What Did Your Brokerage Firm or Investment Adviser Do Wrong With GWG
Published On: May 27, 2020

Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with unscrupulous investment brokers selling municipal bonds.

Although municipal bonds are generally regarded as “safe,” that is, investors are, in most cases likely to be paid interest over the life of the bond, “muni” bonds don’t guarantee payments. The market has been under duress lately as the coronavirus pandemic has bruised government bodies by reducing tax revenues. If investors generally fear that they won’t be paid, then prices of these bonds fall.

Municipal bonds are debt securities usually issued by government entities to raise money for a wide range of projects from schools to airport expansions. Munis come in several varieties. Many “general obligation” bonds have interest payments, or coupons, that are not taxed while others are taxable. Like other bonds, their coupon yields are based on the amount of risk an investor takes in purchasing them. The higher the risk, the lower the bond’s credit rating – and the higher the interest payment. You’re usually compensated for taking on more risk.

As news of the coronavirus roiled U.S. markets, though, investors initially panicked in early spring and began to pull money out of muni mutual funds. Some $12 billion flowed out of these funds in early March, according to Lipper. The Federal Reserve moved in quickly to backstop the market, but many investors lost money.

Although the overall stock market, at roughly $30 trillion (through 2019) dwarfs the market for munis ($4 trillion at the end of last year), there are 1 million outstanding munis, accounting for 35,000 daily trades, according to the Municipal Securities Rulemaking Board. About two-thirds of munis are held through mutual and exchange-traded funds. Yet munis represent a small but important part of the $40 trillion global bond market.

Brokers selling individual bonds and funds often fail to disclose the risks or total costs of owning these investments. BB&T Securities (LLC), for example, was censured, fined and ordered to pay more than $7 million in restitution to clients for “excessive mark-ups” on muni and other bonds, according to FINRA, the main regulator of the brokerage industry. The FINRA findings stated that “the mark-ups and mark-down were not fair and reasonable, taking into consideration all relevant factors, including the individual prevailing market prices. As a result, the firm’s account holders were assessed $7,243.62 in excessive charges for those transactions.”

More recently, BB&T was fined $47,500 for violations filed by FINRA to settle charges earlier this month that it failed to disclose information in selling variable-rate bonds. “The firm also failed to establish and maintain a supervisory system,” FINRA found.

Brokers add a “mark-up” to prices on single bonds they sell. The mark-up is the difference between the market price of a security and the “retail” price that a customer pays. Retail customers may also pay a transaction fee, which must be disclosed. Average investors may have no idea of the total cost they are paying when purchasing or trading bonds from brokers.

Regulators have fined brokers multiple times in the recent past over excessive muni bond fees and trading violations. The U.S. Securities and Exchange Commission (SEC), for example, last year ordered Morgan Stanley Smith Barney to cease and desist in a muni bond case in which Morgan “recommended 135 ‘swap’ transactions to its retail customers in which the customers sold one municipal bond while purchasing another municipal bond that was nearly identical to the bond sold or that otherwise provided no apparent economic benefit to the customer.” The firm generated more than $340,000 in fees and commissions on those trades, which the SEC ordered be returned to customers.

Although FINRA and the MSRB have written a new set of bond mark-up rules, the lack of clear, plain-language disclosure continues to ensnare unwary investors, who still may be paying too much to buy individual bonds.

Stoltmann Law Offices has represented investors in dozens of cases involving municipal bond mark-ups and municipal bond funds. If you invested with a broker and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!


The posting on this site are mere OPINIONS and NOT statements of fact in any way whatsoever. The information should not be relied upon and there have been no findings made against the firms or individuals referenced on this site. In addition, this Blog is made available for educational purposes only and incorporates information from the web as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and Stoltmann Law Offices (161 N Clark Street 16th Floor Chicago, IL 60601). The Blog opinions should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.


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