The U.S. Securities and Exchange Commission alleged that over a period of nearly four years, bankers at RBC’s New York offices allocated bonds to unregistered brokers that then flipped them for a profit on 41 occasions, when institutional customers and dealers should have had priority according to RBC’s internal policies.
In three instances, the SEC alleged that RBC violated an issuer’s instructions to place retail customers’ orders first, instead allocating some bonds to the “flippers” first, and failed to document the reasons why. In bond offerings not underwritten by RBC, the order found that RBC obtained bonds for its own inventory at least 87 times by placing requests with those flippers to purchase bonds through them at a set markup, gaining the bank a higher priority than it would otherwise have had.
RBC did not admit or deny the SEC’s findings, but agrees to a censure, a US$150,000 penalty, disgorgement of US$552,440, and prejudgment interest of US$160,886.
RBC spokesperson Elisa Barsotti declined to comment.
The SEC also settled related actions against the former head of municipal sales, trading and syndication for RBC, Kenneth G. Friedrich, and head of its municipal syndicate desk, Jamie L. Durando, who is still with the bank. The orders impose censures and civil penalties of US$30,000 for Mr. Friedrich, 57, and US$25,000 for Mr. Durando, 62. Mr. Friedrich is also prohibited from trading new municipal issues for six months.
Since 2018, the SEC has brought a range of charges against various firms for flipping municipal bonds and abuses related to retail orders.
The SEC action targets RBC’s bond allocations to two companies that were small clients for RBC: California-based RMR Asset Management Co., and Florida-based Core Performance Management LLC (CPM), neither of which was registered with the SEC.
In one instance in 2016, RBC acted as senior manager for a US$128-million offering of municipal bonds that was highly oversubscribed. RBC submitted eight orders on behalf of RMR and two affiliates, and RMR was allocated US$3.3-million in bonds, while about US$130-million in institutional customer orders and US$127-million in dealer orders were left unfilled.
“The flippers’ orders ‘crowded out’ institutional customer and/or dealer orders which should have been filled first,” the SEC wrote in its settlement order. “RBC’s syndicate desk allocated oversubscribed new issue bonds to the flippers in order to maintain relationships with the flippers who often purchased new issue bonds from RBC in deals where there were not enough other buyers for the bonds.”
In another US$627-million municipal bond offering in late 2015, for which RBC was senior syndicate manager, the issuer directed that orders from retail customers should be given first priority. Before that priority period closed, an RBC salesperson submitted two orders for RMR and one for a CPM affiliate, and “falsely certified” that their orders met the criteria for retail customers, in part by filing “zip codes that were not associated with the flippers’ locations,” according to the SEC.
Mr. Friedrich and the syndicate manager “participated in the decision to allocate bonds to the flippers in this offering,” the SEC said, and “were aware that the flippers were not retail customers.” Mr. Durando was senior underwriter for the offering, involved in deciding which orders would be allocated bonds, and was also aware the flippers did not qualify, the SEC said.
Even so, RBC allocated a total of US$1.75-million in bonds to RMR and the CPM affiliate, while retail orders from other buyers went unfilled.
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