Edward Jones on Thursday agreed to pay $20 million to settle a case brought by the Securities and Exchange Commission claiming the firm overcharged customers in the sales of new municipal bonds.
In the first case of its kind, the SEC alleged that from 2009 until 2013, the former head of Edward Jones’ municipal underwriting desk, Stina R. Wishman, improperly procured new bonds for the firm's inventory and then offered them to customers at inflated rates.
According to the regulator, underwriters are required to offer new municipal bonds to investors at an agreed-upon initial offering price. But in the case of Wishman and Edward Jones, 156 separate bonds in 75 negotiated offerings were never offered to investors at the initial sale price, but rather sold to investors at higher rates—either outright or by withholding the sale of the bond until trading began on the secondary market.
The regulator claims, because of the pricing-related fraud, Edward Jones customers paid at least $4.6 million more than they should have when purchasing new bonds. Firm spokesman John Boul said Thursday that the case affected 13,000 former and current customers. Additionally, in at least one case, the firm’s alleged scheme caused an adverse federal tax determination for an issuer, jeopardizing valuable federal tax subsidies.
The SEC’s investigation also uncovered separate misconduct in the form of inadequate supervision in the review of its secondary market municipal bond trades. Edward Jones allegedly had a supervisory system that failed to monitor whether the markups charged to customers were reasonable.
“Edward Jones undermined the integrity of the bond underwriting process by overcharging retail customers by at least $4.6 million and by misleading municipal issuers,” Andrew J. Ceresney, director of the SEC’s enforcement division, said in a statement Thursday.
In reaching a settlement agreement, Edward Jones neither admitted nor denied the SEC’s allegations, but agreed to pay $20 million, which includes nearly $5.2 million in restitution (with interest) to current and former customers who were overcharged and a $15 million civil fine.
"The case involved certain practices that the firm engaged in between 2009 and 2013, so this is not current activity. The SEC did acknowledge that we've taken positive steps to correct these practices and enhance overall business practices," Boul said, noting the average repayment dictated by the settlement to customers is around $400 and the process to make customers whole will begin "posthaste."
Meanwhile, Wishman—who had no previous disciplinary actions according to FINRA’s BrokerCheck—agreed to pay $15,000. The SEC also ordered that the former employee be barred from the securities industry for at least two years. According to the SEC's order, Wishman retired from Edward Jones in July 2014.
