Settlement Is Biggest in Flip Probe
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. ◽