SEC Set­tles 3 Cases for Flip­ping

The Bond Buyer - - Front Page - By Kyle Glazier

WASH­ING­TON – Three more in­di­vid­u­als have agreed to be barred from the se­cu­ri­ties in­dus­try for their al­leged in­volve­ment in a mu­nic­i­pal bond flip­ping and kick­back scheme, the lat­est de­vel­op­ment in an on­go­ing Se­cu­ri­ties and Ex­change Commission in­ves­ti­ga­tion that has pro­duced sev­eral set­tle­ments and a fed­eral law­suit.

The SEC an­nounced set­tle­ments on Aug. 31 with Bruce Broekhuizen, John Kirschen­baum, and Neil Kelly.

All three were al­leged to have par­tic­i­pated as “in­de­pen­dent con­trac­tors” of the now-de­funct un­reg­is­tered San Diego-based bro­ker-dealer RMR As­set Man­age­ment Co., in a scheme to pose as re­tail in­vestors in or­der to gain pri­or­ity ac­cess to new-is­sue mu­nis that were then “flipped” for profit to the cus­tomers of other bro­ker-deal­ers. All three agreed to set­tle with the SEC with­out ei­ther ad­mit­ting or deny­ing the

Commission’s find­ings.

Th­ese set­tle­ments were reached through ad­min­is­tra­tive pro­ceed­ings sep­a­rate from the penal­ties the men al­ready agreed to pay last month as de­fen­dants in the SEC’s civil law­suit against RMR and sev­eral other in­di­vid­u­als. Broekhuizen agreed in court to pay $79,506, while Kelly agreed to pay $80,452 and Kirschen­baum $186,648.

RMR as­so­ci­ates Richard Gounaud, Jo­ce­lyn Mur­phy, and Michael Mur­phy con­tinue to face lit­i­ga­tion.

The court also per­ma­nently en­joined the de­fen­dants from fu­ture vi­o­la­tions of the fed­eral se­cu­ri­ties laws, as well as the Mu­nic­i­pal Se­cu­ri­ties Rule­mak­ing Board’s Rule G-17 on fair deal­ing.

Ac­cord­ing to the terms of the ad­min­is­tra­tive or­ders set­tling with Broekhuizen, Kirschen­baum, and Kelly, all three will be barred from as­so­ci­at­ing with any bro­ker-dealer, muni ad­vi­sor, in­vest­ment ad­viser, rat­ing agency, or trans­fer agent for at least two years. They will then have the op­por­tu­nity to ap­ply for re­in­state­ment, sub­ject to meet­ing cer­tain terms such as hav­ing paid the dis­gorge­ment they were or­dered by the court to pay. The men were not regis­tered bro­kers at the time of the al­leged scheme, which was part of their al­leged wrong­do­ing.

RMR was al­leged to be one player in a larger case an­nounced on Aug. 14, in which RMR, Core Per­for­mance Man­age­ment LLC, and their prin­ci­pals used fic­ti­tious busi­ness names to pur­chase bonds dur­ing re­tail pur­chase pe­ri­ods and pre­vent le­git­i­mate re­tail cus­tomers from re­ceiv­ing pri­or­ity as was in­tended by the is­suers. The con­duct took place from 2009-2016, ac­cord­ing to the SEC.

After ac­quir­ing the bonds, the SEC al­leged, the de­fen­dants quickly resold them to bro­ker-deal­ers, typ­i­cally for a fixed, pre-ar­ranged commission, and of­ten sought to hide the flip­ping ac­tiv­ity from is­suers and un­der­writ­ers by ma­nip­u­lat­ing sales tick­ets.

The case also en­snared Charles Kerry Mor­ris, the for­mer head of mu­nic­i­pal un­der­writ­ing at bro­ker-dealer NW Cap­i­tal Mar­kets Inc., who was al­leged to have taken “kick­back” money from CPM Man­ag­ing Di­rec­tor James Scherr and engaged in a park­ing scheme in which Mor­ris al­lo­cated new is­sue bonds to Scherr with the un­der­stand­ing that Mor­ris would re­pur­chase them.

The case could be es­pe­cially sig­nif­i­cant be­cause there are in­di­ca­tions that the SEC may be mak­ing a fur­ther push to crack down on this be­hav­ior, sources said. The Commission has said its in­ves­ti­ga­tion is con­tin­u­ing.

The on­go­ing law­suit against the other de­fen­dants is Se­cu­ri­ties and Ex­change Commission v. RMR As­set Man­age­ment Com­pany et al, in the U.S. Dis­trict Court for the South­ern Dis­trict of Cal­i­for­nia. ◽

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