mopdf.com

Background on Negotiated Offerings of Municipal Bonds8.Municipalities often raise money by issuing bonds that are sold to the publicthrough an underwriting process. In what is known as a “negotiated” offering, the municipal issuerchooses a broker-dealer to act either as the sole underwriter or as the senior manager of anunderwriting syndicate. An underwriting syndicate is a group of broker-dealers that join togetherto purchase new issue bonds from the issuer and distribute those bonds to the public. In addition,certain broker-dealers distribute new issue bonds pursuant to distribution agreements withmembers of the underwriting syndicate.9.Bonds in negotiated offerings are offered for sale during designated “order periods,”which are windows of time during which the underwriters solicit orders from potential investors.Underwriters market offerings by distributing electronic “pricing wires” to their own customers aswell as to other broker-dealers, who may be interested in purchasing bonds for their inventory. Thepricing wires describe the bonds being offered as well as applicable rules for the offering, includingthe “priority of orders,” which establishes the sequence in which bonds will be allocated to specificorder types, if the issuer chooses to establish such a priority. The priority of orders is set by theissuer and may vary by issuer. The priority of orders is important to potential purchasers becauseorders for bonds in a primary offering often exceed the amount of bonds available. Where retail isincluded as part of the priority of orders, those orders from individual retail investors have thehighest priority. Issuers that choose to prioritize retail orders do so to maximize the volume ofbonds placed with individuals who will buy and hold the bonds rather than quickly re-trade theirbonds. Retail investors may also reside in the issuer’s jurisdiction and therefore benefit from stateor locality-specific tax advantages. Issuers often require the submission of zip codes with retailorders as a way to verify that the customer is a resident of the issuer’s jurisdiction.10.An issuer may specify separate order periods for different categories of customers,typically by holding an initial retail order period for retail customers and a subsequent institutionalorder period for institutional customers. Often there is only one order period, with priority given toretail orders during that period. Pricing wires typically contain issuer-approved rules stating who iseligible to participate in the retail order period or to receive retail order priority. Pricing wires alsocommonly state that “stock orders are not permitted to be entered during the retail order period.”“Stock orders” refer to orders from broker-dealers attempting to purchase bonds for their owninventory. Stock orders are permitted during subsequent institutional order periods, but issuerpriority rules generally require underwriters to give stock orders lower priority than retail orinstitutional customer orders. Because stock orders generally have lower priority than customerorders, orders from broker-dealers (or traders acting on their behalf) often go unfilled.11.During the relevant period, UBS did not act as an underwriter or a member of anunderwriting syndicate. Instead, it entered into distribution agreements with other broker-dealerswho did serve as members of the underwriting syndicate. UBS’s “syndicate desk” handled ordersfor new issue municipal bonds that UBS sold to its customers under these distribution agreements.The distribution agreements in effect during the relevant period required UBS to offer and sellsecurities in compliance with certain offering restrictions, and to confirm that each order on behalf4

of a retail customer was a bona fide retail order (i.e., an order that met the requirements for “retail”as defined by the issuer).Certain UBS Registered Representatives Submitted Improper Retail Orders in PrimaryOfferings of Municipal Bonds and Facilitated UBS’s Purchase of Bonds from Flippers12.During the relevant period, UBS improperly allocated bonds to flippers onhundreds of retail orders from CPM and RMR for new issue bonds distributed by UBS. CPMand RMR maintained multiple customer accounts at UBS which were opened at differentbranches with different UBS registered representatives. Rosenthal was the UBS registeredrepresentative for multiple CPM and RMR-related flippers, with dozens of accounts forindividual flippers and their entities. Marvin and Costas were each the registered representativefor a different CPM-related flipper account. Each registered representative placed orders for newissue bonds on behalf of CPM or RMR with UBS’s syndicate desk.8 For part of the relevantperiod, Orellana worked on the UBS syndicate desk and was responsible for accepting ordersfrom UBS registered representatives on behalf of their customers, and submitting those orders tomembers of the underwriting syndicate in offerings distributed by UBS.13.Between August 2012 and May 2016, Rosenthal submitted the majority ofineligible retail orders on behalf of CPM and RMR, when he knew, or was reckless in notknowing, those orders did not qualify for retail priority. Rosenthal knew CPM and RMR wereengaged in flipping new issue municipal bonds. Rosenthal often included zip codes with theretail orders for CPM and RMR that were not associated with the relevant CPM or RMRaccount. Rosenthal would either receive the fraudulent zip code from CPM and RMR, or, insome instances, would look up a zip code on his own that would meet the issuer’s definition ofretail priority.14.Between April 2015 and June 2016, Marvin submitted ineligible retail orders onbehalf of CPM. Marvin understood that CPM traded new issue municipal bonds and on at leasttwo occasions Marvin described CPM in written communications as a “flipper.” Marvinsubmitted inaccurate zip codes with some of those retail orders so that the orders would receivethe highest retail priority. Marvin negligently submitted those inaccurate zip codes with CPM’sorders when he should have known that they did not correspond to CPM’s account.15.During April and May of 2016, Costas submitted ineligible retail orders on behalfof an associate of CPM. Costas was aware that his customer was flipping new issue bonds.Nevertheless, Costas submitted orders during retail order periods for CPM, and some of thoseorders included zip codes that were not associated with his customer’s account. Costasnegligently submitted those inaccurate zip codes with the retail orders when he should haveknown that they did not correspond to his customer’s residence.16.Between April 2015 and June 2016, Orellana, who worked on the UBS syndicatedesk, submitted some of the retail orders from Costas, Marvin and Rosenthal to syndicate8Costas, Marvin, and Rosenthal worked in different branches of UBS in California, Florida, and Ohio, respectively.5

members when he should have known those orders were ineligible for retail priority. Orellanaunderstood that flipper orders generally did not qualify for retail priority. The UBS registeredrepresentatives who submitted orders on behalf of CPM and RMR often represented to Orellana(and others at UBS) that the orders were bona fide retail orders, and either concealed or did notdisclose the fact that their customers were flippers. Nevertheless, Orellana understood that theflipper customer of a UBS registered representative whose orders were submitted for retailpriority was in the business of buying and immediately reselling bonds, because Orellana hadoccasionally traded with that customer in 2012 and 2014 when Orellana was a UBS bond trader.Orellana also had reason to know that, prior to his time on the UBS syndicate desk, another UBSregistered representative had submitted at least one retail order on behalf of his flipper customer.As a result, Orellana should have known that some of the orders he received from these UBSregistered representatives did not qualify for retail priority. On a few occasions, Orellanaprovided zip codes not associated with the UBS customer’s account and submitted it with thecustomer’s retail order to the underwriting syndicate.17.During the relevant period, UBS made a profit of approximately 1.54 millionfrom allocations of new issue bonds to CPM and RMR.18.In addition, Rosenthal and Costas facilitated improper trades with flippers whereUBS acquired bonds for its inventory. Broker-dealers seeking to purchase new issue bonds fortheir own inventory are required to submit “stock orders,” which generally have a lower prioritythan customer orders and often are not filled. UBS registered representatives placed UBS’sindications of interest with the flippers when they knew or should have known that the flipperswould, in turn, place the orders as a purported “customer” of the underwriting firm offering thebonds. Once the flippers had obtained the new issue bonds, they immediately sold (or “flipped”)the bonds to UBS, typically at a set mark-up price. During the relevant period, UBS obtainednew issue bonds for its inventory through CPM and RMR approximately 2,382 times. Thispractice circumvented the priority of orders and improperly gave UBS higher priority in the bondallocation process. Rosenthal facilitated the vast majority of trades between UBS traders andCPM and RMR, and helped UBS traders acquire bonds through those flippers both in bondofferings distributed by UBS, and in offerings in which UBS was not participating. Costashelped UBS traders improperly obtain new issue municipal bonds in offerings in which UBS wasnot participating in the underwriting. During the relevant period, UBS made a profit of 5.2million from reselling bonds that it had obtained through CPM and RMR.UBS’s Policies and Procedures19.UBS’s written supervisory procedures (“WSPs”) did not address retail order periodrestrictions to comply with federal securities laws and applicable MSRB rules. UBS lackedpolicies and procedures to verify the retail eligibility of customer orders or the accuracy of zipcodes. Under these circumstances, UBS failed to establish policies and procedures that wouldreasonably be expected to prevent and detect violations by Costas, Marvin, Orellana, andRosenthal.6

20.Similarly, UBS’s WSPs did not address evasion of issuers’ priority rules in newissue bond offerings to comply with federal securities laws and applicable MSRB rules when UBSbought new issue bonds for its inventory. UBS lacked policies and procedures with respect to howits registered representatives were to submit orders for UBS’s account when UBS was not part ofthe underwriting syndicate. Under these circumstances, UBS failed to establish policies andprocedures reasonably designed to prevent and detect violations by Rosenthal and Costas relatingto evasion of issuers’ priority provisions.Legal DiscussionUBS Failed Reasonably to Supervise and to Establish an Adequate Supervisory System21.Section 15(b)(4)(E) of the Exchange Act authorizes the Commission to imposesanctions against a broker-dealer for failing reasonably to supervise a person subject to the firm’ssupervision who committed a securities law violation. A broker-dealer can be liable for failure tosupervise either when it lacks procedures reasonably designed to prevent and detect the underlyingviolation, see, e.g., Smith Barney, Harris Upham & Co., Exch. Act Release No. 21813, 1985 WL548567, at *3 (Mar. 5, 1985), or when it has failed to adopt a reasonable system to implementthose procedures. See, e.g., A.G. Edwards & Sons, Inc., Exch. Act Release No. 55692, 2007 WL1285761, at *4 (May 2, 2007). MSRB Rule G-27(a) obligates brokers, dealers, and municipalsecurities dealers to “supervise the conduct of the municipal securities activities of the firm and itsassociated persons to ensure compliance with [MSRB] rules and the applicable provisions of the[Exchange] Act and rules thereunder.” MSRB Rule G-27(b) obligates brokers, dealers, andmunicipal securities dealers to establish and maintain a system to supervise the municipalsecurities activities of each associated person that is reasonably designed to achieve compliancewith applicable securities laws, regulations and MSRB rules.22.UBS failed to establish policies and procedures that reasonably would be expectedto prevent and detect the violations by Costas, Marvin, and Orellana, who were each its associatedpersons, of MSRB Rules G-11(k) and G-17 in connection with their new issue municipal bondactivities. UBS also failed to establish policies and procedures that reasonably would be expectedto prevent and detect the violations by Rosenthal, who was its associated person, of Section 10(b)of the Exchange Act and Rule 10b-5 thereunder, MSRB Rules G-11(b), G-11(k), and G-17. Inaddition, UBS failed to supervise the municipal securities activities of Costas, Marvin, Orellanaand Rosenthal to ensure compliance with MSRB rules, and UBS lacked a system that wasreasonably designed to achieve compliance with MSRB Rules G-11(k) and G-17.23.As a result, UBS failed reasonably to supervise within the meaning of Section15(b)(4)(E) of the Exchange Act and willfully9 violated MSRB Rule G-27.9“Willfully,” for purposes of imposing relief under Sections 15(b) and 15B of the Exchange Act, “‘means no morethan that the person charged with the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C.Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor“also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). Thedecision in The Robare Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differentlystructured statutory provision, does not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the7

UBS Violated MSRB Rule G-1724.MSRB Rule G-17 provides that, in the conduct of its municipal securitiesbusiness, every broker, dealer, municipal securities dealer, and municipal advisor shall deal fairlywith all persons and shall not engage in any deceptive, dishonest, or unfair practice. Negligenceis sufficient to establish a violation of MSRB Rule G-17. See Wheat, First Securities, Inc., Exch.Act Rel. No. 48378, 80 SEC Docket 3406, 3425 (Aug. 20, 2003).25.During the relevant period, as discussed above, UBS, through Costas, Marvin, andRosenthal, submitted orders to the UBS syndicate desk (and ultimately to the senior syndicatemanager by Orellana) as eligible retail orders when they knew or should have known that thoseorders were not eligible for retail priority, and by providing inaccurate zip codes with some ofthose orders.26.In addition, UBS, through Rosenthal and Costas, circumvented the priorityprovisions of new issue bond offerings by acquiring bonds from CPM and RMR on behalf of UBStraders who were seeking to purchase bonds for UBS inventory.27.Through the conduct described above, UBS willfully violated MSRB Rule G-17.UBS Violated MSRB Rule G-11(k)28.MSRB Rule G-11(k) provides that each broker, dealer, or municipal securitiesdealer that submits an order during a retail order period to the senior syndicate manager or soleunderwriter, as applicable, shall provide in writing the following information relating to each orderdesignated as retail submitted during a retail order period: (i) whether the order is from a customerthat meets the issuer’s eligibility criteria for participation in the retail order period; (ii) whether theorder is one for which a customer is already conditionally committed; (iii) whether the broker,dealer, or municipal securities dealer has received more than one order from such retail customerfor a security for which the same CUSIP number has been assigned; (iv) any identifyinginformation required by the issuer, or the senior syndicate manager on the issuer’s behalf, inconnection with such retail order (but not including customer names or social security numbers);and (v) the par amount of the order.1029.UBS, through Costas, Marvin, and Rosenthal, submitted orders to the UBSsyndicate desk (and ultimately to the senior syndicate manager by Orellana) which wereimproperly designated as retail orders because they did not meet the issuer’s retail eligibilityshowing required to establish that a person has “willfully omit[ted]” material information from a required disclosurein violation of Section 207 of the Advisers Act).10Rule G-11(k) further provides that the senior syndicate manager may rely on the information furnished by eachbroker, dealer, or municipal securities dealer that provided the information required by (i) - (v) unless the seniorsyndicate manager knows, or has reason to know, that the information is not true, accurate, or complete.8

criteria. In addition, those registered representatives provided inaccurate identifying information(zip codes) required by the issuer, or the senior syndicate manager on the issuer’s behalf, inconnection with some of those orders.30.Through the conduct described above, UBS willfully violated MSRB Rule G-11(k).UBS Violated Section 15B(c)(1) of the Exchange Act31.Section 15B(c)(1) of the Exchange Act prohibits brokers, dealers, and municipalsecurities dealers from using the mails or any means or instrumentality of interstate commerce toeffect any transaction in, or to induce or attempt to induce the purchase and sale of, any municipalsecurity in contravention of any MSRB Rule.32.As a result of the negligent conduct described above and its willful violations ofMSRB Rules G-11(k), G-17 and G-27, UBS willfully violated Section 15B(c)(1) of the ExchangeAct.UBS’s Remedial EffortsIn determining to accept the Offer, the Commission considered remedial acts promptlyundertaken by UBS. UBS has taken a number of remedial steps, including reviewing andimproving its retail order period policies and procedures, introducing retail order period trainingfor registered representatives and other employees whose work relates to municipal bond trading,enhancing monitors and controls for the retail order period, and revising its account opening andclient verification procedures. In addition, during the relevant period, UBS took steps to restrictdelivery-versus-payment (“DVP”) accounts, which were typically used by the flippers, fromreceiving negotiated new issue municipal bond allocations.IV.In view of the foregoing, the Commission deems it appropriate, in the public interest, toimpose the sanctions agreed to in Respondent’s Offer.Accordingly, pursuant to Sections 15(b), 15B(c) and 21C of the Exchange Act, it is herebyORDERED that:A.Respondent UBS cease and desist from committing or causing any violations andany future violations of Section 15B(c)(1) of the Exchange Act and MSRB Rules G-11(k), G-17,and G-27.B.Respondent UBS is censured.C.Respondent shall, within 10 days of the entry of this Order, pay disgorgement of 6,740,000 and prejudgment interest of 1,549,336 to the Securities and Exchange Commissionfor transfer to the general fund of the United States Treasury, subject to Exchange Act Section9

21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to SEC Rule ofPractice 600.D.Respondent shall, within 10 days of the entry of this Order, pay a civil moneypenalty in the amount of 1,750,000 to the Securities and Exchange Commission, of which 525,000 shall be transferred to the Municipal Securities Rulemaking Board in accordance withSection 15B(c)(9)(A) of the Exchange Act, and of which the remaining 1,225,000 shall betransferred to the general fund of the United States Treasury in accordance with Section 21F(g)(3)of the Exchange Act. If timely payment of the civil money penalty is not made, additional interestshall accrue pursuant to 31 U.S.C. § 3717.E.Payment must be made in one of the following ways:(1)Respondent may transmit payment electronically to the Commission, whichwill provide detailed ACH transfer/Fedwire instructions upon request;(2)Respondent may make direct payment from a bank account via Pay.govthrough the SEC website at http://www.sec.gov/about/offices/ofm.htm; or(3)Respondent may pay by certified check, bank cashier’s check, or UnitedStates postal money order, made payable to the Securities and ExchangeCommission and hand-delivered or mailed to:Enterprise Services CenterAccounts Receivable BranchHQ Bldg., Room 181, AMZ-3416500 South MacArthur BoulevardOklahoma City, OK 73169Payments by check or money order must be accompanied by a cover letter identifying UBSFinancial Services Inc. as a Respondent in these proceedings, and the file number of theseproceedings; a copy of the cover letter and check or money order must be sent to Ivonia K. Slade,Assistant Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,Washington, DC 20549.F.Amounts ordered to be paid as civil money penalties pursuant to this Order shall betreated as penalties paid to the government for all purposes, including all tax purposes. Topreserve the deterrent effect of the civil penalty, Respondent agrees that in any Related InvestorAction, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of anyaward of compensatory damages by the amount of any part of Respondent’s payment of a civilpenalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such aPenalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order grantingthe Penalty Offset, notify the Commission's counsel in this action and pay the amount of thePenalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemedan additional civil penalty and shall not be deemed to change the amount of the civil penalty10

imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means aprivate damages action brought against Respondent by or on behalf of one or more investors basedon substantially the same facts as alleged in the Order instituted by the Commission in thisproceeding.By the Commission.Vanessa A. CountrymanSecretary11

UBS Financial Services Inc. ("UBS"), incorporated in Delaware and headquartered in Weehawken, New Jersey, is registered with the Commission as a broker-dealer and investment adviser. It is a subsidiary of UBS AG. Other Relevant Entities and Individuals 2. Core Performance Management, LLC ("CPM") was a Florida limited liability