WASHINGTON -- Synovus Securities Inc. of Columbus, Ga., and its former president have agreed to pay a total of $250,000 in fines for failing to tell customers that a midleman profited in more than 120 municipal transactions done on their behalf, the SEC said yesterday.
Between 1988 and 1991, Synovus president Clark L. Reed Jr. did the trades directly through longtime friend Richard T. Taylor instead of shopping around for buyers or sellers who could provide the best price for their customers' bonds, the Securities and Exchange Commission charged.
In most of the trades, Taylor was able the same day to sell the bonds to or buy the bonds from other brokers at a profit, which was not always disclosed to Synovus' customers, the SEC alleged in a six-page order Synovus, which is also a registered financial adviser, is the broker-dealer subsidiary of the Columbus-based bank, Synovus Financial Corp.
The commission charged that the scheme led to more than $800,000 in losses or lost profits for Synovus' customers and more than $500,000 in profits for Taylor.
By "interpositioning" Taylor in the deals, Synovus violated the federal securities laws, which the SEC interprets as requiring dealers to get the best price and "execution" on behalf of customers, Richard Wesell, administrator of the SEC's Atlanta district office, said in a telephone interview.
"The SEC has long held that the broker has a fiduciary duty to its client to get the best price and execution," said Phillip Parker, deputy general counsel for legal policy at the SEC. By "interjecting an additional person into the chain of a transaction," the dealer is violating that fiduciary duty, Wesell said.
The SEC said that Reed and Taylor had a "long-standing personal as well as business relationship," They have known each other for more than 15 years and participated jointly in several business ventures throughout the 1980s and 1990s, the commission said.
Without admitting or denying the SEC's charges, the firm agreed to pay a $200,000 civil penalty, to be censured by the SEC, to cease and desist from its illegal activities, and to adopt corrective measures and procedures. Reed agreed to pay a $50,000 fine and be barred from the securities business. He can apply for reinstatement in 18 months.
Sanders Griffith, general counsel of Synovus' financial corporation, was unavailable for comment yesterday.
The SEC will proceed with litigation against Taylor, who has not submitted an offer of settlement.
Wesell said the case is significant because the SEC has brought few enforcement actions involving the activities of bank-affiliated brokerage firms.
It also underscores the need for greater transparency and trade reporting in the municipal securities market, he said. "As it stands now, to get a competitive quote, a brokerdealer has to make the call because there is no effective trade and price reporting. It creates an atmosphere where this kind of conduct can occur," Wesell said.
The Municipal Securities Rulemaking Board said Jan. 11 that it will begin making available to enforcement agencies regular "surveillance" reports containing the details of interdealer transactions, including the identity of dealers involved in the transactions and the prices of individual transactions. The reports would be used exclusively for market surveillance and enforcement purposes and would not be made public, the MSRB said.
The move is part of a larger pilot program that the MSRB hopes to launch next January to supply daily volume and prices to the market for frequently traded municipal bonds. Concern is growing among regulators, particularly the SEC, that bond dealers are charging customers arbitrarily because their prices generally do not have to be posted in major national newspapers or some other publicly available vehicle.
The SEC also proposed a controversial rule on March 17 that would requre dealers to disclose price markups or markdowns in riskless principal transactions, which are trades in which a dealer receives an order, locates a seller, buys the bonds for its own account, and then quickly sells them to the investor.
All of the Synovus trades were riskless principal transactions and were general obligation bonds, revenue bonds, or industrial development bonds, according to the order released by the SEC.
Comments on the agency's proposed Rule 15c2-13, which is drawing strong protest from the municipal industry, are due July 15.
The Synovus case is the second in a month brought by the SEC's Atlanta district office involving municipal bonds. On June 23, the commission charged Jackson, Miss., underwriter Thorn, Alvis, Welch Inc., its president, and bond lawyer with fraud in connection with seven low-income housing issues totaling $20 million in two Mississippi counties in 1992 and 1993.
The actions come as SEC Chairman Arthur Levitt Jr. has pledged to beef up enforcement by the agency in the municipal arena. The agency is conducting a nationwide investigation into possible influence peddling in the municipal market.
