Commission Prevails on Summary Judgement Against Municipal Advisors

Conflicts of interest are frequently at the center of claims involving market professionals. While market professionals such as investment advisers have fiduciary duties to their clients, conflicts can undermine those obligations. The same is true of brokers governed by Regulation BI, conflicts can undermine the best interest obligations of those professionals to their clients. Municipal advisers are no different. Conflicts can undermine their obligations to clients as illustrated by the Commission’s latest case in this area. There the Court granted summary judgement in favor of the agency based on undisclosed conflicts. SEC v. City of Rochester, New York, Civil Action No. 22-cv-6273 (W.D.N.Y. Ruling on April 15, 2024).

Named as defendants in the action are: The City of Rochester; Capital Markets Advisors, LLC; Richard Tortora, a principal of that firm; and Richard Granci, also a principal of Capital Markets.

The complaint claimed that there was a material conflict of interest arising from the compensation arrangements of the advisory firm which required disclosure. Specifically, a municipal adviser has a material conflict when its compensation is contingent on the size or closing of a client’s transaction. Under those circumstances the adviser must disclose its material arrangements prior to, or upon engaging into, municipal advisor activities.

Here the advisory firm, as well as Messrs. Tortora and Granci, made written representation to the clients stating that the advisory firm did not have any undisclosed material conflicts. The representations were false. In addition, the advisory firm did not establish written supervisory procedures requiring the disclosure of all material conflicts of interest. Indeed, even after the firm adopted such procedures it failed to implement them.

The Court granted summary judgment in favor of the Commission and against the three Defendants, concluding that there were repeated violations arising from the undisclosed conflicts: 1) When Defendants failed to disclose their conflicts in violation of Exchange Act Section 15B(c)(1) and MSRB Rule G-42; 2) By failing to deal fairly with their clients and in fact being dishonest and/or engaging in dishonest or unfair practices; 3) By violating MSRB Rule G-42 by engaging in dishonest and unfair practices and not providing full and fair disclosure of the conflicts to their clients in writing; 4) By violating MSRB Rule G-17 by failing to deal fairly with their clients and engaging in wrongful, deceptive conduct; 5) By violating MSRB Rule G-44 by failing to establish appropriate policies and procedures to prevent such conduct; and 6) by violating Exchange Act Section 15B(c)(1) through their conduct.

The Commission did not seek summary judgment on other claims involving the advisory, Mr. Ganci and the City of Rochester. Those claims remain pending. See Lit. Rel. No. 25981 (April 22, 2024).