UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 36694 / January 9, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8917 ________________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : ADMINISTRATIVE PROCEEDINGS FIRST FIDELITY SECURITIES : PURSUANT TO SECTION15B(c)(2) GROUP, : OF THE SECURITIES EXCHANGE : ACT OF 1934, MAKING FINDINGS Respondent. : AND IMPOSING SANCTIONS _______________________________: I. The Commission deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 15B(c)(2) of the Securities Exchange Act of 1934 ("Exchange Act") against First Fidelity Securities Group ("FFSG"). Accordingly, IT IS ORDERED that a public administrative proceeding pursuant to Section 15B(c)(2) of the Exchange Act be, and hereby is, instituted. II. In anticipation of the institution of this administrative proceeding, FFSG has submitted an Offer of Settlement ("Offer"), which the Commission has determined is in the public interest to accept. Solely for the purpose of this proceeding, and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except that FFSG admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, FFSG, by its Offer, consents to the issuance of this Order and to the entry of the findings and the imposition of the sanctions set forth below. -------------------- BEGINNING OF PAGE #2 ------------------- III. On the basis of this Order and the Offer, the Commission finds-[1]- that: A. FACTS 1. Respondent First Fidelity Securities Group is a municipal securities dealer, as defined in Section 3(a)(30)(B) of the Exchange Act, and is registered with the Commission pursuant to Section 15B(a)(2) of the Exchange Act. It was separately identifiable department of the treasury division of First Fidelity Bank N.A. (the "Bank"), which in turn was a wholly-owned subsidiary of First Fidelity Bancorporation ("FFB"), a bank holding company. On June 18, 1995, FFB entered into an agreement with First Union Corporation ("First Union") which provided, among other things, for the merger of FFB with and into a wholly-owned subsidiary of First Union. This merger closed on January 1, 1996. As a result of the merger, FFSG's municipal securities business will be conducted in First Union's registered broker-dealer subsidiary. Prior to the merger, FFB's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act, and was traded on the New York Stock Exchange. 2. Relevant Persons and Entities A. George L. Tuttle, Jr. ("Tuttle"), was an investment banker associated with FFSG and a senior vice president of the Bank, until his employment was terminated in November 1994. B. Alexander S. Williams ("Williams"), was the head of FFSG and an executive vice president of the Bank, until his employment was terminated in November 1994. C. Nicholas A. Rudi ("Rudi"), was the president and a fifty percent owner of Consolidated Financial Management, Inc. ("CFM") in late 1989 and early 1990, among other times. Rudi had been Camden County, New Jersey's ("Camden County") administrator during the early 1980s. D. Essex County is a county in the State of New Jersey comprised of 22 municipalities. Essex County's executive branch is headed by a county executive that, among other things, signs contracts, bonds and other instruments requiring the county's consent. The legislative branch is comprised of the Essex County Board of Chosen Freeholders ("Freeholders"), which has the power to adopt ordinances and resolutions, including those concerning bond issues. E. Irvington, New Jersey is a township located in Essex County. Irvington's executive branch is headed by a mayor. The legislative branch is comprised of the Municipal Council, which has the power to adopt ordinances and resolutions, including --------- FOOTNOTES --------- -[1]- The findings herein are made pursuant to Respondent's Offer of Settlement and shall not be binding on any other person or entity named as a respondent or otherwise in this or any other proceeding. 2 -------------------- BEGINNING OF PAGE #3 ------------------- those concerning bond issues. The Municipal Council also selects underwriters, at times upon the recommendation of the mayor. F. The Camden County Municipal Utilities Authority ("CCMUA") was organized on March 15, 1972, for the purpose of acquiring, constructing, maintaining, and operating sewerage facilities for Camden County. G. The Payee was a financial consultant to the Freeholders from 1982 until June 1987. The Payee was Treasurer of Essex County from June 1987 until mid-1989, when the Payee became the financial consultant to the Essex County administration. The Payee was the budget consultant to the Irvington Municipal Council from at least 1984 until 1992. The Payee was also the financial consultant to the Municipal Council on Irvington's fiscal year adjustment financings. 3. FFSG Agrees to Pay Kickbacks to Secure Underwriting Business Sometime prior to 1986, the Payee solicited a kickback arrangement from Tuttle in return for securing underwriting business in Essex County for FFSG, which Tuttle took under advisement. Then in 1986, FFSG began to analyze Essex County's outstanding debt to determine whether a refunding would be beneficial to Essex County. Although FFSG had been the lead underwriter of the debt offering that was to be refunded, Tuttle learned that Essex County's administration was planning to support another underwriting firm for the lead underwriter position on the refunding. To secure for FFSG the lead underwriter position on this planned refunding and other Essex County bond offerings, Tuttle, on behalf of FFSG, agreed to the kickback arrangement previously proposed by the Payee, under which the Payee would obtain underwriting business in Essex County for FFSG in return for FFSG paying the Payee a kickback based upon the amount of bonds issued by Essex County that FFSG underwrote. Tuttle and the Payee also agreed that the payments would be made in connection with bond issues outside of Essex County. This kickback agreement was not disclosed. At the time of the agreement, the Payee was an employee of Essex County, namely the budget and financial consultant to the Freeholders. As budget and financial consultant to the Freeholders, the Payee's duties included reviewing any financial information presented by the executive branch on bond issues. Later, in or about January 1987, the Payee informed Tuttle that FFSG had been selected as the lead underwriter for the bond refunding which was to take place in March 1987 (the "March 1987 Offering"). Furthermore, the Payee was Tuttle's main contact at Essex County on the March 1987 Offering. In fact, Tuttle negotiated the underwriters' discount with the Payee.-[2]- Tuttle considered the kickback owing to the Payee in determining the amount of the proposed underwriters' discount that Tuttle submitted to the Payee as the agent of Essex County. The Payee accepted the proposed underwriters' discount without change. The --------- FOOTNOTES --------- -[2]- The underwriters' discount is the difference between the purchase price that the underwriter pays to the issuer to buy the bonds and the offering price at which the underwriter sells the bonds to the public. 3 -------------------- BEGINNING OF PAGE #4 ------------------- fee schedule that Tuttle submitted to Essex County on FFSG's behalf for the March 1987 Offering failed to disclose that the underwriters' discount included a kickback to the Payee. FFSG paid $31,331.50 to the Payee as a kickback on the March 1987 Offering. As Tuttle and the Payee had agreed, the Payee submitted sham invoices to FFSG for services allegedly rendered on bond transactions outside of Essex County. FFSG then paid the invoices from its profits on the other transactions. The Payee performed no bona fide services on any of those transactions for which he submitted invoices. As a result of Tuttle's actions, FFSG improperly recorded these payments on its municipal securities dealer books and records as relating to these other transactions. 4. The Payee Continues to Receive Kickbacks From FFSG After Being Appointed Essex County Treasurer In mid-1987, the Payee was appointed Essex County Treasurer. As part of his duties as Treasurer, the Payee was primarily responsible for overseeing Essex County bond issues. In accordance with their agreement, the Payee continued to receive kickbacks from Tuttle, and again this agreement was not disclosed. In January 1989, Essex County conducted a refunding of approximately $49 million in order to complete the funding of Essex County's pension fund (the "January 1989 Offering"). On June 15, 1989, Essex County issued approximately $103 million in bonds in a general obligation refunding (the "June 1989 Offering"). FFSG was selected as lead underwriter on both of these transactions. As in the March 1987 Offering, Tuttle submitted the proposed underwriters' discount to the Payee in connection with both of these transactions. Tuttle took into consideration the kickback to the Payee when proposing the underwriters' discount. The Payee made no change to the proposed underwriters' discount. The fee schedules that Tuttle submitted to Essex County on FFSG's behalf for the January 1989 Offering and the June 1989 Offering failed to disclose that the underwriters' discount included a kickback to the Payee. Between March 1990 and February 1991, the Payee received, directly or indirectly from FFSG, at least $119,964.66 in kickbacks for his assistance in securing for FFSG the lead underwriter role on the January 1989 Offering and the June 1989 Offering. As had been agreed, the Payee submitted fictitious invoices either to FFSG or to a third party that owed money to FFSG. The Payee provided no bona fide services on any of those transactions for which he submitted invoices. As a result of Tuttle's actions, FFSG improperly recorded these payments on its municipal securities dealer books and records. 5. FFSG Pays Kickbacks to the Payee On the Irvington Offerings In 1991, Tuttle informed the Payee, who was also budget consultant to the Municipal Council of Irvington, that FFSG was interested in being the lead underwriter for Irvington's fiscal year bond anticipation notes (the "Irvington BANs") and Irvington's fiscal year adjustment bonds (the "Irvington FYABs") (collectively, the "Irvington Offerings"). Tuttle and the Payee agreed that FFSG would pay the Payee if he helped FFSG obtain the 4 -------------------- BEGINNING OF PAGE #5 ------------------- lead underwriter role on the Irvington Offerings. Again, the agreement to pay the kickback was not disclosed. The Payee brought FFSG's interest in lead underwriting the Irvington Offerings to the attention of the Municipal Council and spoke to its members on FFSG's behalf. At or about the same time that the Municipal Council approved FFSG as the lead underwriter, the Municipal Council also entered into a contract with the Payee under which he was retained as the financial consultant to the Municipal Council in connection with the Irvington Offerings. FFSG was selected as the lead underwriter for the Irvington BANs, which were issued on December 17, 1991. When the Irvington FYABs were issued two months later, FFSG was again the lead underwriter on the offering. Tuttle considered the kickback to the Payee when he set the underwriters' discount on the Irvington BANs. The fee schedule that Tuttle submitted to Irvington on FFSG's behalf for the Irvington BANs failed to disclose that the underwriters' discount included a kickback to the Payee. As with the kickbacks on the Essex County March 1987 Offering, January 1989 Offering and June 1989 Offering (collectively, the "Essex County Offerings"), FFSG paid the Payee on a fictitious invoice the Payee submitted to a third party for work allegedly done relating to another municipal securities offering. The Payee provided no bona fide services on the offering for which he submitted an invoice. On Tuttle's instructions, in August 1992, the third party paid the Payee $25,000 using FFSG's profits on a guaranteed investment contract ("GIC")-[3]- on this other offering. 6. FFSG Agrees to Pay a Kickback to CFM On behalf of FFSG, Tuttle also agreed to pay, and paid, kickbacks to CFM in connection with a February 1990 offering by the CCMUA (the "CCMUA Offering") in return for FFSG securing the lead underwriting position. In late 1988, FFSG and Butcher & Singer, Inc. ("Butcher & Singer"), a broker-dealer registered with the Commission, began to analyze whether the outstanding CCMUA debt could be refunded. Over approximately the next year and a half, FFSG and Butcher & Singer analyzed the CCMUA's debt and discussed their analyses with various individuals and entities, including CFM. In or about December 1989, Rudi told Tuttle that the CCMUA had reduced CFM's financial advisory fee on the CCMUA Offering to a flat fee of $15,000 because the amount of past fees had been subject to criticism by the press. In prior offerings, CFM had received one dollar per $1,000 face value of bonds ("one dollar per bond"). Rudi said that CFM should still receive one dollar per bond for working on the CCMUA Offering and told Tuttle that he wanted FFSG to pay CFM the difference, which at the time was expected to be $200,000. On behalf of FFSG, Tuttle agreed to pay CFM one dollar per bond. This agreement was not disclosed. Tuttle had intended to include a structuring fee in the underwriters' discount, --------- FOOTNOTES --------- -[3]- A GIC is a contract that guarantees the interest, income or yield on the use of funds for a specified period of time in exchange for a fee. 5 -------------------- BEGINNING OF PAGE #6 ------------------- representing the work that First Fidelity and Butcher & Singer had done in putting the CCMUA Offering together. Tuttle decided to increase the structuring fee to include the one dollar per bond kickback. Not only did Tuttle increase the structuring fee by one dollar per bond, but he also padded the other components of the underwriters' discount in anticipation of negotiating these fees downward with Rudi. Tuttle submitted the inflated fee schedule to Rudi for approval. Tuttle explained to Rudi that the structuring fee was to compensate FFSG and Butcher & Singer for the work they had done and that the third underwriter would not share in that fee. In further justification of the size of the structuring fee, Tuttle emphasized to Rudi that FFSG had some extra expenses, referring to the kickback on the CCMUA Offering. Contrary to his usual practice, Rudi did not negotiate the underwriters' discount and accepted the figure presented by Tuttle. The fee schedule that Tuttle submitted to the CCMUA on FFSG's behalf for the CCMUA Offering failed to disclose that the underwriters' discount included a kickback to CFM. In or about January 1990, Tuttle told Williams about FFSG's kickback to CFM. When pressed about the need for the kickback, Tuttle told Williams that they had no choice but to pay the money. Williams was concerned about the payment of a kickback and wanted to hide it from the Bank's internal auditors. He did so by arranging for FFSG's finder on the CCMUA Offering, Robert Jablonski ("Jablonski"), to pay CFM the kickback on FFSG's behalf. Williams so informed Tuttle, who told Rudi. 7. FFSG Makes Kickbacks to CFM The CCMUA ultimately issued approximately $237 million in bonds. At one dollar per bond, the kickback due CFM from FFSG was $222,000 ($237,000 less the $15,000 advisory fee paid directly to CFM by the CCMUA), rather than the $200,000 originally anticipated. In a series of payments ending December 3, 1990, FFSG paid $595,000 to Meadowlands Securities, Inc. ("Meadowlands"), Jablonski's company, which included Jablonski's finder's fee and FFSG's one dollar per bond kickback to CFM. Jablonski, in turn, paid $335,500 to Armacon Investment Company ("Armacon Investment") between February 27, 1990 and April 17, 1990.-[4]- Included in this $335,500 was FFSG's one dollar per bond kickback to CFM. Between March 9, 1990 and April 25, 1990, Armacon Investment disbursed $240,000 to CFM. Between March 7, 1990 and April 25, 1990, Armacon Investment distributed an additional $93,000 to Salema. As a result of Tuttle's actions, FFSG falsely recorded all payments to Jablonski, including both Meadowlands' finder's fee and the CFM kickback, as cash disbursements to Meadowlands. Nowhere in FFSG's municipal securities dealer books and records is there any record of any payment to CFM in connection with the CCMUA Offering. FFSG's municipal securities dealer books and records were also false because they overstated the finder's fee due Jablonski and Meadowlands. --------- FOOTNOTES --------- -[4]- Armacon Investment was owned by Joseph C. Salema ("Salema"), who was a fifty percent owner of CFM at the time. 6 -------------------- BEGINNING OF PAGE #7 ------------------- Tuttle then began to make arrangements to pay CFM the remaining $22,000 of the kickback. Tuttle decided to pay CFM the $22,000 from FFSG's profits on The Town of West New York Municipal Utilities Authority's March 1990 debt offering ("WNYMUA Offering"), for which FFSG and Butcher & Singer were also underwriters. Tuttle called Rudi and told Rudi to send FFSG a CFM invoice for $22,000 purportedly for CFM's work on the WNYMUA Offering, even though Rudi and Tuttle both knew that CFM had performed no work on the WNYMUA Offering. Rudi agreed and sent FFSG the requested invoice. FFSG paid CFM $22,000 from FFSG's and Butcher & Singer's profits on the WNYMUA Offering. Tuttle falsely recorded this payment to CFM on FFSG's municipal securities dealer books and records as a "consulting fee" on the WNYMUA Offering. 8. FFSG Makes Further Payments to CFM from a Variety of Bond Issues for CFM's Help on a Guaranteed Investment Contract for the CCMUA In late 1990, Tuttle and an investment banker at Butcher & Singer approached Rudi with the idea of reinvesting $20 million of the CCMUA's funds more efficiently by using a GIC. In or about January or February 1991, the CCMUA entered into the GIC. The GIC provider paid fees to FFSG and Butcher & Singer. By that time, Tuttle and the Butcher & Singer investment banker had decided to pay CFM a share of their firms' fees on the GIC. Specifically, they agreed that FFSG and Butcher & Singer would pay CFM $45,000 and $30,000, respectively. Tuttle arranged with Rudi to pay FFSG's share out of FFSG's profits on various municipal bond offerings for which FFSG was the lead underwriter. On each such bond offering, Tuttle told Rudi to send Tuttle an invoice for a certain amount of money for services relating to the particular offering. Rudi complied and submitted invoices to FFSG requesting payment to his and Salema's then registered broker-dealer, Armacon Securities, Inc. ("Armacon"). Each time Armacon sent FFSG an invoice, FFSG paid Armacon the specified amount from FFSG's profits on the invoiced offering even though Rudi and Tuttle both knew that CFM had performed no work on that offering. Tuttle then falsely recorded the payments on FFSG's municipal securities dealer books and records as an expense of the bond transaction referenced on the invoice. B. LEGAL DISCUSSION 1. FFSG Willfully Violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 FFSG, through Tuttle and Williams, willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, which prohibit fraud in the offer or sale, or in connection with the purchase or sale, of securities. Specifically, as a result of Tuttle's and Williams's undisclosed kickback schemes, FFSG defrauded Essex County, Irvington, and the CCMUA (collectively, the "Issuers") as well as investors. a. The Fraud on the Issuers 7 -------------------- BEGINNING OF PAGE #8 ------------------- FFSG, through Tuttle and Williams, engaged in schemes to defraud the Issuers by agreeing to pay kickbacks to the Payee and to CFM, agents of the Issuers, in exchange for underwriting business. Tuttle not only agreed to pay the kickbacks to the Payee and CFM, but also ensured that the Issuers' money, in whole or in part, would be used to fund the kickbacks, thus inflating the Issuers' underwriters' discounts or costs of issuance. For example, Tuttle factored in the kickbacks to the Payee when calculating the underwriters' discounts that he submitted to Essex County through the Payee on the Essex County Offerings, while on the CCMUA Offering, Tuttle directly charged most of the kickback to the CCMUA by including it as part of the structuring fee. Tuttle, on FFSG's behalf, submitted fee schedules on the Essex County Offerings, the Irvington BANs and the CCMUA Offering which failed to disclose that the underwriters' discounts or costs of issuance included kickbacks to the Payee or to CFM. The undisclosed kickback scheme was material to the Issuers. The fact that an issuer's agent was to receive kickbacks from an underwriter in exchange for the underwriting assignment is information that a reasonable issuer would likely consider important in deciding to sell its securities to the underwriter, especially when, as here, the kickbacks had a direct financial effect on the Issuers because the payments increased the underwriters' discounts or the costs of issuance.-[5]- A reasonable issuer would want to know that its underwriter had agreed to make secret payments to the issuer's financial consultant, treasurer or financial advisor because such arrangements and payments could compromise the independence and judgment of these agents and distort the underwriter selection process. b. The Fraud On Investors FFSG delivered the official statements on the Essex County Offerings, Irvington BANs and the CCMUA Offering to investors. These official statements were materially false and misleading because they misrepresented the underwriters' discounts or costs of issuance, and do not disclose the kickback scheme.-[6]- The --------- FOOTNOTES --------- -[5]- See SEC v. Washington County Utility District, 676 F.2d 218 (6th Cir. 1982) (undisclosed kickback scheme between underwriter and official of municipal securities issuer violated antifraud provisions); United States v. Rudi, 902 F. Supp. 452 (S.D.N.Y. 1995) (holding that securities fraud claim adequately pleaded when financial advisor allegedly caused the issuer to sell its bonds to an underwriter for less than the bonds would have brought but for the fraud). -[6]- As the Commission has repeatedly recognized in discussing the responsibilities of municipal underwriters to investors: By participating in an offering, an underwriter makes an implied recommendation about the securities. Because the underwriter holds itself out as a securities professional, and especially in light of its position vis-a-vis the issuer, this recommendation (continued...) 8 -------------------- BEGINNING OF PAGE #9 ------------------- omitted information concerning FFSG's kickbacks to Essex County's financial consultant and Treasurer, the Irvington Municipal Council's financial consultant and the CCMUA's financial advisor was material to investors because it increased the underwriters' discounts or costs of issuance at Essex County's, Irvington's and the CCMUA's expense. The existence of the kickbacks also casts doubt on the integrity of the offering process, including the honesty of the underwriter.-[7]- As the Commission has said: "[I]nformation concerning financial and business relationships and arrangements among the parties involved in the issuance of municipal securities may be critical to an evaluation of an offering." Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others, Exchange Act Release No. 33741, 7 Fed. Sec. L. Rep. 72,442 at 62,198 (Mar. 9, 1994) (footnote omitted).-[8]- --------- FOOTNOTES --------- -[6]-(...continued) itself implies that the underwriter has a reasonable basis for belief in the truthfulness and completeness of the key representations made in any disclosure documents used in the offerings. Exchange Act Release No. 26100 (Sept. 22, 1988) (proposing adoption of Rule 15c2-12), 4 Fed. Sec. L. Rep. (CCH) 25,097, at 18,175, 18,183. This interpretation was clarified and modified by Exchange Act Release No. 26985, 4 Fed. Sec. L. Rep. (CCH) 25,098, at 18,199-10 to 18,200 (Jun. 28, 1989), and reaffirmed by the Commission in Exchange Act Release No. 33741, 7 Fed. Sec. L. Rep. (CCH) 72,442 at 62,193 (Mar. 9, 1994). See also Exchange Act Release No. 34961, [1994-95 Transfer Binder] Fed. Sec. L. Rep. 85,456 at 85,950 (Nov. 10, 1994) (making certain amendments to Rule 15c2-12). Disclosures in an official statement about the underwriters' discount and costs of issuance are key representations. See MSRB rule G-32(a)(ii)(A). -[7]- See Washington County, 676 F.2d at 224-25 & n.15 (kickback scheme between official of a municipal securities issuer and the underwriter was material because it increased the costs of issuance and "an investor, had he known of the payments, could have reasonably concluded . . . that the District's bonds were a poor investment because the quality of the District's management was suspect."). -[8]- There, the Commission noted: [S]uch information could indicate the existence of actual or potential conflicts of interest, breache3 of duty or ld ransactions . . . . Failure to disclose material information concerning such relationships, arrangements or practices may render misleading statements made in connection with the process . . . . In addition, investors reasonably expect participants in municipal securities offerings to follow standards and procedures established by such participants, or other governing authorities, to safeguard the integrity of the offering process; (continued...) 9 -------------------- BEGINNING OF PAGE #10 ------------------- c. Scienter FFSG acted with scienter. Tuttle, a senior investment banker with FFSG, agreed to make secret payments to the Payee and to CFM to secure underwriting business and factored these kickbacks into the fees he charged Essex County, Irvington, and the CCMUA. Williams, the head of FFSG, approved the payments to CFM. Tuttle and Williams each took steps to conceal the payments from the Bank's internal auditors and others. Specifically, Tuttle concealed the kickbacks to the Payee by disguising them on FFSG's municipal securities dealer books and records as expenses on the transactions for which the Payee submitted false invoices. On the CCMUA Offering, Tuttle and Williams concealed the kickbacks by directing the payments to CFM through Jablonski's company, Meadowlands, and by recording the payments on FFSG's municipal securities dealer books and records as "cash disbursements to Meadowlands," or as "consulting fees" to CFM on other municipal transactions. Such concealment is evidence of scienter. Tuttle knew that the kickback agreements were not disclosed to either the Issuers or to investors. Tuttle also knew that, because of the undisclosed kickback agreements, the official statements for the Essex County Offerings, the Irvington BANs, and the CCMUA Offering misrepresented the underwriters' discounts and costs of issuance. The actions of Tuttle and Williams are imputed to FFSG.-[9]- d. Nexus --------- FOOTNOTES --------- -[8]-(...continued) accordingly, material deviations from those procedures warrant disclosure. . . . Beyond existing specific disclosure requirements and guidelines, the range of financial and business relationships, arrangements and practices that need to be disclosed depends on the particular facts and circumstances of each case. If, for example, the issuer (or any person acting on its behalf) selects an underwriter, syndicate or selling group member, expert, counsel or other party who has a direct or indirect (for example, through a consultant) financial or business relationship or arrangement with persons connected with the offering process, that relationship or arrangement may be material. Areas of particular concern are undisclosed payments to obtain underwriting assignments and undisclosed agreements or arrangements, including fee splitting, between financial advisers and underwriters. If the adviser is hired to assist the issuer, such relationships, financial or otherwise, may divide loyalties. Id. at 62,199 (footnotes omitted). -[9]- See Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938 (1982); Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3d Cir. 1975). See also American Soc'y of Mechanical Eng'rs., Inc. v. Hydrolevel Corp., 456 U.S. 556, 565-66 (1982). 10 -------------------- BEGINNING OF PAGE #11 ------------------- The frauds were in the offer or sale and in connection with the purchase or sale of securities (the "nexus requirements"). The fraud here concerns the manner in which FFSG -- which was awarded contracts to purchase securities from Essex County, Irvington, and the CCMUA -- obtained this role and the manner in which the Payee and Rudi advised the Issuers. Moreover, the kickbacks on the Essex County Offerings, Irvington BANs and CCMUA Offering were charged, in part, to the Issuers, thus increasing the underwriters' discount or costs of issuance and decreasing the consideration received by the Issuers for their securities. Last, the bonds were sold to the public by means of official statements that omitted material facts. The kickbacks, therefore, satisfy the nexus requirements.-[10]- --------- FOOTNOTES --------- -[10]- See Washington County, 676 F.2d at 226 n.17; Rudi, 902 F. Supp. at 456-57. 11 -------------------- BEGINNING OF PAGE #12 ------------------- 2. FFSG Willfully Violated Section 15B(c)(1) of the Exchange Act and MSRB Rules G-8, G-17 and G-20 Section 15B(b) of the Exchange Act established the MSRB and empowers it to propose and adopt rules with respect to transactions in municipal securities by brokers, dealers and municipal securities dealers. Pursuant to Section 15B(c)(1), a broker, dealer or municipal securities dealer is prohibited from using the mails or any instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in violation of any rule of the MSRB. As a municipal securities dealer, FFSG is subject to Section 15B(c)(1) of the Exchange Act and the MSRB rules. In connection with the Essex County Offerings and the CCMUA Offering, FFSG, through Tuttle and Williams, willfully violated Section 15B(c)(1) of the Exchange Act and MSRB rules G- 8, G-17 and G-20. a. MSRB Rule G-8 MSRB rule G-8 requires municipal securities dealers to make certain books and records concerning their municipal securities business. Among the required books and records are blotters or other records of original entry containing: (1) all receipts and disbursements of cash with respect to transactions in municipal securities; and (2) all other debits and credits pertaining to transactions in municipal securities. MSRB rule G-8(a)(i). The rule requires that the information be recorded "clearly and accurately." MSRB rule G-8(b). FFSG failed to make accurate municipal securities dealer books and records. As a result of Tuttle's actions, FFSG created false municipal securities dealer books and records by recording the kickbacks to the Payee on transactions other than the Essex County Offerings. Similarly, as a result of Tuttle's and Williams's actions, FFSG also created false municipal securities dealer books and records by recording the kickbacks to CFM as payments to Jablonski. Thus, FFSG willfully violated Section 15B(c)(1) of the Exchange Act and MSRB rule G-8. b. MSRB Rule G-17 MSRB rule G-17 provides: In the conduct of its municipal securities business, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. MSRB rule G-17 is a fair dealing rule. The failure to disclose financial and other relationships between a fiduciary of an issuer and an underwriter that create potential or actual conflicts of interest violates MSRB rule G-17. See In the Matter of Lazard Freres & Co. LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Exchange Act Release No. 36419, 1995 SEC LEXIS 2818 (Oct. 26, 1995) (settled case). FFSG, through Tuttle and Williams, by paying kickbacks to the Payee and CFM, dealt unfairly with Essex County, Irvington and the CCMUA, and thus willfully violated Section 15B(c)(1) of the Exchange Act and MSRB rule G-17. 12 -------------------- BEGINNING OF PAGE #13 ------------------- c. MSRB Rule G-20 This rule, "Gifts and Gratuities," prohibits municipal securities dealers from: (1) giving any thing or service worth more than $100 per year; (2) to a person other than an employee or partner of such dealer; (3) if such payment or service is in relation to the municipal securities activities of the employer of the recipient of the payment or service. MSRB rule G-20(a). The rule specifically provides that "employer" includes the principal for whom the recipient of the payment or service is acting as agent or representative. The rule is intended to prohibit commercial bribery and covers payments to issuer officials. Order Approving a Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Recordkeeping and Record Retention Requirements Concerning Gifts and Gratuities, Exchange Act Release No. 34372, 1994 SEC LEXIS 2112 at [*4-*5] (July 13, 1994); Comments Requested Concerning Recordkeeping and Record Retention Relating to Gifts and Gratuities; Rules G-20, G-8 and G-9, MSRB Manual (CCH) 10,623 at 11,250 (Jan. 12, 1994). By paying kickbacks of over $175,000 to the Payee and in excess of $220,000 to CFM, FFSG, through Tuttle and Williams, gave to them each "a thing or service of value . . . in excess of $100." The Payee and CFM were neither an employee nor partner of FFSG; instead, they were agents or representatives of the Issuers. The kickbacks were directly related to the Essex County Offerings, the Irvington Offerings, and the CCMUA Offering. FFSG, therefore, willfully violated Section 15B(c)(1) of the Exchange Act and MSRB rule G-20. IV. FFSG has submitted an Offer which the Commission has determined is in the public interest to accept. Under the Offer, FFSG, without admitting or denying the findings herein, consents to the Commission's issuance of this Order, and agrees to pay disgorgement plus prejudgment interest in the amount of $1,793,309.43 and a civil penalty in the amount of $500,000.00. In determining that it is in the public interest that the Offer be accepted, the Commission has relied upon FFSG's undertaking set forth in its Offer that, within twenty-one (21) days of the date of this Order, FFSG will file a Form MSDW. Accordingly, IT IS HEREBY ORDERED that, pursuant to Section 21B(e) of the Exchange Act, FFSG shall, within twenty-one (21) days of the date of this Order, pay $1,793,309.43, representing disgorgement of $1,044,441.00 and prejudgment interest of $748,868.43. Payment shall be made by postal money order, certified check, bank cashier's check or bank money order, payable to the order of the "United States Securities and Exchange Commission." The payment shall be transmitted to the Comptroller, Securities and Exchange Commission ("Comptroller"), 450 Fifth Street, N.W., Washington, D.C. 20549, under cover of letter identifying the name and number of this administrative proceeding and the Respondent, and specifying that the payment is disgorgement and prejudgment interest. A copy of the cover letter and payment shall be simultaneously transmitted to Teri A. Brotbacker, Senior Attorney, Securities and Exchange Commission, 7 World Trade Center, New York, New York 10048. 13 -------------------- BEGINNING OF PAGE #14 ------------------- IT IS FURTHER ORDERED that, the disgorgement and prejudgment interest paid by FFSG shall be held by the Comptroller, to be utilized for payment to persons eligible to receive such funds pursuant to a plan of distribution, which shall be submitted by FFSG (or its successor) or the Division of Enforcement within 60 days from the date of the payment by FFSG. In the event that all or any portion of these funds remain after adjudication of any claims and disbursement of any funds, the remainder shall be disbursed to the United States Treasury in the manner described below in this Paragraph IV. In no event shall any portion of these funds be returned to FFSG or its agents, successors or assigns, or to any other defendant or respondent in this action or in any other action or proceeding brought or instituted by the Commission concerning the transactions, acts, practices and courses of business that are the subject of this Order. IT IS FURTHER ORDERED that FFSG shall comply with its undertaking to file a Form MSDW within twenty-one (21) days of the date of this Order. IT IS FURTHER ORDERED that, pursuant to Section 21B(a) of the Exchange Act, FFSG shall, within twenty-one (21) days of the date of this Order, pay a penalty to the United States Treasury in the amount of $500,000. Payment shall be made by postal money order, certified check, bank cashier's check or bank money order, payable to the order of the "United States Securities and Exchange Commission." The payment shall be transmitted to the Comptroller, under cover of letter identifying the name and number of this administrative proceeding and the Respondent, and specifying that the payment is a penalty pursuant to Section 21B(a) of the Exchange Act. A copy of the cover letter and payment shall be simultaneously transmitted to Teri A. Brotbacker, Senior Attorney, Securities and Exchange Commission, 7 World Trade Center, New York, New York 10048. By the Commission. Jonathan G. Katz Secretary 14