RE:Trippingstockwatch.com
SEC fines BMO $40M (U.S.) for misleading bond offerings
2025-01-13 19:01 ET - Street Wire
Also Street Wire (C-BMO) Bank of Montreal
by Mike Caswell
The U.S. Securities and Exchange Commission has imposed $40-million in sanctions against BMO Capital Markets Corp. for misleading clients as it sold $3-billion worth of mortgage bonds. (All figures are in U.S. dollars.) The SEC says that BMO failed to supervise salesmen who changed the "cosmetics" of the bonds to make them more attractive. The practice continued even as a client complained that the firm was "not selling what is advertised," the SEC claims.
The penalties for BMO are contained in an administrative order that the SEC released on Monday, Jan. 13. The $40-million includes disgorgement of $19-million, plus interest, and a $19-million fine. The penalty represents a negotiated settlement, in which BMO did not admit any wrongdoing.
The case arises from so-called "sliver bonds" that BMO sold between December, 2020, and May, 2023, in the United States. The bonds represented pooled residential mortgages that paid returns based on the underlying loans. They are considered a low-risk investment in the U.S., and are often backed by government support.
The problem with BMO's bonds, as set out by the SEC, is that the firm lumped less attractive mortgages in with a small number of more appealing mortgages in an effort to sell the products. Salesmen at the firm realized that by using a blend of mortgages, they could obtain evaluations from third party data providers that emphasized the contribution of the more favourable mortgages, the order states. This held true even when the more appealing mortgages comprised as little as 0.01 per cent of a bond offering, according to the SEC.
As a result, BMO employees offered and sold more than 400 bonds using altered or inflated data, the SEC claims. Conversations between employees, as quoted in the order, referred to the bond structure as necessary after the employees "hadn't been able to sell jack s##t" previously. In a phone call quoted by the SEC, one BMO employee told another that "we gotta make s##t look cosmetically short ... I think that's paramount here ... that's what sells."
According to the SEC, some clients were able to determine that the information on the bonds was misleading. In June, 2022, one market participant sent a message to a BMO employee, complaining that "on bonds like these are you [sic] not selling what is advertised," the order states. The employee's response, as set out by the SEC, was to state that he "well understood" the concerns. He did not escalate the complaint, however, and BMO continued the practice, the SEC says.
In settling the case, the SEC notes that BMO has since changed its procedures for supervising the bonds at issue. The firm has also put in place "scenario-based training" for employees. That training is aimed at "novel bond structures" and "escalation of complaints and potential issues."
BMO Capital Markets is owned by the Bank of Montreal.