WASHINGTON -- Prudential Securities Inc. and Blount Parrish & Roton Inc. have been censured and fined by the National Association of Securities Dealers for failing to conduct proper due diligence in the offering and reoffering of a $138.48 million port facility bond issue.
Blount Parrish, a broker-dealer based in Montgomery, Ala., was fined $150,000 and Prudential Securities, formerly Prudential-Bache Securities, was fined $90,000, the NASD announced yesterday.
Without admitting or denying the charges, the two broker-dealers consented to the fines and the entering of a finding that they violated Rule G-17 of the Municipal Securities Rulemaking Board. Rule G-17 is the board's fair dealing rule and prohibits municipal securities brokers and dealers from engaging in deceptive, dishonest, or unfair practices.
The NASD action revolved around a 1989 port bond issue that the Marengo County, Ala., Port Authority offered as uninsured on June 13, 1989, and then reoffered as insured the next day.
The bond issue was to finance the port authority's acquisition of a marina and fueling facility at a port in Demopolis, Ala., said a lawyer for the authority who was unaware of the NASD action or the charges that led to it. The marina and fueling facility had been owned by a private company that was having financial troubles, he said.
The NASD decision and order did not disclose the details of the charges against the two broker-dealer firms but said the censure and fines were necessary to put them and other firms on notice of the importance of conducting sufficient due diligence in municipal underwritings.
The association took into account "that the Marengo County Port Authority Capital Accumulator Port Facility Revenue bonds are AAA-rated and are fully secured by escrowed government securities, that no investor have complained, and that there is no evidence that any of the investors have been or will be injured," the NASD said in its decision and order.
"On the other hand," it said, "we do believe that there were significant failings in the due diligence conducted" by Prudential Securities and Blount Parrish "and recognize the need to put other firms similarly situated on notice that the Association expects them to carefully perform their due diligence functions in municipal underwritings.
"This means," the NASD continued, "that the broker-dealer must thoroughly investigate the financial capability and credit-worthiness of the issuer and the insurer, if the bonds are credit-enhanced; the reasonableness of the insurance premium; and whether or not monies were actually exchanged at each level if the bond issue involves a series of transactions."
One party to the bond deal said the charges might have stemmed from the fact that revenues are not even close to those that were projected under a proposed schedule for calling the bonds, so that fewer bonds are being called than planned.
"I suspect that has put some people in investments that are different than what they thought they had," said the source, who did not want to be identified. He stressed that there is not a default problem with the bonds because of the bond insurance. Officials with Prudential and Blount Parrish declined to comment on the NASD's action.
In another matter, the NASD expelled Fitzgerald, DeArman & Roberts Inc., of Tulsa, Okla., and disciplined two of its officials for engaging in fraudulent practices in connection with government, utility, and corporate bonds.
Larry Dale Harrison, the firm's compliance officer and its principal in Tulsa, was fined $50,000 and suspended from association with any member of the NASD for 90 days. Eric Linton Witherow, a registered representative in the firm's Irvine, Calif., branch office, was fined $30,000.
The allegation of misconduct were based on findings that on two separate occasions the firm, acting through Mr. Harrison and Mr. Witherow, engaged in a fraudulent pricing scheme known as "adjusted trading."
Under the scheme, the firm purchased U.S. Treasury, utility, and corporate bonds from a public customer at prices "not reasonably related to the then-current market," the NASD said. The firm then sold Federal National Mortgage Association and Student Loan Marketing Association zero coupon bonds to the same customer at "inflated prices substantially above the then-prevailing market," it said.
As a result, the firm was found by the NASD to have violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5. These prohibit the use of any manipulative or deceptive device or scheme in the purchase or sale of any security.
