SEC Charges First Midstate, Inc. and Owner Paul D. Brown with Unfair Conduct in Connection with Municipal Underwritings

ADMINISTRATIVE PROCEEDING
File No. 3-20187

December 22, 2020 - The Securities and Exchange Commission today announced settled charges against First Midstate, Inc., an Illinois-based broker-dealer, and its owner, Paul D. Brown, for failing to provide issuers with certain material information about First Midstate’s underwriting practices in connection with municipal bond underwritings.

According to the SEC’s order, between June 1, 2014 and October 1, 2018, First Midstate represented on its website and in certain other communications that it had an extensive customer list that would allow it to sell bonds to investors at competitive interest rates. In reality, as alleged in the order, First Midstate had a very limited customer base and its regular practice was to sell many of the offerings it underwrote to other broker-dealers, not to investors. The order found that First Midstate also did not disclose that this practice posed a risk to competitive pricing of the issuers’ bonds. As stated in the order, First Midstate acted as underwriter for 101 offerings totaling $198 million in which First Midstate sold the entire offering to a single broker-dealer. The order finds that these transactions represent 35% of the total par amount of all bonds, and 31% of all offerings, underwritten by First Midstate from June 1, 2014 to October 1, 2018. For those 101 offerings, the purchasing broker-dealer then marked up the bonds and resold them to investors at higher prices (and corresponding lower yields).

First Midstate and Brown have agreed, without admitting or denying the SEC’s findings, to an order finding that they willfully violated the fair dealing and advertising provisions of the Municipal Securities Rulemaking Board (MSRB) Rules G-17 and G-21, finding that First Midstate willfully violated Section 15B(c)(1) of the Securities Exchange Act of 1934, which prohibits broker dealers from effecting transactions in municipal securities in contravention of MSRB Rules, and that Brown caused that violation, censuring First Midstate and Brown, ordering that First Midstate and Brown cease and desist from violating the charged provisions, ordering First Midstate and Brown to pay civil penalties of $175,000 and $25,000 respectively, and requiring First Midstate to retain an independent compliance consultant.

The SEC’s investigation was conducted by Sally Hewitt and Natalie G. Garner of the Public Finance Abuse Unit and the Chicago Regional Office with assistance from Jonathan Wilcox, Joseph O. Chimienti, Michael Fioribello, Samir Badalov, and Deputy Chief Mark R. Zehner. The investigation was supervised by Brian D. Fagel. The SEC examination that led to the investigation of First Midstate was conducted by Paul Mensheha, Asmarah Clinkscales, Jeremy Andersen, David Kinsella, and John Brodersen of the Chicago Regional Office.