The Securities and Exchange Commission has charged Edward Jones with selling municipal bonds at an inappropriate price. The brokerage firm, located in St. Louis, was accused of buying municipal bonds, storing them in their inventory, and then reselling those bonds at a higher price to unsuspecting customers. The SEC also asserts that they have not properly reviewed secondary market municipal bond trades.
As per regulations, municipal bond underwriters are supposed to offer new bonds to customers at “initial offering price.” Allegedly, Edward Jones and Stina R. Wishman bought bonds to place in their own inventory and then sold those bonds at a markedly higher price to customers. These deals would usually take place within a day or so, meaning that the firm held little risk of losses.
Edward Jones also allegedly held first market municipal bonds until trading in the second market begun, and then sold the first bonds at a higher value. The SEC states that customers were charged an excess of $4.6 million dollars on bond because of the hike in prices. In one case the SEC mentions, the misconduct allegedly caused an issuer to experience negative effects on their federal tax determination, with them almost losing valuable federal tax subsidies.
Because current rules do not require dealers to share mark ups to customers on municipal bonds, it is hard to supervise all bond transactions. Investors receive little information when it comes to the dealer’s compensation on municipal bond trades. Therefore, the dealer’s intentions remain clouded.
Edward Jones has agreed to pay over $20 million dollars in disgorgement and prejudgment interest that will be allotted to the victims. The firm has also agreed to take remedial steps to make sure such situations do not occur again. They now disclose the percentage and monetary amount of markups on all fixed transactions. Winshaw agreed to pay $15,000 for her misconduct and will be banned from working in the securities industry for two years.
This is first case that the SEC has dealt with against underwriters for fraud based on wrong pricing in the primary market for municipal bonds.