By Hilary Russ
(Reuters) - The U.S. Securities and Exchange Commission on Tuesday said it charged a Kansas-based advisory firm with breach of fiduciary duty for failing to disclose its role with an underwriter on municipal bonds, the first-ever such case under 2010 Dodd-Frank rules.
Central States Capital Markets, Chief Executive Officer John Stepp and employees Mark Detter and David Malone settled the allegations without admitting or denying findings. The firm will pay $289,827.80 in disgorgement and interest and an $85,000 civil penalty.
Jeffrey Jensen, an attorney representing the firm and Stepp, said, "We are pleased to have this behind us so we can focus on providing financial services to our many satisfied clients."
The case came after an unidentified city hired Central States in April 2011 as municipal adviser, according to the SEC's cease and desist order.
Through the rest of that year, the firm advised the city on three municipal debt offerings totaling $14.7 million - two sets of temporary improvement notes and one general obligation bond issuance.
Central States assigned Detter and Malone to advise the city on interest rates, the selection of underwriters and underwriting fees.
But in consultation with Stepp, the two employees arranged to have the city's offerings underwritten by a broker-dealer with whom all three men were still working as representatives. They did not conduct any bidding to select the underwriter.
None of the men told the city that they had a conflict of interest, however, because they were benefiting financially from the broker-dealer's underwriting business.
The firm made $130,120 in adviser fees and the broker-dealer, also unnamed in the order, collected $121,530 in underwriter fees, 90 percent of which was remitted to Central States. The firm then paid commissions to Detter and Malone for both their advisory and underwriting services.
In an April 2011 email Detter sent to Malone, Detter wrote that "if we are going to charge an [advisory] fee and [the City's administrator] keeps calling us [municipal advisers], should we not resign as [municipal advisers] to [underwrite] this issue? Out of an abundance of caution I believe we should resign…," the order said.
Instead, they neither resigned nor disclosed the conflict even when a city representative asked specifically whether the firm and broker-dealer had any connection.
The SEC fined Detter $25,000 and barred him from the financial services industry for at least two years. Malone was fined $20,000 and agreed to a one-year ban, while Stepp will pay a $17,500 penalty and is suspended for six months from acting as a supervisor for any broker-dealer, investment adviser or municipal adviser.