A Financial Industry Regulatory Authority (FINRA) hearing panel has ruled that David Lerner Associates (DLA) charged excessive markups on CMO and municipal bond deals during a two-year period.
According to FINRA, this action resulted in the firm’s retail customers paying unfairly high prices and receiving lower yields than they otherwise would have gotten.
The panel fined DLA $2.3 million for the markup and related supervisory violations. It also ordered the firm to pay restitution of over $1.4 million, plus interest, to clients who were affected by the higher markups.
FINRA also fined and suspended DLA’s head trader William Mason. Mason’s fine is worth $200 thousand and his suspension from the securities industry lasts six months.
The ruling resolves charges brought by FINRA’s department of enforcement in May 2010.
The panel found that DLA and Mason charged excessive markups in over 1,700 CMO deals from January 2005 through August 2007.
Additionally, from January 2005 through January 2007, both also charged retail customers excessive markups in over 1,500 muni deals.
FINRA rules require that the amount of a markup must be fair and reasonable, taking into consideration all relevant factors and circumstances, such as the type of security involved, the availability of the security in the market and the amount of money involved in a deal.
The hearing panel decision noted that DLA’s CMO and muni bond trades had a pattern of intentional excessive markups. The bonds in the transactions were all rated investment grade or above, and were readily available in the market at considerably lower prices versus what DLA had charged.
The panel noted that DLA charged markups on the municipal bonds ranging from 3.01% to 5.78% and charged markups on the CMOs ranging from 4.02% to 12.39%.