’s supervisor, James A. Fagan, failed reasonably to supervise Morris’s activities.
Morris, NW Capital, and Fagan agreed to settle the charges without admitting or denying the SEC’s findings. Morris agreed to pay a total of $254,009 and to consent to an industry bar. NW Capital agreed to be censured and pay a total of $87,065 and Fagan agreed to pay a $10,000 penalty and to consent to a six-month supervisory suspension.
Loren Washburn, with Smith Washburn LLP, which represents RMR and several other defendants, said: "They cooperated with the SEC throughout the investigation. They are looking forward to getting this behind them and moving on with their personal and professional lives."
Washburn also represents: Bruce Broekhuizen, Douglas Derryberry, David Frost, Neil Kelly, John Kirschenbaum, David Luttbeg, Timothy McAloon, Anadel Pinzon, Ralph Riccardi, Dewey Tran, and Philip Weiner.
Lawyers for the other defendants could not be reached for comment.
