Municipal Bond Investors: Victims of Securities Fraud?

Municipal bond investors may have been charged billions of dollars of excessive charges when they bought and sold municipal bonds over the past decade. Investors who plan to purchase or sell municipal bonds should be aware of the hidden charges that they may be paying. These hidden charges could form the basis of securities fraud or investment fraud claims against the brokerage firms that made the trades for the investors. A published study reveals what appears to be billions of dollars of municipal bond fraud

Municipal bonds generally are viewed as conservative investments. Their default rates have been relatively low over the years and investors generally have enjoyed the steady, tax-free income provided by municipal bonds. By the end of 2012, there were $3.7 trillion in municipal bonds outstanding in the market, about 75% of which were held directly or indirectly by individual investors. But these seemingly benign investments may be the source of billions of dollars of improper charges that Wall Street brokerage firms put in their pockets.

When investors buy or sell municipal bonds, they typically do not pay commissions. Rather, the bonds trade in an over-the-counter market by broker-dealers who profit from charges that they tack onto the transactions. More specifically, broker-dealers sell municipal bonds to investors at prices that are higher than the prices broker-dealers pay for the bonds. This difference is called a markup, and represents broker-dealers' profit. Similarly, a markdown is the difference in price that broker-dealers sell investors' municipal bonds for and the amounts broker-dealers credit to investors' accounts. Again, this difference represents broker-dealers' profit on the trades. So, when investors review their trade confirmations and see that no commission was charged, they should not be fooled into thinking that broker-dealers have not profited from the trades.

The markups and markdowns can be enormous. Unfortunately, most retail investors have no idea how much they are being charged for municipal bonds trades.

Broker-dealers have discretion in the specific amount of markups and markdowns that they charge. But this discretion is governed by regulatory rules such as the Municipal Securities Rulemaking Board (MSRB) Rule G-17 that states that brokerage firms must deal fairly with parties and Rule G-30 that requires securities purchases and sales to be done at rates that are "fair and reasonable." The Financial Industry Regulatory Authority (FINRA) has similar rules.

One way to determine whether investors have been treated fairly and whether markups and markdowns were fair reasonable is to compare the trading prices charged to customers with the prices of inter-dealer trades.

A Fairfax, VA research firm, Securities Litigation and Consulting Group, recently analyzed nearly 14 million municipal bonds trades for the period 2005 through and April 2013 and has opined that investors paid at least $10 billion in what could be considered excessive markups during that period. These enormous excessive charges mean that municipal bond investors may have been bilked out of billions of dollars that should be in their accounts.

Municipal bond investors, especially those with millions of dollars of municipal bond trades, are advised to have their portfolios reviewed to determine whether they may have been charged excessive markups and markdowns. If it appears that excessive markups and markdowns were charged, investors could pursue FINRA arbitration claims against the brokerage firms involved in the trades.

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