Set­tle­ment Is Big­gest in Flip Probe

The Bond Buyer - - Front Page - BY KYLE GLAZIER

WASH­ING­TON – The Se­cu­ri­ties and Ex­change Com­mis­sion’s nearly $400,000 set­tled case against a for­mer UBS Fi­nan­cial Ser­vices bro­ker al­leged to have en­gaged in a “flip­ping” scheme grew out of a ma­jor case an­nounced ear­lier this year, and the SEC said the in­ves­ti­ga­tion isn’t over yet.

The SEC an­nounced on Dec. 18 that it had charged and reached a set­tle­ment with Chris Rosen­thal, a for­mer UBS bro­ker who is al­leged to have par­tic­i­pated in a ma­jor flip­ping and kick­back scheme that re­sulted in the SEC lev­el­ing charges at 18 peo­ple in Au­gust.

Un­der the SEC’s ad­min­is­tra­tive or­der, Rosen­thal nei­ther ad­mit­ted nor de­nied the SEC’s find­ings but will dis­gorge $284,080 in ill-got­ten gains and pay $15,128 in in­ter­est and a $75,000 civil penalty. That’s the big­gest set­tle­ment with an in­di­vid­ual to have arisen from the flip­ping in­ves­ti­ga­tion so far.

Ac­cord­ing to his reg­is­tra­tion history Rosen­thal was a bro­ker for 26 years, in­clud­ing 17 at UBS from 1999 un­til 2016 when his Fi­nan­cial In­dus­try Reg­u­la­tory Author­ity bro­ker pro­file said he

re­signed af­ter UBS be­gan in­ves­ti­gat­ing the al­leged flip­ping con­duct. He is 54 years old and lives in Ohio, ac­cord­ing to the SEC.

The SEC found that from 2012 to 2016, Rosen­thal placed fraud­u­lent re­tail or­ders with UBS’s syndicate desk on be­half of two firms, Core Per­for­mance Man­age­ment and RMR As­set Man­age­ment Com­pany, which the SEC in Au­gust charged were op­er­at­ing as un­reg­is­tered bro­ker-deal­ers.

Ac­cord­ing to the SEC, the in­di­vid­u­als work­ing for these firms posed as re­tail in­vestors to gain pri­or­ity in ob­tain­ing newly is­sued bonds.

They then quickly resold the mu­nis to bro­ker-deal­ers for a pre­ar­ranged com­mis­sion, the SEC said, and tried to hide the flip­ping from the is­suers and un­der­writ­ers by ma­nip­u­lat­ing sales tick­ets.

Rosen­thal was the reg­is­tered rep­re­sen­ta­tive for 22 ac­counts at UBS held by CPM and 29 held by RMR un­der var­i­ous fic­ti­tious busi­ness names, ac­cord­ing to the SEC’s or­der. Rosen­thal knew that the firms were in the busi­ness of flip­ping new is­sue mu­nic­i­pal bonds, the SEC al­leged.

UBS was not par­tic­i­pat­ing as an un­der­writer, but was able to ob­tain new is­sue bonds by en­ter­ing into dis­tri­bu­tion agree­ments with other bro­ker-deal­ers who were un­der­writ­ing syndicate mem­bers. UBS han­dled or­ders for new is­sue mu­nic­i­pal bonds that the firm ob­tained un­der these dis­tri­bu­tion agree­ments. The dis­tri­bu­tion agree­ments re­quired UBS to of­fer and sell se­cu­ri­ties in com­pli­ance with cer­tain of­fer­ing re­stric­tions, and to con­firm that each or­der on be­half of a re­tail cus­tomer was a bona fide re­tail or­der, the SEC found.

Ac­cord­ing to the com­mis­sion, Rosen­thal sub­mit­ted 1,388 re­tail or­ders on be­half of CPM and RMR to the UBS syndicate desk. As a re­sult of those or­ders, CPM and RMR re­ceived ap­prox­i­mately 1,101 al­lot­ments of new is­sue bonds dis­trib­uted by UBS.

“When Rosen­thal sub­mit­ted re­tail or­ders to UBS’s syndicate desk on be­half of CPM and RMR, he knew or was reck­less in not know­ing that they were not bona fide re­tail or­ders,” the SEC said.

The SEC said Rosen­thal was so in­volved in the scheme that he of­ten pro­vided lo­cal zip codes with CPM and RMR or­ders to give the mis­lead­ing im­pres­sion that CPM and RMR were lo­cal re­tail in­vestors or rep­re­sent­ing lo­cal re­tail in­vestors.

Rosen­thal also al­legedly “parked” bonds with CPM and RMR. Ac­cord­ing to the SEC, “park­ing” means an un­law­ful ar­range­ment in which a per­son sells se­cu­ri­ties to a pur­chaser sub­ject to an agree­ment or un­der­stand­ing that the seller will re­pur­chase the se­cu­ri­ties at a later time at a price that leaves the eco­nomic risk with the seller.

For ex­am­ple, on Oct. 9, 2015, the SEC said, Rosen­thal placed an or­der for CPM to pur­chase $500,000 of new is­sue bonds be­ing dis­trib­uted by UBS in one of CPM’s UBS ac­counts at the ini­tial of­fer­ing price with the un­der­stand­ing that Rosen­thal would re­pur­chase the bonds on be­half of UBS traders at a pre-ar­ranged price of $1 per bond above the ini­tial of­fer­ing price. Rosen­thal ar­ranged for a UBS trader to buy the bonds back for UBS’s ac­count on Oct. 13, but re­ported the pur­chase in two trade tick­ets of $250,000 each and through two dif­fer­ent ac­counts held by CPM.

The SEC’s or­der in­cludes in­crim­i­nat­ing mes­sages that ap­pear to show Rosen­thal help­ing UBS traders place “im­proper re­tail and in­sti­tu­tional cus­tomer or­ders” through CPM and RMR in or­der to get higher pri­or­ity than they would if they had placed or­ders through UBS for UBS’ own ac­count.

In a se­ries of emails in July 2013 which the SEC cited, a UBS trader asked Rosen­thal whether he could get bonds of­fered by a Texas-based is­suer. Rosen­thal replied that he had “five flips” that could be put in.

“I split it up pretty nicely amongst the thieves to try and sneak in here and there,” the SEC found Rosen­thal told the trader. The next day, the trader pur­chased for UBS’s ac­count $500,000 of the bonds from RMR and $900,000 of the bonds from CPM.

Rosen­thal would split sales tick­ets to hide the con­duct, the SEC said, and would also warn oth­ers in­volved in the trade against ac­tiv­ity that might re­veal the con­duct.

Rosen­thal’s con­duct was fraud un­der the fed­eral se­cu­ri­ties laws, the SEC said, and the com­mis­sion charged him with vi­o­la­tions of the an­tifraud statutes in sec­tion 10(b)-5 of the Ex­change Act and sec­tions 17(a)(1) and (a)(3) of the Se­cu­ri­ties Act. He fur­ther vi­o­lated the Mu­nic­i­pal Se­cu­ri­ties Rule­mak­ing Board’s Rules G-17 on Fair Deal­ing and G-11 on Pri­mary Of­fer­ing Prac­tices, and was a cause of CPM’s and RMR’s vi­o­la­tions, the SEC said.

A se­cu­ri­ties lawyer who pre­ferred not to be named said the case was in­ter­est­ing in part be­cause the SEC won a set­tle­ment on the point of Rosen­thal caus­ing CPM and RMR’s vi­o­la­tions. That’s not been typ­i­cal in muni en­force­ment ac­tions, but Rosen­thal’s al­legedly very deep in­volve­ment in the ac­tiv­ity may have trig­gered it here. the lawyer said.

In ad­di­tion to his fi­nan­cial penal­ties, Rosen­thal agreed to be barred from the in­dus­try with the right to ap­ply for read­mis­sion af­ter five years.

The SEC is hold­ing open the pos­si­bil­ity that even more flip­ping charges could come down the pike, as the in­ves­ti­ga­tion is on­go­ing. Most of those ac­cused of par­tic­i­pa­tion in the flip­ping have al­ready set­tled and been barred from the in­dus­try, though three are lit­i­gat­ing the mat­ter in fed­eral court with more de­vel­op­ments ex­pected early in the new year. ◽

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