Buyer beware with bonds.

LET'S play blame the victims.

At least most of them, for the latest round of pricing abuses in the municipal market, as illustrated by the National Association of Securities Dealers enforcement action against J.B. Hanauer & Co., Quick & Reilly and RBC Dain Rauscher.

The firms were fined $22,500 and ordered to pay restitution of $20.734 for five transactions involving $140,000 in par value of bonds during 2002.

Like the other enforcement actions taken by the agency earlier this year, these involve Municipal Securities Rulemaking Board Rules G-30(a) and G-17. The first requires dealers to execute transactions "at prices that are fair and reasonable, taking into consideration all relevant factors." The second requires firms to deal fairly.

Like the NASD's other actions, this one is really all about not giving a damn, not making sure that your customer was getting the best price for his bonds when he wanted to sell them.

In each case, a customer asked a dealer to sell some bonds. The dealer got a bid from a broker's broker, and accepted that bid, without making sure Ihat it was "fair and reasonable."

One customer asked J.B. Hanauer to sell $30,000 in Sweetwater County, Wyo., resource recovery bonds. The bonds were sold in 1994, have a 7 percent coupon and mature in 2024. The company purchased the bonds from its customer at 86.53, and sold them to the broker at 88.03. The NASD says the fair value of these bonds was really 97.50, so the customer was shortchanged by 11.25 percent.

The NASD had Hanauer send the customer a check for $3,291 in restitution.

Just a week before, the bonds traded at prices ranging from 95.09 to 100 cents on the dollar. If the customer wanted to, he could have checked the MSRB's transaction reports or asked his broker to do it.

Or consider a $25,000 lot of Warren County, N.J., pollution control revenue bonds sold for a landfill in 1992. The bonds have a 5.875 percent coupon and mature in 2006.

Back in August of 2002 a customer asked Quick & Reilly to sell these bonds for him. The firm purchased them for 80.75, and sold them to a broker's broker at 82. The NASD says a fair price was 96.

These bonds sold the Monday before last. The previous Friday, a dealer bought a $50,000 lot of the same bonds for a price of 96.30.

The customer could have checked to see where these bonds were trading, and asked why the broker was going to pay a little less than 81 cents on the dollar when it looked like another dealer was willing to pay more than 96 cents.

Perhaps the broker would have said, "Go sell them to the other guy, if you can find him." Or perhaps the broker would have been so surprised that the customer knew what the bonds were worth that he would have fainted and fallen out of his chair.

Either way, it would have been better than willingly going off like a lamb to the slaughter.

It would be tough to blame the owner of $50,000 in the Oaks, Okla. (population: 500), Economic Development Authority's educational facilities lease revenue bonds. The bonds mature in 2008, and carry a 5.50 percent coupon.

The customer asked his broker, RBC Dain Rauscher, to sell them. The dealer bought them for 85.25. The bonds sold later that day for prices ranging from 85.25 to 102.679. This seems to be the only time the bonds, $50,000 in par value out of $200,000 originally issued in this maturity, ever traded in the secondary market. The NASD had RBC Dain Rauscher send the customer a check for $8,714.50.

In the real world of bond dealers, it should never be buyer beware. Which is why J.B. Hanauer and Quick & Reilly and RBC Dain Rauscher had to cough up restitution and fines.

--Joe Mysack, Bloomberg News