On January 13, a broker-dealer agreed to pay over $40 million to settle SEC charges that it failed to properly supervise its employees in the sale of mortgage-backed bonds. According to the SEC order, the broker-dealer’s employees allegedly sold bonds using misleading offer sheets metrics that inaccurately described the characteristics of the underlying collateral, and that falsely suggested that these bonds were backed by higher-interest rate mortgages. As alleged by the SEC, a senior member of the broker-dealer allegedly manipulated the bond structure by mixing large amounts of lower-interest mortgages with a small portion of higher-interest ones, which altered key metrics like the weighted average coupon, and violated Section 17(a)(3) of the Securities Act of 1933 and Section 15(b)(4)(E) of the Securities Exchange Act of 1934. The SEC also alleged that the broker-dealer’s supervisory processes did not adequately address the structuring, offering, and sale of bonds, lacking necessary review and approval processes. Despite allegedly receiving complaints about misleading information, employees continued sales without escalating concerns.

The broker-dealer agreed to pay almost $22 million in disgorgement and prejudgment interest, plus a $19 million civil penalty.