The Securities and Exchange Commission said in an administrative proceeding that First Union Securities had failed to properly record certain terms of customer orders made in connection with the purchase and sale of Treasury securities issued through the noncompetitive bidding process from 1995 through 1998.
"The firm's books and records failed to reflect pre-auction agreements between First Union Securities and its noncompetitive bidding customers to immediately sell after auction the Treasury securities those customers would be awarded through the auction," the SEC said.
Such pre-auction agreements violate a Treasury Department rule.
A spokesman for First Union Securities of Richmond, Va., a unit of First Union Corp. in Charlotte, N.C., would only confirm the settlement. The unit was formed after First Union's 1998 purchase of the brokerage Wheat First Butcher Singer.
The noncompetitive bidding process is intended to let relatively unsophisticated, smaller investors participate in Treasury auctions. The ban on prearranged sales is designed to minimize the use of noncompetitive bidding by those who should bid competitively.
The SEC said First Union got about $225,000 in markdowns from its customers in connection with these transactions. It said the firm agreed to pay $308,931 to disgorge the markdowns, plus pre-adjustment interest, as well as a civil penalty of $100,000.
The agency said a former First Union trader had devised a strategy in the early 1990s under which First Union Securities customers bought Treasury securities in the noncompetitive auction and then sold them at or immediately after the applicable deadline. The ex-trader developed this strategy after observing that the prices of noncompetitive Treasuries rose after auction, it said.
The SEC said six First Union Securities salesmen had used the strategy in 35 Treasury auctions from May 1995 through February 1998. "The salesmen solicited a number of individuals and small institutional customers to engage in the strategy," the SEC said. "The salesmen explained the trading strategy to the customers generally and told them that it presented little risk of loss and an opportunity for a small but quick profit."