Redemption Time: Muni-Bond Pest Makes an Impact

By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
March 25, 2004; Page C1

SAN FRANCISCO -- For years, Kevin Olson was the municipal-bond world's Rodney Dangerfield.

Respect was scant for the former bond trader, as he pursued a mission to provide small investors better and more timely municipal-bond prices. When Mr. Olson sent e-mails last summer about potentially improper bond pricing to a state securities-regulator group, he was told to bug off. One official from the group tattled on Mr. Olson to the Federal Trade Commission for sending unsolicited spam.

Now, the 43-year-old Mr. Olson appears to be getting his due. He has emerged as a catalyst in the bid to overhaul the nation's $1.9 trillion municipal-bond market, a haven for small investors since income on muni bonds is usually exempt from taxes. Cities, counties and states issue muni bonds to fund everything from highways to hospitals. Like stocks, they are usually bought or sold on the open market through a brokerage firm.

But unlike with stocks and some other bonds, there is no place small investors can go to figure out whether they are paying a fair price -- a problem that long has been one of the open secrets on Wall Street.

Last month, regulators passed new rules that next year will give investors access to current muni-bond price information for the first time. The Securities and Exchange Commission, the National Association of Securities Dealers and several state securities regulators also have opened investigations into bond pricing, which they trace back in part to Mr. Olson's e-mail reports.

"He's made an impact," says Malcolm Northam, an NASD official who met with Mr. Olson last year. John Hanley, head of the state regulatory group, the North American Securities Administrators Association, apologized this month to Mr. Olson for the FTC complaint -- which now is being dropped -- and recently invited Mr. Olson to speak to state regulators to help them in their burgeoning investigations.

Mr. Olson's newfound value comes as newly assertive regulators look for the next area of investor abuse after scandals in industrial America and on Wall Street. Indeed, the SEC has formed a group within the agency to identify longstanding problems on Wall Street that previously were ignored. The shift also stems in part from Mr. Olson's decision to turn a pet project into a strident critique of Wall Street dealers and regulators.

Working from a storage room here cluttered with boxes of old clothes, Mr. Olson for years has peppered regulators with e-mails telling of instances in which brokerage firms may have improperly priced municipal bonds, hurting small investors.

He has passed out leaflets to state treasurers and asked tough questions at investor roadshows. He has done it all on a shoestring -- he can't dial out on his office phone because the "5" button doesn't work.

After earning as much as $120,000 a year on Wall Street a decade ago, Mr. Olson now splits his time between bonds and free-lance video-production jobs while his wife works as an accountant.

Each morning, he blasts his e-mails to hundreds of regulators and government officials detailing what he sees as the worst bond trades of the previous day.

In the 1980s and early 1990s, Mr. Olson worked on muni-bond trading desks at four financial firms, including Bank of America. He still seems obsessed with the market.

A movie buff, Mr. Olson notes that a Nebraska pioneer museum visited by Jack Nicholson in the movie "About Schmidt," was financed with municipal bonds. (In the mid-1990s, Mr. Olson also produced educational bond videos as part of consulting work he did for Dow Jones & Co., owner of The Wall Street Journal and the online Journal.)

Mr. Olson bought a Web domain name in 1997, hoping to make it a one-stop shopping center for muni-bond information. It hit a brick Wall, as in Street: Securities firms didn't want to use the Internet to post bond prices, arguing that the thinly traded market worked better without instant disclosure of prices, known as "real time price transparency." Mr. Olson argued that such transparency could help investors and boost trading volume.

Then, a break. In 2000, the Municipal Securities Rulemaking Board, a congressionally chartered muni watchdog, started publishing trading data with a one-day delay. The new prices, encouraged by the SEC, gave Mr. Olson fresh material to analyze on his Web site (www.municipalbonds.com).

What he found was disturbing. More than one-fifth of the bonds he studied had prices that varied by more than 4% during one day, a huge swing for a traditionally staid market. Mr. Olson concluded that the wide price differences came from high dealer markups that caused unwitting investors to overpay for bonds.

Mr. Olson e-mailed the MSRB and the Bond Market Association, a dealers trade group, in late 2001 to see if they were interested in using his research. Both said they didn't need it.

Having tried to work within the system, Mr. Olson attempted a more aggressive tack. In early 2002, he began publishing reports that identified the wide price spreads. He announced the change with a message on his Web site: "Are there illegal markups in Municipal Bonds? Do Municipal Bond traders gouge investors? Are regulators ignoring shockingly large bid/offer spreads in hard to regulate Municipal Markets?"

That is when he began tangling with regulators. He started collecting regulators' e-mail addresses and sent them daily reports highlighting instances of traders marking up bonds by 4% or more.

"Your trades are being watched," he wrote on his site, encouraging regulators to bring more enforcement cases on bonds.

Regulators were unimpressed. Christopher "Kit" Taylor, head of the muni rule-making body, complained that Mr. Olson was himself misleading investors by using bad data. The SEC sent curt replies to Mr. Olson's e-mails and declined his request to provide a link from the SEC's Web site to his. (Mr. Olson also asked whether he could become an SEC commissioner; that request also went nowhere.)

Frustrated, Mr. Olson started contacting state regulators, including New York State Attorney General Eliot Spitzer. But some state officials were confused by his unsolicited e-mail reports or objected to getting them so often. Regarding the reports as "junk mail," many asked to be taken off Mr. Olson's mail list. That's when the official with the state-securities regulator group complained to the FTC about Mr. Olson's "spam."

Fearing his site might be shut down, Mr. Olson delayed buying a new computer and instead hired a lawyer. In an Oct. 22 letter to NASAA and state regulators, the lawyer wrote: "Mr. Olson intends to continue to send these reports reflecting the deceptive, dishonest and unfair practices in the municipal bond markets." It continued: "If we do not hear from you affirming your commitment to reforming the municipal bond markets within two weeks, we will assume by your silence that you have chosen to abandon the investors in your state."

Mr. Olson heard back, all right. An official from Mr. Spitzer's office got in touch with the lawyer to criticize the letter. A Pennsylvania regulator called Mr. Olson's tactics "unprofessional" and a Louisiana official called them "disgusting." (Mr. Olson dropped the matter.)

Three months later, The Wall Street Journal reported that the NASD and SEC had opened investigations into whether brokerage firms were improperly pricing muni bonds (see article). Much to the surprise of Mr. Olson, regulators also named his Web site as a source that has helped draw their attention to the problem. Two SEC economists followed up with a Feb. 9 study criticizing high trading costs in the muni market.

Now Mr. Olson is getting his calls returned. In early February, Mary Simpkins, an SEC lawyer, called Mr. Olson to discuss an investor complaint he had forwarded about the lack of disclosure on a particular Pennsylvania bond. The next day, a San Francisco finance official thanked him for helping with another investor's question about some local airport bonds.

Through it all, Mr. Olson hasn't actually bought or sold any muni bonds himself. His mission has been anything but profitable, he explains -- and the little money he has to invest is mainly tied up in stock mutual funds.

--Michael Mackenzie and Liz Rappaport of Dow Jones Newswires contributed to this article