Salomon, Others Sued Over Pricing: Plaintiffs Claim Markups Excessive

By Lynn Hume

Charging that unfair pricing by broker-dealers is costing investors and municipalities billions of dollars per year, a municipal bond-pricing Web site sponsor and a law firm specializing in class-action suits yesterday sued Salomon Smith Barney Inc., Merrill Lynch & Co., and eight other major firms on behalf of the general public over alleged excessive markups in the muni market.

The suit, which was filed by Kevin Olson and the law firm of Milberg Weiss Bershad Hynes & Lerach in the San Francisco Superior Court, claims the firms violated California fair business practice laws and the Municipal Securities Rulemaking Board's Rules G-17 on fair-dealing and G-30 on prices and commissions by taking excessive markups and fees on municipal bonds.

The suit does not seek monetary damages, but rather urges the court to impose a permanent injunction on the firms barring them from further alleged unfair pricing and business practices. However, if the suit is successful, both the Milberg Weiss firm and Olson could ask the court for reimbursement of costs they incurred in waging the litigation, said Stan Mallison, an attorney at Milberg Weiss.

"The primary motivation behind this suit is to fix this broken practice," said , Mallison. "We're just trying to stop this practice in what appears to be a very broken market."

The Milberg firm and one of its partners, William Lerach, achieved notoriety as a leading filer of class-action suits against companies whose stock prices plummet, several years ago during the debate over securities law reforms.

This suit is not a class-action suit, but is rather a "private attorney general action" that was filed under California law that allows residents to file suits on behalf of the general public, Mallison said. The suit alleges that each of the 10 firms has bought and sold muni bonds in California and San Francisco County.

Both Olson and Milberg Weiss expect the suit will go to trial before a jury.

Neither Christopher Taylor, MSRB executive director, nor Ward Marsh, the chairman of the board and a managing director at Salomon Smith Barney, would comment on the suit. Salomon, Merrill Lynch, and The Bond Market Association also would not comment. Several other firms could not be reached for comment.

"The reason we're filing this is due to the exorbitant fees in the municipal bond market in comparison to other markets," such as the corporate and U.S. Treasury bond markets, Mallison said. However, the complaint also contends that markups of munis are much higher than markups of equities.

The suit focuses on bond sales and purchases in the secondary market during the past four years and relies on Olson's reports on the "worst spreads" on municipal bonds for 2000, 2001, and the first two quarters of 2002. The reports, which are posted on Olson's web site, MunicipalBonds.com., feature data collected by the MSRB.

Olson is founder and executive director of the site, which is described in the suit as being "dedicated to providing information to the public and attempting to reduce unfair business practices in the municipal market."

In their complaint, Olson and the Milberg firm contend that, "Despite the size of the market for municipal bonds and the extremely low risk, the municipal bond secondary market is extremely inefficient and gross markups are rampant ... due to defendants' unfair business practices. This ultimately leads to fewer public interest projects being done and a greater expense for those projects that are carried out as investors avoid municipal bonds to avoid these market inefficiencies."

"Unlike other portions of the securities markets, the secondary market is `opaque.' That is, the market prices for municipal bonds are clear and known to broker-dealers but are not clear, known, or generally available to public retail customers," they say.

The suit claims that bonds with high credit ratings are mostly traded in the secondary market and that brokers' compensation for these transactions "should be substantially less than 1% and `significantly' less than what the broker charges for equity transactions of similar size or dollar amount."

Instead, however, the firms have "systematically employed an unscrupulous and fraudulent practice of charging markups in excess of 1% and sometimes greater than 5% and far in excess of what defendants charged for equity transactions of similar size, risk, and dollar amount," the suit claims.

The suit also alleges that the firms failed to accurately disclose their compensation in the confirmations of trades they sent to customers. "On none of the ... confirmation statements was the full amount of the markup or markdown revealed," the suit claimed. "Further, some defendants included a phony `processing fee' or similar box on their standard confirmations and specified ... that the fee was relatively small."

The other defendants in the suit are Goldman, Sachs Group Inc., UBS PaineWebber Inc., Bear, Stearns & Co., Morgan Stanley Dean Witter Inc., Prudential Securities Inc., Charles Schwab & Co., U.S. Bancorp, and Bank of America Corp.

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