Wednesday, June 26, 2013

FINRA Fines StateTrust for Charging Unfair Prices in Fraudulent Bond Transactions

By Tim Dulaney, PhD and Tim Husson, PhD

We've been discussing markups a lot on the blog recently -- including an entire week devoted to markups in municipal bonds. Yesterday FINRA announced that it fined StateTrust Investments and their head trader, Jose Luis Turnes, for charging excessive markups and markdowns on hundreds of corporate bond transactions.1 The letter of acceptance, waiver and consent (AWC) is available here (PDF).

According to FINRA, StateTrust charged prices customers much more, or paid them much less, than the prevailing market price between March 2007 and June 2010. In some cases, the markups/markdowns charged on the trades were in excess of 23%. FINRA found that StateTrust failed to adequately supervise their head trader and failed to report several transactions to FINRA TRACE system.

FINRA also found that the head trader failed to properly price the bonds and relied upon the Bloomberg terminal or telephone calls. The excessive markups and markdowns on these transactions were not properly disclosed to clients in trade confirmations or account statements.

In total, FINRA found that StateTrust had charged more than $336,000 in excessive markups and fined the firm more than $1 million dollars. StateTrust has been ordered to pay restitution and interest to compensate investors for the excessive markups the customers have been charged. This action should encourage investors to be mindful about the prices they are paying, or the prices they are being paid, for securities.

markup is the difference between the price a customer pays to buy a security and the prevailing market price.  On the other hand,  a markdown is the difference between the prevailing market price of the security and the price the customer receives for selling the security.  It is often expressed as a percent of the prevailing market price.

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