BMO unit to pay $40.7 million in US SEC settlement over misleading bond sales

By Jonathan Stempel

NEW YORK (Reuters) – A unit of Bank of Montreal agreed to pay $40.7 million to settle U.S. Securities and Exchange Commission charges that it failed to supervise employees who misled investors about the attractiveness of mortgage-backed bonds the bank was selling.

The settlement announced by the SEC on Monday includes a $19 million civil fine.

It resolves charges that BMO Capital Markets employees used offering sheets and metrics that inaccurately described collateral backing more than $3 billion of so-called Agency CMO bonds from Dec. 2020 to May 2023.

Agency CMO bonds are backed by pools of residential mortgages, and issued by Fannie Mae (OTC:), Freddie Mac (OTC:) and Ginnie Mae. They are considered low risk because of guarantees of principal and interest payments or other government support.

The SEC said BMO structured some bonds with a sliver, often just $1,000, of mortgages with higher interest rates, in a way that suggested the bonds were backed by large amounts of the mortgages, making them more appealing to investors.

BMO did not admit or deny wrongdoing in agreeing to settle. Its payment includes the $19 million fine, $19.42 million of disgorgement and $2.24 million of interest. BMO also agreed to a censure.

In a statement, it said: “We hold ourselves to the highest standards of fair and ethical conduct, and continuously review and enhance our controls and supervisory framework. We’re pleased to have this matter behind us.”

According to the regulator, BMO bankers spoke about changing the bonds’ “cosmetics” to boost sales.

Outsiders noticed, with one market participant complaining to a BMO banker in June 2022 that the bank was “not selling what is advertised,” the SEC said.