A FINRA hearing panel ruled that Long Island-based David Lerner Associates, Inc. (DLA) and Head Trader and EVP William Mason had committed various violations in the sale of municipal bonds and collateralized mortgage obligations (CMOs) over a 2-year period, causing the firm's retail customers to pay unfairly high prices and receive lower yields than they otherwise would have received. Case Background. The disciplinary proceeding arose from Enforcement's investigation into concerns regarding DLA's markups on its retail sales of muni bonds and CMOs that FINRA staff uncovered during its 2005 routine exam of DLA.  Ultimately, Enforcement examined DLA's muni bond sales from 1/1/05 through 1/31/07, and CMO sales from 1/1/05 through 8/31/07, and based on its findings concluded that Respondents: (i) charged unfair prices to their retail customers on these sales; and, (ii) failed to record the time of receipt on numerous customer order tickets. Enforcement filed a complaint with the Office of Hearing Officers on 5/7/10, containing 6 causes of action:

• 1st Cause - DLA and Mason willfully violated MSRB Rules G-30 and G-17 by charging customers unfair and unreasonable prices for muni bonds.  The bonds were sold out of DLA's inventory, and bond markups ranged from 3.01% to 5.78%.
• 2nd Cause - DLA willfully violated MSRB Rule G-8 by failing to record the time of receipt on over 2300 customer muni bond orders.
• 3rd Cause - DLA willfully violated MSRB Rule G-27 by failing to supervise the conductd of its muni bond activities and establish and maintain adequate procedures ...
• 4th Cause - Mason willfully violated MSRB Rule G-27 by failing to supervise the the pricing of DLA's muni bonds and establish and maintain adequate procedures to monitor the fairness of pricing.
• 5th Cause - DLA and Mason violated NASD Conducct Rules 2440 and 2110 and IM-2440-1, by charging customers unfair and unreasonable prices for CMOs.  DLA acquired CMO securities primarily through its Florida brnach office and then sold them to its customers within one business day.  Similar to the issue on the sales of muni bonds, Respondents were charged with charging excessive markups on CMOs, ranging from 4% to nearly 13%.
• 6th Cause - DLA and Mason violated NAS Conduct Rules 3010(1) and 2110 by failing to supervise the pricing of CMOs and establish adequate systems and procedures for monitoring the fairness of prices.

The extended hearing panel was composed of 2 former members of FINRA's District 10 Committee and the Hearing Officer. Panel's Ruling - David Lerner Associates. For unfair muni bond prices, DLA is fined $1 million and pay restitution to customers, plus interest;  for not recording time of receipt of customer orders, DLA is fined $25K;  for failing to supervise muni bond pricing, DLA is fined $150K, and required to revise its procedures and retain an independent consultant. For charging unfair CMO prices, DLA was fined $1 million and pay restitution and interest to customers;  for failing to supervise CMO pricing, DLA is fined $150K, and required to revised its procedures and retain an independent consultant.  All told, restitution amounted to over $1.4 million. Panel's Ruling - William Mason. For unfair muni bond prices, Mason is fined $1ooK and suspended for 6 months in all capacities. For charging unfair CMO prices, Mason is fined $100K and and suspended for 6 months, which shall run concurrently with his muni bond suspension.  The Hearing Officer dissented 6-month suspension.  He would have suspended Mason for 18 months, stating that given Mason's experience and high standing at the firm, his supervisory failures and allowance of excessive markups - even when presented with red flags of caution -  call for more a significant suspension.

[C-I Note: The Dissent begins on page 73 of the order and is excellent reading - including his dissection of Mason's "lack of credibility." Highly recommended.]

For further details, go to: [FINRA News Release, 4/4/12] and [Extended Hearing Panel Decision].