Underwriter Failed to Conduct Due Diligence
A municipal underwriter was fined and censured, and its principal was suspended from the industry, for failing to conduct adequate due diligence. The public disclosure documents for the bond offerings at issue made misrepresentations about compliance with Continuing Disclosure Agreements. The SEC faults the underwriter for failing to conduct due diligence to determine the (in)accuracy of those misrepresentations, including its failure to check the Electronic Municipal Market Access website maintained by the MSRB. As a result, the underwriter violated several provisions of the securities laws by failing “to form a reasonable basis for believing in the truthfulness of the [issuer’s] assertions that [it] had complied with its prior CDAs.”
OUR TAKE: Market participants have an affirmative obligation to conduct due diligence on issuers and their disclosure statements. This obligation applies to underwriters, administrators, lawyers, consultants, and auditors, who, since the Madoff scandal, have found themselves in the regulatory cross-hairs as market watchdogs.