UBS Financial Services Inc. has agreed to pay more than $10 million in fines after it was found to have participated in a scheme to improperly divert new issue municipal bonds to broker-dealers at the expense of retail investors, the Securities and Exchange Commission said.

According to the SEC order, UBS violated certain rules of the Municipal Securities Rulemaking Board (MSRB) and failed to reasonably supervise its registered representatives and a member of its municipal bond syndicate desk in connection with retail order periods for negotiated new issue municipal bonds.

“Retail order periods are intended to prioritize retail investors’ access to municipal bonds, and we will continue to pursue violations that undermine this priority,” LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit, said in a statement.

The complaint said that between August 2012 and June 2016, UBS improperly allocated bonds intended for retail customers to parties known in the industry as “flippers,” who then immediately resold or flipped the bonds to other broker-dealers at a profit. The UBS registered representatives knew or should have known that flippers were not eligible for retail priority, the SEC order said.

The SEC’s order said the representatives facilitated more than 2,000 trades with flippers, allowing UBS to obtain bonds for its own inventory. Such practice, the SEC said, circumvented the priority of orders and improperly gave UBS access to a higher priority in the bond allocation process.

In its Offer of Settlement, UBS neither admitted or denied the findings and consented to a cease-and-desist order that finds it violated the disclosure, fair dealing, and supervisory provisions of MSRB Rules G-11(k), G-17, and G-27, and also failed reasonably to supervise within SEC laws. In addition to being censured, UBS was ordered to pay a $1.75 million penalty, $6.74 million in disgorgement of ill-gotten gains plus over $1.5 million in prejudgment interest.

In related actions, the SEC also settled proceedings on Monday against two of the UBS registered representatives, William S. Costas, 55, of Oak Park, Calif., and John J. Marvin, 59, of North Palm Beach, Fla. Costas and Marvin negligently submitted retail orders for municipal bonds on behalf of their flipper customers. Both men agreed to settle the charges without admitting or denying the SEC’s findings and consented to orders finding they violated MSRB Rules.

Costas agreed to pay disgorgement and prejudgment interest totaling $16,585 and a civil penalty of $25,000, and Marvin agreed to pay disgorgement and prejudgment interest totaling $27,966 and a civil penalty of $25,000. Both also consented to a 12-month limitation on trading negotiated new issue municipal securities.

In April, the SEC settled charges with Jerry E. Orellana, a former UBS executive director, for submitting retail orders to the underwriting syndicate from certain UBS customers who were flippers. Without admitting or denying the SEC's findings, Orellana, 43, of Paramus, NJ, consented to a 6-month industry suspension and penny stock bar. The order also imposes a $25,000 civil penalty.

And in December 2018, the SEC settled proceedings with Chris D. Rosenthal, who the SEC’s order alleged fraudulently submitted the majority of ineligible retail orders on behalf of the flippers. Without admitting or denying the SEC's findings, Rosenthal, 56, of Novelty, Ohio, consented to a cease-and-desist order barring him from association with various regulated entities with the right to apply for reentry after five years. He was ordered to pay $284,080 in disgorgement, $15,128 in prejudgment interest, and a $75,000 civil penalty.