Businessman sues banks, says muni buyers overcharged

NEW YORK, Sept 16 (Reuters) - A California businessman on Monday sued nine Wall Street banks, alleging the prices they set for municipal bonds are unfair because they often vary widely for the exact same issue.

As a result, the suit says, some customers get overcharged when they buy tax-free bonds, while others get too little when they sell the bonds they own.

Kevin Olson, founder of MunicipalBonds.com, is not seeking damages in his suit, which was filed in California's Superior Court of San Francisco. Instead, he wants an injunction against firms from setting excessive fees, or markups, on municipal bonds traded in the secondary market, according to his lawyer, Stan Mallison of New York-based Milberg Weiss Bershad Hynes & Lerach LLP.

"The markups which defendants determined bore no reasonable relationship to the fair market value of the bonds," the suit alleges.

The firms named in the lawsuit include Citigroup's C.N Salomon Smith Barney; Bear, Stearns & Co. BSC.N ; UBS PaineWebber UBS.N ; Merrill Lynch & Co. MER.N, Morgan Stanley MWD.N; Prudential Financial PRU.N; U.S. Bancorp USB.N; Bank of America BAC.N and Charles Schwab & Co. SCH.N.

Mallison also told Reuters he would compel the Municipal Securities Rulemaking Board, the Washington, D.C.-based self-regulatory agency that governs the $1.6 trillion municipal market, to reveal which firms conduct the trades they report.

"It's all been reported. It's just not being released by the MSRB," Mallison said.

Banks and bond dealers must send the MSRB all of their bond trades for a daily pricing report posted on the Bond Market Association's http://www.investinginbonds.com Web site. But the dealers' names are stripped off the report.

On his Web site -- http://www.municipalbonds.com -- Olson uses MSRB data to highlight the huge disparities in prices on identical municipal bonds.

For example, on Friday, identical bonds from a Berkeley, Missouri, project sold at a price of 85 to one investor and 100 to another, according to Municipalbonds.com.

While tax-free issues are widely held, most of the more than 1 million separate issues outstanding are never traded. Instead, they are held until maturity.

Only the biggest issues, held by a large number of investors, ever trade. The price information banks and dealers glean from these trades helps them set prices for smaller issues.

Investors for years have complained that dealers on Wall Street and in other parts of the country take advantage of the municipal market's lack of price transparency by overcharging individuals when they buy bonds or by paying small investors overly low prices when they sell their holdings.

Of the nine dealers named in the suit, five had no comment and one did not return a call for comment.

"There has been a lot of action from various corners on this issue from people speaking out at the SEC (Securities and Exchange Commission), Olson's Web site and journalists writing about how the municipal bond market is broken," Mallison said.