SW Legal Educational Publishing

Brokers Should Reveal Excessive Markups on Municipal Bonds
Description Investors' suit against Merrill Lynch for non-disclosed excessive markups on municipal bonds allowed to go forward. While securities laws provide less protection in that market than in other securities markets, brokers have implied duty to disclose excessive markups.
Topic Securities Law
Key Words Securities Fraud, Markups, Municipal Bonds
C A S E   S U M M A R Y
Facts Several investors sued Merrill Lynch for securities fraud by charging excessive markups (inflated prices and fees) and by failing to disclose either the prevailing market price of the bonds or the amount of the markups, which ran 4 to 10% on municipal bonds. District court dismissed the complaint, holding that Rule 10b-5 was not violated because Merrill Lynch had no duty to disclose the markups. Investors appealed.
Decision Reversed. The securities law provide investors in the municipal bond market with "substantially less protection" than investors in "the regular securities market." However, there exists an implied representation that broker-dealers charge their customers securities prices that are reasonably related to the prices charged in an open and competitive market. A broker-dealer can commit securities fraud by charging excessive markups without proper disclosure. A markup is excessive when it bears no reasonable relation to the prevailing market price. In general, markups should not exceed five percent and should be much less on municipal bonds. There is an implied duty to disclose excessive markups.
Citation Grandon v. Merrill Lynch & Co., Inc., 147 F.3d 184 (2nd Cir., 1998)

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