Investing

SEC Issues Charges Against Underwriter for Gatekeeper Failures

Chris Lange

Published: April 7, 2017 9:05 am

Last Updated: January 12, 2020 1:12 pm

The U.S. Securities and Exchange Commission (SEC) recently announced that an Arizona-based brokerage firm, its CEO and its former underwriter’s counsel have agreed to settle charges related to municipal bond offerings they were underwriting that turned out to be fraudulent. Although the firm is not entirely guilty of the fraud, it did not conduct its due diligence to protect investors.

According to the agency’s report, Lawson Financial failed in its role as a gatekeeper to conduct reasonable due diligence when underwriting bond offerings to purchase and renovate nursing homes and senior living facilities.

These offerings were managed by Atlanta-based businessman Christopher F. Brogdon, who was later charged by the SEC with fraud and faces a court order to repay $85 million to investors. Lawson Financial failed to ensure that Brogdon and his related borrowers were in compliance with their continuing disclosure undertakings.

This failure falls under Rule 15c2-12, which generally prohibits underwriters from purchasing or selling municipal securities unless the issuer or obligated person has committed to providing continuing disclosure information, such as annual financial materials and operating data.

Lawson Financial’s founder and CEO, Robert Lawson, and then-underwriter’s counsel, John T. Lynch Jr., are charged with failing to conduct reasonable due diligence, and Lynch also failed to disclose that he was not actually authorized to practice law at the time as represented to investors in the bond offering documents.

Andrew M. Calamari, director of the SEC’s New York Regional Office, commented:

Underwriters are critical gatekeepers relied upon by investors to ensure that accurate information is being provided in municipal bond offering documents.  Lawson Financial failed to confirm that continuing disclosure obligations were being met by the Brogdon-controlled borrowers, allowing Brogdon’s nursing home investment scheme to continue.

Without admitting or denying the SEC’s findings, Lawson and the firm agreed to pay combined disgorgement of nearly $200,000, as well as penalties of nearly $200,000 for the firm and $80,000 for Lawson, who will be barred from the securities industry for three years.

Lynch also must pay nearly $45,000 and agreed to the entry of an order permanently suspending him from appearing and practicing before the SEC as an attorney.