MuniciCorp to close doors, hurt by issue slump, broker defection; Florida firm to assume personnel, but no merger.

MuniciCorp to close doors, hurt by issue slump, broker defection

Troubled by a decrease of new tax-exempt bond issues, competition for top brokers and weakness in the securities brokerage industry, MuniciCorp of California Inc., the Woodland Hills-based brokerage specializing in municipal bonds, will close within 90 days.

Some of MuniciCorp's branches and brokers may be absorbed by St. Petersburg, Fla.-based brokerage Raymond James & Associates Inc., but there will be no formal merger between the firms, said Kenneth Rogers, 50, MuniciCorp chief executive, co-founder and largest shareholder.

"MuniciCorp is going to gear down and close in an orderly and controlled fashion," said Rogers, a one-time Fuller Brush salesman who owns 44.5 percent of MuniciCorp. "The National Association of Securities Dealers (NASD) has been apprised of our situation, and we are doing it in conjunction with their oversight. There will no inconvenience to our customers."

Rogers spiked rumors of an impending merger with Raymond James. "They may take on some of the brokers...and assume some of the leases, but MuniciCorp is simply going to close and cease as an entity," he said.

Rogers co-founded MuniciCorp in Century City in 1973. He built it into the region's 25th-largest securities brokerage - it was the state's largest independent municipal bond brokerage - and moved the headquarters to Woodland Hills in 1988.

As of February a year ago, MuniciCorp had 52 registered representatives (bond brokers), and 139 employees. It had small underwriting and institutional sales departments, and branches in Woodland Hills, Century City, Newport Beach, downtown Los Angeles and San Francisco. A branch in Rancho Mirage was recently closed.

But in the last year MuniciCorp has been plagued by defections. Several of its top officers and brokers left, including co-founder Andrew Geller, former senior vice president and 22.3 percent shareholder, and top brokers Gary Hallis and Don Moulton, all with the Century City offices of brokerage house PaineWebber. Robert DeFazio, former chief compliance officer, is now associated with Century City offices Oberhofer & Co.

Rogers said intense competition from the "major wire houses" - the Merrill Lynches, the PaineWebbers, the Shearson Lehman Huttons - for top brokers such as Geller spurred MuniciCorp's demise.

"It used to be brokerages trained their own talent. About five years ago that changed, starting, I think, with Prudential Bache. Now they go out and offer large upfront bonuses to get top brokers and their `books," which is their client list. A lot of our top producers [brokers] have left the firm."

Last week Geller, now with Paine-Webber, said he hadn't "had any communications with MuniciCorp for a month" and was unaware of MuniciCorp's future. He said he left MuniciCorp for personal reasons.

But in addition to losing broker talent, changes in federal tax law whipsawed MuniciCorp, said Rogers.

In particular, the Tax Reform Act of 1986 spelled trouble for the firm, which specialized in buying and and selling tax-free municipal bonds for an income- and safety-oriented clientele.

The tax act sharply restricted the types of municipal issues that could be considered exempt from federal taxes, including most industrial development bonds (IDBs), some of which were used to finance private sector projects.

The Internal Revenue Service told Congress that IDBs had become a way for politically influential companies to borrow tax-free through friendly municipalities.

In California, municipal bond offerings plunged from $32.9 million in 1985 to $24.3 million in 1986 to a low of $17.5 billion in 1987. Issues picked up a bit in 1988 to $22.5 billion, according to the state Treasurer's Office.

The shortage of state municipal issues after 1986, in which MuniciCorp specialized, slowly suffocated MuniciCorp, said Rogers, in comments echoed by former MuniciCorp officers who declined to be identified.

"Municipal bonds are the stuff of the (municipal) bond industry, it is the raw product from which they made their living " a former officer said. "When there was less product, it got harder to make a living."

The difference between the prices brokerage paid for municipal bonds, and the prices they could sell the bonds to their customers decreased, said Rogers.

Large municipal bond funds, operated by the major wire houses and institutional bond funds, drove the wholesale price for tax-free municipal bonds up, while the retail price had to reflect actual bond yields.

The spread between the wholesale bond price and the retail price, once as much as 4 cents on the dollar of face value, in some cases shrank to less than a penny, said bond traders last week. "You had a lot of dollars chasing too few issues," said Rogers.

Lastly, the general malaise afflicting securities brokerages nationwide afflicted MuniciCorp too. In general, brokerage houses have had a tough time earning enough to pay for high broker salaries and commissions, swank office space and other overhead associated with financial firms. A slowdown of retail sales, following the October 1987 stock market crash, is usually cited for the financial difficulty.

"If Merrill Lynch posts huge losses, how is a smaller regional firm like MuniciCorp going to make money?" asked Rogers.

Rogers said he has no immediate plans. "I am taking things one step at a time, and right now I am effecting an orderly closing of MuniciCorp."