On January 30, 2024, the Securities and Exchange Commission secured a final judgment against Comer Capital Group, LLC, and Brandon L. Comer. The SEC had previously charged them with violating their fiduciary duty concerning a $6 million municipal bond issuance for the Harvey Public Library District in Harvey, Illinois.

Case Summary

The Securities and Exchange Commission (SEC) states the following:

NATURE OF ACTION

This case concerns a breach of fiduciary duty by a municipal advisor and its principal about a $6 million bond issuance by the Harvey Public Library District (referred to as "the District") on January 16, 2015.

Municipal advisors guide municipal entities, particularly regarding municipal bond issuance. As fiduciaries, they have obligations of care and loyalty to their clients, and they must act in their client's best interests with honesty and good faith, putting the client's interests above their own.

The District, a relatively inexperienced issuer that had never issued bonds before, hired Comer Capital Group, LLC (Comer Capital) in late 2014 as their municipal advisor for bond issuance to finance the expansion and renovation of their library. Comer Capital is primarily owned and operated by Brandon L. Comer. The District relied on Comer Capital to offer guidance, represent its interests, and advise on selecting an experienced underwriter for the bonds, researching and analyzing bond pricing, assisting in setting prices and negotiating on the District's behalf to secure competitive pricing.

However, Comer Capital and Comer failed to fulfill these responsibilities, breaching their fiduciary duty to the District. Instead, they deferred entirely to IFS Securities (IFS), the bond underwriter, for the sale and pricing of the bonds. IFS, lacking relevant experience, provided inadequate marketing, neglected to reach appropriate buyers, and mishandled the order period, ultimately selling the bonds at an unfair and unreasonable price to the District. This mismanagement is expected to cost the District an extra $500,000 in interest over the bonds' lifetime.

The SEC alleges that these actions by Comer Capital and Comer violate Section 15B(c)(1) of the Securities Exchange Act of 1934.

RELIEF SOUGHT

The SEC seeks a court judgment to:

(a) Determine that Comer Capital and Comer violated the law;

(b) Permanently prevent them from future breaches of Section 15B(c)(1);

(c) Compel Comer Capital to return ill-gotten gains with interest;

(d) Impose civil monetary penalties as per Section 21(d)(3) of the Exchange Act.

Defendants

1. COMER CAPITAL GROUP, LLC

Comer Capital Group, LLC ("Comer Capital") is a limited liability company based in Jackson, Mississippi, where it operates as a registered municipal advisor with the Commission and the Municipal Securities Rulemaking Board (MSRB). Registered firms must file Form MA-I with the Commission to disclose details of individuals involved in municipal advisory activities. Brandon L.

2. COMER

Comer, 37, resides in Jackson, Mississippi. He is the Managing Partner, Chief Compliance Officer, and principal owner of Comer Capital, listed as an associated individual on its Form MA-I.

Relevant Third Parties

1. THE HARVEY PUBLIC LIBRARY DISTRICT

The Harvey Public Library District ("District"), based in Harvey, Illinois, has independent authority and taxation powers under Illinois law. It is a distinct government unit from the City of Harvey, though geographically aligned with it. The District’s seven-member Board of Trustees is elected, and Cook County handles its tax billing and collection.

2. IFS SECURITIES

IFS Securities ("IFS"), headquartered in Atlanta, Georgia, is a broker-dealer registered with the Commission.

Statement of Facts

I. ROLES IN A NEGOTIATED OFFERING

The District issued the Bonds through a "negotiated sale." In such a sale, the issuer aims to secure the lowest borrowing cost for the bonds, meaning minimizing the interest payments over the bond's duration. The borrowing cost is influenced by the bond's price, yield, and coupon. Price and yield are inversely related; if the bond price is lower, its yield is higher, and vice versa. A higher yield and lower price result in increased interest payments for the issuer throughout the bond's life. The coupon represents the fixed annual interest rate paid by the issuer, expressed as a percentage of the bond's face value.

In a negotiated sale, the issuer chooses an underwriter or a group of underwriters (underwriting syndicate) to market and sell the bonds to investors. The lead or sole underwriter negotiates critical terms, such as price, yield, and coupon, with the issuer. The underwriting syndicate buys the bonds from the issuer under those terms and then sells them to their investor clients. The underwriter maintains an arm's-length relationship with the municipal issuer.

State and local government entities, like the District, typically hire a municipal advisor to assist in the bond offering process. The advisor provides guidance on underwriter selection, financing options, and bond pricing. Acting as a fiduciary to the issuer, the advisor must work in the issuer's best interest. The municipal advisor, as a representative of the issuer, also has an arm's-length relationship with the underwriter. With regard to bond pricing, the municipal advisor and issuer may be at odds with the underwriter.

To secure the lowest borrowing cost, the issuer's goal in selecting an underwriter is to find one best suited to minimize borrowing expenses, typically one with proven experience in handling similar bonds. To aid in this selection, it is generally considered best practice for an issuer, particularly an inexperienced one like the District, to hire a municipal advisor before choosing an underwriter. This ensures that the issuer benefits from professional advice when selecting an underwriter experienced with the type of bonds to be issued.

II. IFS WAS ENGAGED WITHOUT A COMPETITIVE PROCESS

In April 2011, the District’s voters passed a referendum permitting the issuance of bonds to finance the renovation of the District's library and acquire updated equipment. By late 2013 or early 2014, the District decided to proceed with issuing these bonds.

The District, being inexperienced in issuing bonds, had never done so prior to the issuance of the Bonds under this action. The District’s Director was a librarian without prior experience in the bond offering process. IFS became involved after a member of the District’s Board of Trustees, who knew someone affiliated with IFS, invited that person to attend Board meetings to discuss the Bonds.

On September 30, 2014, the District selected IFS as the underwriter for the Bonds without a competitive selection process or hiring a municipal advisor. At that time, IFS had acted as the sole or co-lead underwriter for only five prior municipal offerings, none of which involved long-term credit-rated bonds.

The District formalized its choice by signing a "letter of intent" with IFS, confirming their intention to engage IFS as the Bonds' underwriter. This agreement was non-binding, allowing the District to terminate it at any time. Moreover, it explicitly stated that the District was free to choose a different or additional underwriter(s) for the Bonds.

III. COMER CAPITAL WAS ENGAGED BASED ON IFS'S RECOMMENDATION, AND IFS ASSISTED IN NEGOTIATING COMER CAPITAL'S FEES

The District's legal counsel advised hiring a municipal advisor for the bond offering. In an unusual arrangement that contrasted with the typical practice of an advisor helping an issuer choose an underwriter, IFS suggested that the District engage Comer Capital as its municipal advisor. IFS had previously collaborated with Comer Capital on other bond offerings. An IFS representative contacted Comer, informed him that IFS had referred the District to Comer Capital for advisory services, and provided him with the Director's contact information. On September 30, 2014, Comer was interviewed by the Board and was hired as the District's municipal advisor that same day. No other advisors were interviewed.

Initially, Comer Capital proposed a flat fee of $20,000 for its services, but the Board asked Comer to accept a lower fee during the interview. He agreed to reduce it to $15,000. A few days later, Comer asked IFS to help negotiate a higher fee with the District. Over the next few months, an IFS representative discussed increasing Comer Capital's fee with at least one Board member and stated that he would speak with another. Due to IFS's involvement, Comer Capital's fee was restored to $20,000. After the bond sale was finalized, Comer further negotiated to increase the fee to $40,000.

As previously stated, a municipal advisor owes a fiduciary duty to the issuer and must act with honesty and good faith, prioritizing the client's best interests over their own financial gain. As the issuer's representative, a municipal advisor is expected to have an arm's-length relationship with the underwriter. Therefore, it was inappropriate and a breach of fiduciary duty for Comer to ask IFS to intervene and renegotiate Comer Capital's fee. This request created a conflict of interest for Comer Capital as the District's municipal advisor because it now felt indebted to IFS for increasing its fee.

IV. COMER CAPITAL AGREED TO DELIVER SPECIFIC SERVICES AND GUIDANCE TO THE DISTRICT

The service agreement between Comer Capital and the District, signed by Comer, detailed the services Comer Capital committed to providing. These included: (1) collaborating with the District to draft a request for underwriting proposals to "identify firms most experienced in marketing this type of security," (2) "negotiating on behalf of the District to ensure aggressive pricing in line with current market conditions," and (3) "helping the District determine the appropriate pricing levels" by performing "historical pricing analyses and market evaluations," and "establishing clear pricing benchmarks or targets." Comer was the primary individual at Comer Capital responsible for providing municipal advisory services to the District.

However, Comer Capital and Comer did not fulfill these commitments. As detailed below, their failure to deliver these services had significant implications, resulting in the District accepting a price for its bonds that was neither fair nor reasonable. Consequently, the District's borrowing costs were significantly higher than necessary.

V. THE DEFENDANTS DID NOT ADVISE THE DISTRICT ON UNDERWRITER SELECTION

As previously mentioned, the District chose IFS to underwrite its bonds before appointing Comer Capital as its municipal advisor. However, this didn't obligate the District to rely on IFS for underwriting services. The letter of intent with IFS explicitly stated that the District could choose a different underwriter. Comer also acknowledged that the District was not bound to IFS and could switch underwriters at any time before the bond transaction's closing.

Therefore, Comer Capital and Comer: (1) were aware that the District was a first-time issuer lacking sophistication, having chosen an underwriter without the guidance of a municipal advisor; (2) had explicitly agreed to help the District identify underwriters experienced in marketing the type of bonds being considered; and (3) understood that the District was not compelled to use IFS.

Despite this knowledge, after being hired by the District, Comer Capital and Comer did not evaluate IFS's qualifications or experience in handling the bonds. They didn't investigate how the District had selected IFS, nor did they check if other underwriters were considered. While they had collaborated with IFS on previous transactions, those involved short-term bonds from distressed issuers. By contrast, the District's bonds were long-term, and the District itself wasn't distressed.

Failing to provide the District with advice on underwriter selection, as agreed, amounted to a breach of fiduciary duty by the Defendants.

VI. OVERVIEW OF THE DISTRICT'S BONDS

The District’s Bonds possessed several characteristics that made them attractive to a wide range of investors.

1. Insurance

The Bonds were insured, enhancing the likelihood that bondholders would receive timely payments of principal and interest. The District secured an insurance policy guaranteeing scheduled payments even in the event of a default by the District, thereby significantly reducing investor risk.

2. Investment-Grade Rating

The Bonds had an "investment grade" rating. Standard & Poor’s, which assesses bonds on a scale from AAA to D for creditworthiness and risk, rated the Bonds "AA" when insured, with an underlying "BBB" rating and a stable outlook.

3. Lock-Box Feature

The Bonds included a "lock-box" provision. The District pledged that tax proceeds would be directed to a tax escrow agent, who would then distribute the funds to bondholders. This feature, similar to insurance, ensures that bondholders receive principal and interest payments promptly, making the Bonds appealing to investors.

4. Bank-Qualified Status

The Bonds were "bank qualified" under the Internal Revenue Code. This status is advantageous because it allows commercial banks holding these bonds to deduct a portion of their interest costs from taxes. Generally, bank-qualified bonds attract smaller banks and potential buyers, as these bonds are also sought after in the secondary market.

VII. THE ROLES OF THE UNDERWRITER AND MUNICIPAL ADVISOR IN PRICING AN OFFERING

In a negotiated sale, the lead or sole underwriter handles the pricing process. If the issuer hires a municipal advisor, the advisor typically oversees pricing, providing analysis, guidance, and recommendations throughout.

To determine the price, yield, and coupon for a negotiated bond offering, the underwriter leverages its market expertise, assesses current market conditions, examines comparable bond issues, and gathers feedback from customers and other prospective investors.

During the marketing phase, which can last for a week or more, the underwriter disseminates relevant information about the bond offering to potential investors. The underwriter then collects their insights on how much they are willing to invest and at what prices and yields. This data is used to analyze and establish a fair price for the bonds.

The underwriter will then release initial pricing terms, which have been agreed upon with the issuer, to interested investors. There is a limited window, known as the "order period," during which investors can place provisional orders. Before suggesting a final price to the issuer, the underwriter might adjust these proposed terms. The municipal advisor typically offers input and analysis to ensure the pricing terms are fair and reasonable.

Once both parties agree on pricing, the issuer and underwriter finalize a bond purchase agreement, through which the underwriter acquires the bonds from the issuer. The underwriter then sells the bonds to the investors who placed orders during the order period.

VIII. THE UNDERWRITER'S INADEQUATE MANAGEMENT OF THE OFFERING

As previously mentioned, IFS lacked sufficient experience acting as the sole or lead underwriter for long-term, credit-rated bonds like the District's Bonds. Several aspects of its management were subpar, including:

1. Limited Identification of Banks

IFS failed to identify smaller banks interested in purchasing the "bank qualified" Bonds. At the time of the offering, the firm had only handled one bank-qualified transaction. Additionally, the employee responsible for finding buyers was unfamiliar with the benefits that banks receive from acquiring these bonds.

2. Poor Marketing Strategy

IFS mismanaged the marketing period. The order period was initially set for Tuesday, January 13, 2015. The firm waited until January 8 or 9 to begin marketing to investors—just days before the scheduled order period. Furthermore, the bond insurance, which would increase the bonds' rating, wasn't confirmed until the evening of January 13. Such a brief marketing window was unreasonable, particularly for a first-time issuer like the District.

3. Last-Minute Investor Search:

When IFS couldn't secure any investors by or during the order period, it rescheduled for January 14. Late that day, IFS reached out to a broker-dealer known for purchasing large lots of bonds from them. The broker-dealer, due to the late hour, suggested contacting them the following day.

4. Failed Negotiation and Acceptance

On January 15, IFS made two offers to the broker-dealer, both of which were rejected. By January 16, the broker-dealer found a customer interested in the bonds and countered with a demand for a 5.05% yield, which was worse for the District as it resulted in higher borrowing costs. Without negotiating further or seeking other buyers, IFS accepted this counteroffer. In consultation with Comer Capital and IFS, the District agreed. The bond purchase agreement was signed on January 16, 2015, at a price of $115.73, a fixed annual interest rate of 7.10%, and a yield of 5.05%. The transaction closed on January 30, 2015.

Two days before closing, Comer negotiated an increase in Comer Capital’s fee with the District from $20,000 to $40,000 without adding any additional responsibilities to justify the fee hike.

IX. THE BOND PRICE WAS UNFAIR AND UNREASONABLE FOR THE DISTRICT

Despite Comer's assurances, the price and yield of the Bonds were neither fair nor reasonable for the District, as demonstrated by three factors: (1) a comparison with IFS's internal pricing projections before the sale, (2) a comparison with contemporary bond offerings of a similar nature, and (3) the sharp price increase and yield decrease that occurred after IFS sold the Bonds to the sole buyer they could find.

The Yield Significantly Exceeded IFS's Pre-Sale Internal Estimates

A month before the issuance, IFS projected the Bonds would yield 3.79%. Even in the days before the order period, IFS anticipated a yield in the upper 3% range. Ultimately, the Bonds were sold at a yield of 5.05%, 126 basis points higher than expected, which was far less advantageous for the District.

The Yield Was Significantly Higher Than Comparable Bond Issues

The yield was also substantially higher compared to similar bond issuances during the same period. A table comparing the District’s Bonds with five similar issuances in Illinois highlights this discrepancy, given their comparable size, credit rating, and maturity.

Claim For Relief

VIOLATION OF SECTION 15B(C)(1) OF THE EXCHANGE ACT

The Commission reiterates and fully incorporates the claims made in paragraphs 1-66 as if presented here verbatim.

The Bonds qualify as "securities" under Section 3(a)(10) of the Exchange Act [15 U.S.C. § 78c(a)(10)].

According to Section 15B(c)(1) of the Exchange Act [15 U.S.C. § 78o-4(c)(1)], municipal advisors, along with anyone associated with them, are considered to have a fiduciary duty to any municipal entity they serve. Thus, no municipal advisor can engage in practices that violate this fiduciary responsibility.

As described earlier, the Defendants Comer Capital and Comer served as municipal advisors and associated persons, as outlined in Sections 15B(e)(4)(A) and 15B(e)(7) of the Exchange Act [15 U.S.C. §§ 78o-4(e)(4) and (7)]. They were therefore obligated to act in the District's best interest.

However, through their conduct and the practices mentioned above, Comer Capital and Comer breached their fiduciary duty to the District, violating Section 15B(c)(1) of the Exchange Act [15 U.S.C. § 78o-4(c)(1)].

Prayer For Relief

In light of the preceding information, the Commission respectfully requests that the Court:

1. ISSUE A PERMANENT INJUNCTION

Prevent Defendants Comer Capital, Comer, their agents, employees, attorneys, and any individuals working in active coordination with them, who receive direct notice through personal service, fax, or express delivery, from future breaches of Section 15B(c) of the Exchange Act [15 U.S.C. § 78o-4(c)].

2. DISGORGE ILL-GOTTEN GAINS

Order Defendant Comer Capital to return any unjust profits, including prejudgment interest.

3. IMPOSE CIVIL PENALTIES

Direct Defendants Comer Capital and Comer to pay appropriate civil penalties as stated under Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].

4. MAINTAIN JURISDICTION

Retain jurisdiction over this matter to enforce and administer all issued orders and decrees.

5. GRANT ADDITIONAL RELIEF

Provide any further relief that the Court finds fair and appropriate.

Final Judgment

The SEC secured a final judgment against Comer Capital Group, LLC and Brandon L. Comer, who had been charged by the SEC for violating their fiduciary duty in relation to a $6 million municipal bond issuance by the Harvey Public Library District in Harvey, Illinois.

Key Takeaways For Investors

Key takeaways for investors from this case include:

1. FIDUCIARY RESPONSIBILITY IS CRUCIAL

Municipal advisors have a legal obligation to prioritize the interests of their clients above their own. Breaches can lead to significant legal and financial consequences.

2. DUE DILIGENCE MATTERS

Investors should scrutinize the qualifications and track record of municipal advisors and underwriters to ensure they are capable of effectively managing the sale and pricing of bonds.

3. TRANSPARENCY AND COMMUNICATION:

Open communication between issuers, advisors, and underwriters is essential. Lack of transparency or withholding critical information can lead to unfavorable pricing and increased borrowing costs.

4. BENCHMARK COMPARISONS:

Investors should expect advisors to conduct thorough market analyses and comparisons with similar bond issues to secure fair and reasonable pricing.

Conflict of Interest: Situations where conflicts of interest arise must be disclosed and addressed. Unchecked conflicts can compromise the integrity of the transaction and lead to regulatory scrutiny.

5. LEGAL COMPLIANCE AND REGULATORY OVERSIGHT:

Compliance with securities regulations is vital. Municipal advisors must adhere to their fiduciary duties to avoid litigation and penalties from regulatory bodies like the SEC.

6. MONITORING MARKET CONDITIONS

Staying informed about changing market conditions is crucial to ensure favorable pricing. This includes understanding how insurance, credit ratings, and lock-box features can impact bond demand and pricing