Fund Sponsor to Pay $26 Million for Concealing Proprietary Trading and Deteriorating Secondary Market

A large broker-dealer agreed to pay over $26 Million to settle charges that it misrepresented and manipulated the secondary market for affiliated closed-end funds. The SEC charges that the respondent effectively controlled the secondary market and consistently provided prices that exceeded the funds’ net asset values. When the secondary market started to decline in 2008, the firm attempted to reduce its own inventory (in response to demand from its Chief Risk Officer) by selling at prices below orders placed by its customers. According to the SEC, the firm, based in Puerto Rico, held 49% of total retail brokerage assets in Puerto Rico and heavily sold the closed-end funds, comprised of Puerto Rico municipal bonds, to retail investors. The SEC also charged the firm’s office head and trading desk head.

OUR TAKE: Firms can’t favor their own trading desks over their own clients. We suspect the respondent would have suffered an action for not adequately disclosing the limited and failing secondary market. What really led to the huge penalties was proprietary trading on information not disclosed to clients and to the detriment of clients trying to unload the same securities.

http://www.sec.gov/litigation/admin/2012/33-9318.pdf
http://www.sec.gov/litigation/admin/2012/33-9317.pdf