FMSBONDS and Frontier Communications Investment Loss

Many investors are unaware of how the bond market works. Bonds do not trade on an exchange like a stock. Bonds trade out of the inventory of brokerage firms like FMS. Not unlike aging produce at a grocery store, its not unusual for management at these firms to take steps to rid themselves of the unwanted product. In a grocery store, prices may be cut or maybe a two for one deal will be offered. In the brokerage world, management will offer incentives, in the way of mark-ups, to its sales force. This extra mark-up is akin to a heightened commission though it may not appear as such on confirmations. This is an incentive for the sales force, the trusted financial advisor or bond broker, to begin recommending those particular bonds. Such incentives often lead to undue concentrations in customer portfolios. In many cases, the firms are not trying to get rid of good bonds. Usually, it is the debt of poorly rated companies, unsecured debt issuances, or low tranche issuances of middling companies. Under its current investigation, SSEK has determined that FMS may have largely recommended the unsecured debt of Frontier.

FMS Bonds originated as First Miami Securities. Its registration with the Financial Industry Regulatory Authority ("FINRA") began in 1979. FINRA is the official regulatory body for brokerage firms. FMS has several regulatory complaints on its CRD, the official record with FINRA. In total there are 11. The majority of FMS's regulatory issues ended in something referred to in the industry as the Acceptance, Waiver & Consent ("AWC"). AWCs usually occur after an investigation by FINRA or the Securities Exchange Commission ("SEC"). In general, with an AWC, the subject brokerage firm neither admits nor denies the allegations but agrees to a fine, censure, and/or suspension.

The most recent AWC was finalized in 2017. FMS consented to a FINRA finding that it failed to disclose material facts pertaining to 51 municipal bond transactions around the time of the trades. To be clear, FMS neglected to notify its customers that the municipal bond trades were at a level below the predetermined minimum, or that the securities in question contained a restriction on resale which could negatively impact liquidity for the client's position. As a result of its behavior, FMS was censured, forced to offer rescission to the negatively impacted customers, and fined $210,000. (See CRD for full details of all of FMS's regulatory issues. https://files.brokercheck.finra.org/firm/firm_7793.pdf)

Frontier Communications Corporation (FTRCQ) is a telecommunications company formerly known as Citizens Utilities Company and prior to that, Citizens Communications Company. It traditionally served rural and less populated communities, but then grew to serve larger markets.

Besides telephone service both local and long-distance, the company offers digital television service, internet, and computer technical support to business and residential customers in approximately 29 states. Frontier had 3,735,000 subscribers and was deemed one the larger providers of broadband services in the US, ranking number 8. It was also ranked as the 11th largest provider of paid-for television. It had 838,000 subscribers.

Unfortunately, Nasdaq announced that it would be delisting Frontier which has been suspended since April 24, 2020. Trouble started for Frontier a while back when it began struggling with $17.5 billion in debt. Most of this debt was through poor acquisitions, problems with customer service, and the decline in pre-existing landline telephone operations, which were a large part of its portfolio. Frontier filed for bankruptcy on April 14, 2020. It had approximately $8 billion in unsecured debt. There is an agreement to accept holdings in a reconstituted Frontier. This could cut the debt by about half. It is unclear what the bankruptcy judge will do. Although, it is believed the judge may roll the debt together through a "master agreement" in exchange for something less than $1 billion in cash and some stock. There would also remain about $6 billion in debt that is considered secured debt. This includes some bondholders, though it is believed many bondholders who purchased through FMS were sold unsecured bonds. As one might guess, unsecured bondholders are in a worse position than secured bondholders.

Contact our seasoned securities and bond attorneys if you suffered losses as an investor in Frontier Communications and your bonds were sold to you by FMSBonds or any other brokerage firm. SSEK Law Firm represents municipal bond investors throughout the United States.