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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933
Release No. 7621 / January 6, 1999

ADMINISTRATIVE PROCEEDING
File No. 3-9799

In the Matter of

 Jean Costanza,
Respondent.

ORDER INSTITUTING A PUBLIC CEASE-AND-DESIST
PROCEEDING PURSUANT TO SECTION 8A OF THE
SECURITIES ACT OF 1933, MAKING FINDINGS,
AND IMPOSING CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist proceeding be and hereby is instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") against Jean Costanza ("Costanza"). II.

In anticipation of the institution of this proceeding, Costanza has submitted an Offer of Settlement, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except that Costanza admits the jurisdiction of the Commission over her and over the subject matter of this proceeding, Costanza, by her Offer of Settlement, consents to the entry of this Order Instituting a Public Cease-And-Desist Proceeding Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing Cease-and-Desist Order ("Order") and to the entry of the findings and the cease-and-desist order set forth below.

Accordingly, IT IS HEREBY ORDERED that a proceeding pursuant to Section 8A of the Securities Act be, and hereby is, instituted. III.

On the basis of this Order and the Offer of Settlement submitted by Costanza, the Commission finds that: 1

A. RESPONDENT

Jean Costanza ("Costanza") was the issuer’s bond counsel for eight note offerings (the "Note Offerings") related to the County of Orange ("Orange County" or the "County") Investment Pools (the "Pools") that raised a total of almost $1.425 billion. Costanza, as bond counsel, participated in preparing the official statements (the "Official Statements") for the Note Offerings and opined on the validity and tax-exempt status of the Note Offerings.

B. FACTS

1. Introduction

Costanza was the bond counsel for the Note Offerings. The Official Statements for seven of the eight Note Offerings, which Costanza participated in drafting, omitted material facts about the Pools’ investment strategy, the risks of that strategy, and the Pools’ investment losses. Accurate and complete disclosure about the Pools was material to investors because these matters affected the issuers’ ability to repay the Notes, as the funds pledged to repay the Notes were invested in the Pools and three of the offerings were conducted for the purpose of reinvesting the offering proceeds for profit. In addition, in two other Note Offerings, the Pools guaranteed repayment of the Notes.

In three of the Note Offerings, the Official Statements also omitted to disclose that the variable interest rate paid on the notes was subject to a 12% interest rate cap. The Official Statements represented that the Notes paid a variable interest rate but omitted to disclose that the interest rate would not exceed 12%. This interest rate cap was material to investors that had adopted policies against investing in securities with an interest rate cap.

The Official Statements for four Note Offerings that were tax-exempt (the "Tax-Exempt Offerings") also omitted to disclose information about the tax-exempt status. The Official Statement for each of these offerings represented that the interest on the notes would be tax-exempt. The Official Statement failed to disclose, however, that the issuer had improperly increased the size of the offering and, therefore, had jeopardized the tax-exempt status. Information about the tax-exempt status of the offering was material to investors because they would have wanted to know that their interest earnings might be taxable, thus reducing the earnings.

2. The Orange County Investment Pools

The Pools operated as an investment fund managed by the Orange County Treasurer-Tax Collector (the "Treasurer"), in which the County and various local governments or districts (the "Participants") deposited public funds. As of December 6, 1994, the Pools held approximately $7.6 billion in Participant deposits, which the County had leveraged to an investment portfolio with a book value of over $20.6 billion.

a. The Pools’ Investment Strategy

From at least April 1992 until December 1994, the Treasurer’s investment strategy for the Pools involved: (1) using a high degree of leverage by obtaining funds through reverse repurchase agreements on a short-term basis (less than 180 days); and (2) investing the Participants’ deposits and funds obtained through reverse repurchase agreements in debt securities (issued by the United States Treasury, United States government sponsored enterprises, and highly-rated banks and corporations) with a maturity of two to five years, many of which were derivative securities. The Pools’ investment return was to result principally from the interest received on the securities in the Pools. Leverage enabled the Pools to purchase more securities with the anticipation of increasing interest income. This strategy was profitable as long as the Pools were able to maintain a positive spread between the long-term interest rate received on the securities and the short-term interest rate paid on the funds obtained through reverse repurchase agreements.

b. The Pools’ Portfolio

During 1993 and 1994, the Treasurer, using reverse repurchase agreements, leveraged the Participants’ deposits to amounts ranging from 158% to over 292%. As of the end of June 1994, the Pools held $19.8 billion in securities, with approximately $7.2 billion in Participant deposits and about $12.6 billion in reverse repurchase agreements, resulting in leverage of about 274%.

During 1993 and 1994, the amount of derivatives in the Pools’ portfolio ranged from 27.6% to 42.2% of the portfolio. As of the end of June 1994, 38.2% of the Pools’ securities were derivatives. Most of the Pools’ derivative securities were inverse floaters, which paid interest rates inversely related to the prevailing interest rate. From January 1993 through November 1994, 24.89% to 39.84% of the Pools’ portfolio consisted of inverse floaters. As of the end of June 1994, 35% of the Pools’ portfolio was invested in inverse floaters. From January 1993 through November 1994, only 1.84% to 5.59% of the Pools’ portfolio consisted of securities that paid interest rates directly related to the prevailing interest rate (variable rate securities) or securities that paid interest rates that rose at certain stated intervals to certain stated rates (step-up securities). As of the end of June 1994, about 3.17% of the Pools’ portfolio was invested in variable and step-up securities.

c. The Pools’ Sensitivity To Interest Rate Changes And The Rise In Interest Rates During 1994

The composition of the Pools’ portfolio made it sensitive to interest rate changes. As interest rates rose, the market value of the Pools’ securities fell, and the interest received on the Pools’ inverse floaters also declined. Thus, the Treasurer’s investment strategy was profitable so long as interest rates, including the cost of obtaining funds through reverse repurchase agreements, remained low, the market value of the Pools’ securities did not decline, and the Pools had the ability to hold securities to maturity.

From April 1992 through 1993, U.S. interest rates remained low and relatively stable. Due to the low interest rates and the Pools’ investment strategy, the Pools earned a relatively high yield of approximately 8%. Beginning in February 1994, interest rates began to rise. This rise in interest rates resulted in: (1) an increase in the cost of obtaining funds under reverse repurchase agreements; (2) a decrease in the interest income on inverse floaters; (3) a decrease in the market value of the Pools’ debt securities; (4) collateral calls and reductions in amounts obtained under reverse repurchase agreements; and (5) a decrease in the Pools’ yield.

d. Orange County’s Bankruptcy

By early December 1994, the Pools had an unrealized decline in market value of about $1.5 billion. Shortly thereafter, on December 6, 1994, Orange County filed Chapter 9 bankruptcy petitions on behalf of itself and the Pools (the petition filed on behalf of the Pools was later dismissed). Between early December 1994 and January 20, 1995, the Pools’ securities portfolio was liquidated, incurring a loss of almost $1.7 billion on the Participants’ deposits of $7.6 billion, a 22.3% loss.

3. The Note Offerings

In July and August 1994, Costanza was the bond counsel for eight offerings of municipal securities conducted by Orange County, the Orange County Flood Control District (the "Flood Control District"), and the Placentia-Yorba Linda Unified School District ("Placentia USD") that raised a total of almost $1.425 billion. 2

a. The Taxable Note Offerings

Orange County, the Flood Control District, and Placentia USD raised $750 million through three offerings of taxable notes (the "Taxable Note Offerings") in 1994. The issuers conducted these offerings for the purpose of generating an anticipated profit by reinvesting the proceeds (together with funds equal to the estimated interest on the notes) in the Pools to earn an investment return that would be higher than the rate of interest payable to the Taxable Note investors. The issuers pledged these invested funds to secure repayment of the Taxable Notes, and, if the pledged funds were insufficient to pay principal and interest, the issuers would satisfy any deficiency with other moneys lawfully available to repay the notes in the respective issuer’s general fund attributable to the fiscal year in which the notes were issued.

The County issued $600 million in notes (the "$600 Million Taxable Notes") on July 8, 1994, described in an Official Statement dated July 1, 1994. These notes earned a variable interest rate reset monthly at the one-month London Interbank Offered Rate ("LIBOR") not to exceed 12% per annum. The $600 Million Taxable Notes were originally due on July 10, 1995. On June 27, 1995, the County and the noteholders entered into Rollover Agreements under which the maturity of the notes was extended from July 10, 1995, to June 30, 1996, and the interest rate paid on the notes was increased. On June 12, 1996, as part of its emergence from bankruptcy, the County repaid the notes with a portion of the proceeds from another County municipal securities offering.

On August 2, 1994, the Flood Control District issued $100 million in notes (the "$100 Million Taxable Notes") described in an Official Statement dated July 27, 1994. These notes earned a variable interest rate reset monthly at the one-month LIBOR plus .03% not to exceed 12% per annum. The notes matured, and were repaid, on August 1, 1995.

On August 25, 1994, Placentia USD issued $50 million in notes (the "$50 Million Taxable Notes") described in an Official Statement dated August 19, 1994. The notes matured, and were repaid, on August 24, 1995.

b. The TRAN Offerings

In 1994, the County conducted two tax and revenue anticipation note ("TRAN") offerings (the "TRAN Offerings") that raised a total of $200 million to fund its expected cash flow deficits, as it received revenue infrequently throughout the fiscal year but had constant working capital expenses. The Official Statements for these offerings represented that: the County would pledge certain anticipated revenues to pay the notes’ principal and interest; the revenue, when received, would be placed into a repayment account; the funds in the repayment account would be invested; and if the County lacked sufficient funds in the repayment account to repay the notes, the County would satisfy any deficiency from other moneys received or accrued during the fiscal year in which the notes were issued and lawfully available for repayment of the notes.

The County issued $169 million in TRANs (the "$169 Million TRANs") on July 5, 1994, described in an Official Statement dated June 27, 1994, and $31 million in tax-exempt TRANs (the "$31 Million TRANs") on August 11, 1994, described in an Official Statement dated August 5, 1994. The $169 Million TRANs and $31 Million TRANs were originally due on July 19, 1995 and August 10, 1995, respectively. On June 27, 1995, the County and the noteholders entered into Rollover Agreements under which the maturity of the TRANs was extended to June 30, 1996. On June 12, 1996, as part of its emergence from bankruptcy, the County repaid the TRANs with a portion of the proceeds from another County municipal securities offering.

c. The $299.66 Million Pooled TRAN Offering

On July 1, 1994, the County raised $299.66 million through an offering of tax-exempt TRANs (the "$299.66 Million Pooled TRAN Offering"). The notes matured, and were repaid, on July 28, 1995.

As represented in the Official Statement dated June 7, 1994, the County used the offering proceeds to purchase $299.66 million in notes issued by the 27 school districts (the "School Districts"), which used the proceeds to fund their cash flow deficits. The Official Statement represented that to repay the notes, the County would deposit certain funds pledged by the School Districts into a repayment account which the County intended to invest in the Pools; in turn, the County intended to pledge those funds to repay the investors. The Pools also guaranteed repayment of the $299.66 Million Pooled TRANs through a Standby Note Repurchase Agreement, under which the County Treasurer, as fund manager of the Pools, agreed to purchase the School Districts’ notes to the extent that the school districts did not meet their obligations of repayment.

d. The Teeter Note Offerings

In 1994, Orange County conducted two offerings of Teeter Notes (the "Teeter Note Offerings"). The purpose of these offerings was to fund the County’s Teeter Plan, an alternate method of property tax distribution whereby the County pays local taxing entities (such as school districts) their share of property taxes upon levy rather than actual collection and the County then retains all property taxes, and the penalties and interest thereon, upon collection.

The first Teeter Note Offering was conducted on July 20, 1994, for $111 million (the "$111 Million Teeter Notes"). These notes were described in an Official Statement dated July 13, 1994. These notes earned a variable interest rate reset monthly at one-month LIBOR not to exceed 12% per annum. The second Teeter Note Offering was conducted on August 18, 1994, for $64 million (the "$64 Million Teeter Notes"). These notes were described in an Official Statement dated August 12, 1994. These notes earned a variable interest rate reset monthly at 70% of one-month LIBOR not to exceed 12% per annum. The $111 Million and $64 Million Teeter Notes matured, and were repaid, in part with proceeds from a June 30, 1995 Teeter bond offering.

The Official Statements for the Teeter Note Offerings represented that the County planned to deposit certain delinquent tax payments, penalties, and interest collections in accounts pledged to repay the Teeter Notes and to then invest those funds in the Pools. The Official Statements for the Teeter Note Offerings represented that the County anticipated that the funds in the repayment account would not be sufficient to pay the principal and interest on the Teeter Notes at maturity and that the County estimated that, at maturity of the Teeter Notes, approximately $70 million would be available in the repayment account to pay the principal and interest on the $175 million in Teeter Notes. The Official Statements further represented that this anticipated deficiency in the repayment account would be satisfied from moneys received under Standby Note Purchase Agreements, which agreements obligated the Treasurer (as "fund manager" of the Pools) to purchase the Teeter Notes, and from other moneys lawfully available to the County for repayment from revenues received or attributable to the fiscal year in which the notes were issued.

4. Costanza’s Role in the Note Offerings

Costanza was bond counsel for the Note Offerings. As bond counsel, Costanza issued opinions regarding the legality and tax-exempt status of the Notes, prepared resolutions authorizing the issuance of the Notes, and coordinated the documents for closing the transaction. In seven of the Note Offerings (the $299.66 Million Pooled TRAN Offering excluded), Costanza also participated in drafting the Official Statements, including the disclosure concerning the Pools. 3 In fact, her contracts with the issuers of the Notes required that she assist in preparing and reviewing the Official Statements for the Note Offerings. Moreover, the officials of the County and Flood Control District would not sign the Official Statements without Costanza’s approval of the Official Statements.

5. The Omissions And Costanza’s Knowledge

a. The Pools 4

(1) The Omissions

(a) The Pools’ Investment Strategy

The disclosure in the Official Statements for the Note Offerings regarding the Pools’ investment strategy was misleading because it failed to disclose material information, including: (1) the Pools’ investment strategy was predicated upon the assumption that prevailing interest rates would remain at relatively low levels; (2) the Pools’ use of leverage through reverse repurchase agreements was constant, high, and a major part of the Pools’ investment strategy; and (3) the Pools had a substantial investment in derivative securities, particularly inverse floaters.

(b) The Risks Of The Pools’ Investment Strategy

The disclosure in the Official Statements regarding the risks of the Pools’ investment strategy was misleading because it omitted material information about the Pools’ sensitivity to rises in interest rates. Specifically, the Official Statements failed to disclose that because of the Pools’ high degree of leverage and substantial investment in inverse floaters, rising interest rates would have a negative effect on the Pools, including: (1) the Pools’ cost of obtaining funds under reverse repurchase agreements would increase; (2) the Pools’ interest income on the inverse floaters would decrease; (3) the Pools’ securities would decline in market value; (4) as the value of the securities fell, the Pools would be subject to collateral calls and reductions in amounts obtained under reverse repurchase agreements; (5) the Pools’ earnings would decrease; (6) the Pools would suffer losses of principal at certain interest rate levels; and (7) if the Pools’ began to suffer lower earnings or losses of principal, certain Participants could withdraw their invested funds, leaving the County and other Participants such as the Flood Control District who were required to deposit their funds with the Treasurer to absorb any losses.

(c) The Pools’ Investment Results

The disclosure in the Official Statements regarding the Pools’ historic investment results was misleading because it omitted material information regarding the Pools’ investment results during the first half of 1994 when interest rates were rising. Specifically, the Official Statements omitted to disclose that as a result of rising interest rates in 1994, the market value of the Pools’ securities was declining, the Pools were subject to collateral calls and reductions in amounts obtained under reverse repurchase agreements, and the Pools’ costs of obtaining funds under reverse repurchase agreements were increasing.

(2) Costanza’s Knowledge About The Pools And Drafting Of The Official Statements

While preparing the Official Statements, Costanza received information concerning the Pools’ investment strategy, the risks of that strategy, and the Pools’ recent investment results. Costanza, however, did not assure that this information about the Pools was disclosed in the Official Statements.

(a) March 1994 Meetings

In late March 1994, Costanza and others participating in preparing the Official Statements for the Note Offerings, including the County’s Assistant Treasurer and a representative from the County Counsel’s Office, met with the rating agencies and two potential institutional investors in New York City to discuss the upcoming Note Offerings. During the meetings, the rating agencies and the potential investors questioned a County official about the Pools and the effect the recent rise in interest rates had had on the Pools. The official responded that the Pools used leverage through reverse repurchase agreements and invested in derivative securities, including inverse floaters.

(b) The Media Coverage Of the Pools

From January 31 through June 30, 1994, articles appeared in the media regarding the Pools. The articles reported that the Treasurer admitted that: he used reverse repurchase agreements to leverage the Pools’ $7.5 billion in deposits to $19.5 billion in investments; 20% of the $19.5 billion portfolio was invested in derivative securities; his strategy was to borrow short-term and invest in medium-term securities; the value of the Pools’ portfolio had "been hit by rising interest rates"; and as a result of rising interest rates and the declining market value of the Pools’ securities, the County had recently experienced up to $300 million in collateral calls under reverse repurchase agreements. These articles also reported that many believed that the investment strategy was too risky for public funds and exposed the Pools to very large losses. Costanza knew that there were a number of articles about the Pools published in numerous newspapers and received from the County by facsimile some of the articles.

(c) May 1994 Telephone Call With A Rating Agency

On May 9, 1994, Costanza and other participants in the Note Offerings, including the County’s Assistant Treasurer and a representative from the County Counsel’s Office, discussed the Pools by telephone with one of the rating agencies. During the conversations, the rating agency asked a County official about the news articles concerning the Pools. One of the topics discussed during the telephone call was the Pools’ sensitivity to changes in the interest rate. The County official told the rating agency that the Pools held floating rate notes to hedge against rises in interest rates and inverse floating rate notes to hedge against declines in interest rates and that, "as long as the movements didn’t occur precipitously all at once," changes in the interest rate should not be a problem for the Pools. According to Costanza’s notes, the County official stated in this regard:

"(The County official) expect(ed interest rates) to go up . . . 25 (basis points)

. . .

If run through 700 m(illion) ((i)n addition to 1.5 B(illion)) -- what happens:

If i(nterest) rates go up 300 (basis points) DISASTER

. . .

(Short term interest) rates go up 200 (basis points and) stay=danger! (If interest rates go up) 100 (basis points) collateral gone"

Another topic discussed during the telephone call was collateral calls suffered by the Pools as a result of recent rises in interest rates. In this regard, Costanza’s notes of the conversation stated that the County official stated that the Pools had suffered a total of $300 million of collateral calls since January 1994, including $40 million dollars of collateral calls during April 1994. 5

(d) The Adoption Of, And Changes To, The Disclosure In A Prior Offering

As a result of the media coverage and the rating agency’s questions regarding the Pools, one of the professionals participating in drafting the Official Statements obtained and reviewed a copy of the Official Statement for a 1993 taxable note offering conducted by another local government located in Southern California (the "Prior Offering"). The Official Statement for the Prior Offering contained disclosure regarding the issuer’s investment pool (the "Prior Pool").

On June 17, 1994, the County, after consultation with Costanza and other professionals and County officials participating in drafting the Official Statements, determined to revise the disclosure about the Pools to be similar to the Prior Pool disclosure. Indeed, much of the disclosure in the Official Statements for the Note Offerings was copied directly from the Official Statement for the Prior Offering. The County, in consultation with Costanza and the others who participated in drafting the Official Statements, however, made some critical changes to the disclosure in the Prior Offering for use in the Note Offerings. The changes to the disclosure principally related to the Pools’ reverse repurchase position and derivative holdings. Costanza was aware of these changes and did not object to them.

First, with respect to reverse repurchase agreements, both offerings stated that "(f)rom time to time" the pools engaged in reverse repurchase transactions. The Prior Offering, however, disclosed that the Prior Pool had engaged in no reverse repurchase agreements as of the end of the prior quarter and that the maximum amount of the Prior Pool’s portfolio that could be pledged under reverse repurchase agreements was 25%. In contrast, the Note Offerings only disclosed that "a significant portion" of the Pools’ securities were pledged under reverse repurchase agreements but did not disclose that the Pools were leveraged by about 274% and that the Pools’ investment strategy was based on such leverage. Second, with respect to derivative investments, the Prior Offering specifically disclosed the dollar amount of derivative securities held by the pool and the structure of the derivatives. In contrast, the Note Offering only disclosed the Pools’ investment in fixed and floating rate securities but did not specifically disclose the Pools’ dollar investment in inverse floaters.

b. Omission Of The 12% Interest Rate Cap

The Official Statements for the $600 Million Taxable Note Offering, the $111 Million Teeter Note Offering, and the $100 Million Taxable Note Offering each represented that the notes paid a variable interest rate connected to the one-month LIBOR. These Official Statements, however, failed to disclose the fact that the notes contained a 12% cap on the maximum variable interest rate that would be paid by the issuer.

The existence of the 12% interest rate cap was material to the investors, even though LIBOR never reached 12% during the term of the Notes and the interest rate cap, therefore, never limited the interest rate paid to investors. Several investors had a policy against purchasing securities that had an interest rate cap and would not have purchased the notes had they known of the interest rate cap.

Costanza knew or should have known of the interest rate cap. The existence of this interest rate cap was stated in three documents relating to the issuance of these Notes: the resolutions of the Boards of Supervisors of Orange County and the Flood Control District authorizing the issuance of the notes; the issuers’ certificates stating that the amount of the offering was in compliance with state law; and the sample notes. Costanza participated in preparing the resolutions and the sample notes expressly stating the interest rate cap. Costanza also received all of these documents as part of the official transcript for each of these offerings that was provided to all professionals participating in the offering. Despite this knowledge, Costanza failed to assure that the Official Statements for the three offerings disclosed the interest rate cap.

c. Omissions Concerning The Tax-Exempt Status Of The Notes

In 1994, the County conducted four tax-exempt offerings: the $169 Million TRAN Offering; the $31 Million TRAN Offering; the $299.66 Million Pooled TRAN; and the $64 Million Teeter Note Offering (collectively, the "Tax-Exempt Offerings"). In order for interest on the notes to be tax-exempt to the investors, however, the County and the School Districts that participated in the $299.66 Million Pooled TRAN were required to conduct the offerings in compliance with the Internal Revenue Code and Treasury Regulations. If they failed to comply with these provisions, the Internal Revenue Service (the "IRS") may deem the interest on the notes to be taxable and may then seek from the investors taxes on the interest earned on the arbitrage bonds. See Harbor Bancorp & Subsidiaries v. Commissioner of Internal Revenue, 115 F.3d 722 (9th Cir. 1997), cert. denied, 118 U.S. 1035 (1998).

Costanza advised the County and the School Districts to take certain actions that had the effect of improperly increasing the size of the Tax-Exempt Offerings. As a result, there was a risk that the IRS could declare that the investors were liable for taxes on the note interest. Costanza had notice that the County’s and the School Districts’ actions to increase the size of the Tax-Exempt Offerings did not comply with the Internal Revenue Code and Treasury Regulations and could jeopardize the tax-exempt status of the offerings.

In each of the Tax-Exempt Offerings, Costanza, as bond counsel, issued an opinion stating that the interest on the notes was exempt from federal income tax. She also participated in drafting the Official Statements for the Tax-Exempt Offerings, which represented that the interest on the notes was tax-exempt. Costanza, however, failed to disclose in the tax opinion or the Official Statements the material information that the County and the School Districts took certain actions that had the effect of improperly increasing the size of the Tax-Exempt Offerings and that, as a result, there was a risk that the IRS could declare that the investors were liable for taxes on the note interest.

C. LEGAL DISCUSSION

1. Costanza Violated Sections 17(a)(2) And (3) Of The Securities Act In The Offer And Sale Of The Notes

Sections 17(a)(2) and (3) of the Securities Act make it unlawful for any person, through the means or instruments of interstate commerce or the mails, in the offer or sale of any security:

(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Scienter is not required to prove violations of Sections 17(a)(2) or (3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 697 (1980). Violations of these sections may be established by showing negligence. SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997); SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992). Accordingly, Costanza, through negligent conduct, violated Sections 17(a)(2) and (3) of the Securities Act in the offer and sale of the Notes.

a. The Omissions Were Material

Information about the Pools, the interest rate cap, and the tax-exempt status of the offerings were material to the Note investors. Information is material if there is a substantial likelihood that a reasonable investor in making an investment decision would consider it as having significantly altered the total mix of information made available. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

Accurate and complete disclosure about the Pools was material to investors because it affected the sources of repayment for the Notes. In particular, in all of the Note Offerings, the funds pledged to repay the securities were invested in the Pools, and, in the two of the Teeter Note Offerings, the Pools guaranteed repayment of the securities. Disclosure of the interest rate cap was material to investors that had adopted policies against investing in securities with an interest rate cap. Disclosure of the risk that the tax-exempt status of the Tax-Exempt Offerings had been jeopardized was material to investors as they could have been held liable for the unpaid taxes on the interest received.

b. Costanza Should Have Known That The Official Statements Were Materially Misleading

Costanza, as bond counsel for the Note Offerings, participated in drafting the disclosure in the Official Statements for the Note Offerings that omitted material information and issued the tax opinion for the Tax-Exempt Offerings. Costanza also knew or reasonably should have known material information about the Pools, the Notes’ interest rate, and the tax-exempt status of the Tax-Exempt Offerings could have been jeopardized. From participating in preparing the Official Statements and issuing the tax opinion for the Tax-Exempt Offerings, Costanza reasonably should have known that the Official Statements omitted to disclose material information that she knew or reasonably should have known about the Pools, the Notes’ interest rates, and the tax exempt status of the Tax-Exempt Offerings could have been jeopardized.

2. Conclusion

Accordingly, based on the foregoing, the Commission finds that Costanza violated Sections 17(a)(2) and (3) of the Securities Act. IV.

Costanza has submitted an Offer of Settlement in which, without admitting or denying the findings herein, she consents to the Commission’s entry of this Order, which: (1) makes findings, as set forth above; and (2) orders Costanza to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act.

V.

In view of the foregoing, the Commission deems it appropriate to accept the Offer of Settlement submitted by Costanza. Accordingly, IT IS HEREBY ORDERED that, pursuant to Section 8A of the Securities Act, Costanza shall, effective immediately, cease and desist from committing or causing any violation and any future violation of Sections 17(a)(2) and (3) of the Securities Act.

By the Commission.

Jonathan G. Katz

Secretary


FOOTNOTES

1

/ The findings herein are made pursuant to Costanza’s Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding.

2

/ Orange County, the Flood Control District, and related parties previously settled enforcement proceedings relating to the Note Offerings. See SEC v. Citron , Civil Action No. SA CV 96-0074 (C.D. Cal. Jan. 24, 1996); In re County of Orange, California , Securities Act Rel. No. 7260 (Jan. 24, 1996).

3

/ Other participants in the Note Offerings were County officials, the issuer’s financial marketing specialist, the underwriter, and disclosure counsel.

4

/ For purposes of this section, the terms "Note Offerings" and "Notes" shall exclude the $299.66 Million Pooled TRAN Offering.

5

/ Both rating agencies gave each of the Note Offerings the highest ratings available for a municipal note offering.

http://www.sec.gov/litigation/admin/33-7621.htm


Modified:01/06/1999