The Securities and Exchange Commission has charged Edward Jones with selling
municipal bonds at an inappropriate price. The brokerage firm, located
in St. Louis, was accused of buying municipal bonds, storing them in their
inventory, and then reselling those bonds at a higher price to unsuspecting
customers. The SEC also asserts that they have not properly reviewed secondary
market municipal bond trades.
As per regulations, municipal bond underwriters are supposed to offer new
bonds to customers at “initial offering price.” Allegedly,
Edward Jones and Stina R. Wishman bought bonds to place in their own inventory
and then sold those bonds at a markedly higher price to customers. These
deals would usually take place within a day or so, meaning that the firm
held little risk of losses.
Edward Jones also allegedly held first market municipal bonds until trading
in the second market begun, and then sold the first bonds at a higher
value. The SEC states that customers were charged an excess of $4.6 million
dollars on bond because of the hike in prices. In one case the SEC mentions,
the misconduct allegedly caused an issuer to experience negative effects
on their federal tax determination, with them almost losing valuable federal
Because current rules do not require dealers to share mark ups to customers
on municipal bonds, it is hard to supervise all bond transactions. Investors
receive little information when it comes to the dealer’s compensation
on municipal bond trades. Therefore, the dealer’s intentions remain clouded.
Edward Jones has agreed to pay over $20 million dollars in disgorgement
and prejudgment interest that will be allotted to the victims. The firm
has also agreed to take remedial steps to make sure such situations do
not occur again. They now disclose the percentage and monetary amount
of markups on all fixed transactions. Winshaw agreed to pay $15,000 for
her misconduct and will be banned from working in the securities industry
for two years.
This is first case that the SEC has dealt with against underwriters for
fraud based on wrong pricing in the primary market for municipal bonds.