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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

April 22, 2004

ADMINISTRATIVE PROCEEDING
File No. 3-11462


In the Matter of

IRA WEISS, and
L. ANDREW SHUPE II,

Respondents.


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ORDER INSTITUTING PUBLIC
ADMINISTRATIVE AND CEASE-AND-
DESIST PROCEEDINGS PURSUANT TO
SECTION 8A OF THE SECURITIES
ACT OF 1933, AND SECTIONS 15(b)
AND 21C OF THE SECURITIES
EXCHANGE ACT OF 1934

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Ira Weiss ("Weiss), and L. Andrew Shupe II ("Shupe"), and that public administrative proceedings be, and hereby are, instituted pursuant to Section 15(b) of the Exchange Act against Shupe.

II.

As the result of an investigation, the Division of Enforcement alleges that:

A. SUMMARY

This matter involves the fraudulent offer and sale by the Neshannock Township School District (the "School District") in June 2000, of $9,600,000 of General Obligation Notes, Series of 2000, dated May 15, 2000 and maturing May 15, 2003 (the "Notes"). The Notes were offered and sold to investors based on a legal opinion, issued knowingly or recklessly by Weiss, to the effect that the interest thereon would be exempt from federal taxation, and on a representation that the note proceeds would be used to fund the School District's capital improvement projects. Both of these statements, set forth in School District's disclosure document (the "Official Statement"), were materially false and misleading. In addition, at the closing for the Notes, Weiss knowingly or recklessly rendered another opinion to the effect that nothing had come to his attention that led him to believe that the Official Statement was materially inaccurate or incomplete.

The tax-exempt status of the Notes, was dependent upon, among other matters, the School District reasonably expecting on an objective basis to spend substantially all of the Note proceeds on capital projects within three years of the Notes' issuance. However, the School District had explicitly advised Weiss that it had not made any final decisions on its primary capital project and that it did not want to be locked into undertaking the controversial project of renovating or adding to an existing school building by virtue of the financing. Weiss, nevertheless, reassured School Board members that as long as they "intended" to undertake the aforementioned project, the School District was not actually required to spend the money or to do the project in order to keep the arbitrage profit.

Thereafter, a School District official executed an inaccurate certificate, prepared by Weiss, that concerned the School District's plans to expend Note proceeds during the three-year period on capital projects. However, at all relevant times, the School District intended to use the note proceeds solely to obtain $225,000 of interest rate arbitrage profit. The School District's intention created a significant risk that the interest from the Notes would not be exempt from federal income tax. Indeed, after the Notes closing, the Internal Revenue Service ("IRS") issued a preliminary determination that the Notes were taxable arbitrage notes. The School District and the IRS subsequently entered into a closing agreement that, among other things, preserves the tax-exempt status of the Notes.

Moreover, at all relevant times, Shupe had marketed the issuance of the Notes to the School District as a way to earn $225,000 of interest rate arbitrage profit. Indeed, Shupe's profit calculations were based on the assumption that no net Note proceeds would be spent within three years. Furthermore, the Official Statement, which Shupe prepared, (1) falsely represented that the purpose of the offering, was to "provide funds for capital improvement projects of the School District and to pay all costs and expenses related to the issuance of the Notes…[;]" and (2) recited that the School District's bond counsel had rendered a legal opinion to the effect that the interest on the Notes was exempt from federal income taxation.

Consequently, the School District made untrue statements of material fact and omitted to state material facts in connection with the offer and sale of the Notes in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Further, Weiss and Shupe each made untrue statements of material fact and omitted to state material facts in connection with the offer and sale of the Notes in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Also, Weiss caused, and Shupe willfully aided and abetted and caused, the School District's violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

B. THE RESPONDENTS

1. Weiss, age 55, is an experienced public finance attorney located in Pittsburgh, Pennsylvania. In 2000, Weiss also served as solicitor to numerous school districts, municipalities and authorities in western Pennsylvania. He served as bond counsel to the School District and, in connection with that position, knowingly or recklessly issued an unqualifed legal opinion to the effect that interest on the Notes would be exempt from federal income taxation. Weiss also knowingly or recklessly rendered another opinion to the effect that nothing had come to his attention that led him to believe the Official Statement was materially inaccurate or incomplete.

2. Shupe, age 60, was, in 2000, President and Chief Executive Officer of Quaestor Municipal Group, Inc. ("Quaestor"), a registered broker-dealer. In 2000, he also held numerous securities licenses, including a series 52 (municipal securities representative) and series 53 (municipal securities principal) securities license. Shupe has worked as a public finance investment banker for various broker-dealers registered with the Commission since 1984. Shupe prepared the School District's the Official Statement, which contained the material disclosures and/or omissions to the investing public that are the subject of these proceedings.

E. RELATED PARTIES

1. The School District is a school district duly organized under the Pennsylvania School Code of 1949, as amended, and located in Lawrence County, Pennsylvania. The School District is governed by a board ('School Board"), comprised of nine unpaid, elected school directors.

2. Quaestor was a small broker-dealer based in Pittsburgh, Pa, that specialized in underwriting municipal securities. Quaestor was the corporate successor to Potter, Shupe & Associates, a firm co-founded by Shupe in 1989. In 2000, Quaestor was registered with the Commission as a broker-dealer but voluntarily withdrew its registration in April 2001. Quaestor served as the underwriter for the Notes.

F. FACTS

1. In early 2000 Shupe, as a representative of Quaestor, approached the School District and proposed that it issue up to $10 million of purportedly tax-exempt three-year notes. At all relevant times, Shupe advised the School Board that, given then-current market conditions, if the School District were to issue $9.6 million of tax-exempt three year notes, and to reinvest the proceeds in U.S. Treasury obligations, $225,000 would be available for capital improvements at closing, an amount equal to the excess investment earnings, net of costs of issuance. Shupe also suggested that the School District retain Weiss as bond counsel.

2. Under the relevant federal tax law provisions, issuers of tax-exempt debt for capital projects must reasonably expect on the date of issuance to satisfy certain "spend-down requirements." These spend-down requirement include (i) within six months of the date of issuance incurring a binding obligation to a third party to expend at least five percent of the net proceeds on the capital project, (ii) proceeding with due diligence on the capital projects until completion, and (iii) expending within three years at least eighty-five percent of the net proceeds of the borrowing on capital projects. Under the relevant IRS regulations, an issuer's expectations are considered reasonable only if a prudent person in the same circumstances as the issuer would have those same expectations, based on all the objective facts and circumstances.

3. Bond counsel generally issues one or more legal opinions for the benefit of investors, including an opinion as to the tax-exempt status of publicly offered municipal obligations. The industry standard for such an opinion is that it must be "unqualified," which is to say it would be unreasonable for a court to hold to the contrary. In the alternative, bond counsel may render an unqualified opinion as to federal income tax matters if and only if, upon due consideration of the material facts and applicable law, the IRS would concur or acquiesce in the conclusions stated in the opinion.

4. When Shupe initially approached the School District, it had a general need to either renovate or add to an existing school building. This project, which was estimated to cost about $10 million, was controversial. The School Board had not conducted a demographic study needed to justify an addition, had not formally hired an architect, and had not resolved amongst themselves issues such as whether renovating existing classrooms or constructing new classrooms would be more appropriate. Preliminary cost estimates suggested that the School District also had other, smaller, capital needs totaling $1.5 million, such that in aggregate the School District had about $11.5 million of possible capital expenditures.

5. The School District solicitor expressed concerns about the School District borrowing funds before it was ready to start the underlying capital projects. In particular, the solicitor communicated to Weiss that the School District had not decided which capital projects they were going to undertake, and did not what to be locked into undertaking the renovation project because of the financing. In response, Weiss wrote, on or about May 2, 2000, an opinion letter in which he stated that because "there are capital projects being contemplated for which proceeds will be used should the projects be undertaken," it was his belief that the issuance of the Notes was "totally proper".

6. On or about May 8, 2000, Shupe and Weiss made a joint presentation to the School Board concerning the issuance of the Notes. Shupe submitted a written financing proposal in which he asserted that "school districts have and are borrowing in advance of projects just to invest the proceeds for three years and legally keep the positive investment earnings," and listed $225,000 as the total amount available for capital improvements after the issuance of the Notes. Shupe's oral presentation tracked his written proposal.

7. Furthermore, during the joint representation, Weiss responded to an inquiry from a School Board member, concerning the consequences if the School District did not spend any money on the controversial renovation project. Weiss's response was that so long as the School District "intended" to undertake the project, which he understood it did, then the School District was not actually required to spend the money or to do the project in order to keep the profit. Weiss did not explain that Neshannock had to have objectively reasonable expectations of (i) spending substantially all of the Note proceeds within three years, (ii) entering into a binding commitment within six months, or (iii) proceeding with due diligence to completion.

8. At all relevant times, Shupe and Weiss knew, or were reckless in not knowing, that the $225,000 estimate of arbitrage profits assumed that the School District would not spend any of the principal of the Note proceeds on capital projects.

9. Quaestor was contractually obligated to prepare the Official Statement for the Notes on behalf of the School District. The Official Statement prepared by Shupe represented that the net proceeds from the sale of the Notes would be used to provide funds for capital improvement projects of the School District. The Official Statement did not accurately describe the use of the Note proceeds, and did not disclose the resulting risk to the Notes' purported tax-exempt status. The Notes were offered and sold by Quaestor to investors at interest rates commensurate with their purported tax-exempt status.

10. Shupe prepared and circulated a preliminary official statement to, among others, Weiss. The preliminary draft, like the Official Statement itself, represented that the purpose of the issue was to provide funds for capital improvement projects and to pay all costs and expenses related to the issuance of the Notes. No mention was made of the School District's plan to earn arbitrage profits; nor was there any disclosure of the resulting risk to the tax-exempt status of the Notes. The preliminary draft also recited that the School District's bond counsel had rendered a legal opinion to the effect that the interest on the Notes was exempt from federal income taxation. Not only did Weiss review the preliminary draft of the official statement, including the above representations, but he also made comments with respect thereto.

11. At all relevant times, Shupe and Weiss knew or were reckless in not knowing that the Official Statement failed to disclose the true purpose of the offering which was to gain $225,000 in arbitrage profits.

12. In June 2000 Weiss asked the School District's superintendent to provide a letter setting forth the capital projects (and their anticipated estimated costs) which the School District was "contemplating undertaking" over the next three years. In response, the superintendent gave to Weiss a two-page list of thirty-three such projects, but no cost estimates. Indeed, Weiss never obtained any written cost estimates for any of Neshannock's potential capital projects prior to the closing for the Notes.

13. Moreover, at all relevant times, Weiss and Shupe each knew, or was reckless in not knowing, that the School Board had yet to resolve which of the smaller capital projects had priority.

14. At the closing for the Notes, a School District official executed, among other documents, a thirteen-page tax certificate drafted by Weiss that contained, on page six, a representation that the School District reasonably expected to satisfy the spend-down requirements of the federal tax law. In fact, as Weiss knew or was reckless in not knowing, although the School District did intend at some point to proceed with some of the capital projects, the School District was not certain when it would enter into any binding obligations and did not plan to spend a significant portion of the Note proceeds within three years.

15. At the closing for the Notes, Weiss knowingly or recklessly rendered an unqualified opinion addressed to Noteholders to the effect that the Notes were tax-exempt. Weiss also knowingly or recklessly rendered an opinion, addressed to Noteholders, to the effect that nothing had come to his attention that led him to believe the Official Statement was materially inaccurate or incomplete.

16. Shortly after the closing on the Notes, the School District, at the suggestion of Shupe, invested the net Note proceeds in a Federal Home Loan Bank obligation maturing within sixty days of the maturity date for the Notes. The School District did not enter into any formal commitment to expend any portion of the Note proceeds within six months, nor did it expend any portion of the net Note proceeds on any capital project within three years.

17. In or about November 2000, the IRS commenced an examination of the Notes. Shortly thereafter, the School District decided to redeem the Notes on May 15, 2001, the first call date. The redemption price for the Notes was paid from the proceeds of the Notes. In September 2001, the IRS issued a preliminary determination that the Notes were taxable arbitrage notes. In the IRS's view, the School District had issued the Notes without any reasonable expectation to expend the proceeds on capital projects. The School District and the IRS entered into a closing agreement that, among other things, provides for a payment by the School District to the IRS and preserves the tax-exempt status of the Notes. The closing agreement also provides that it is not to be construed as an admission by the School District that it acted wrongly with respect to the Notes.

18. While engaged in the foregoing acts, the School District, Weiss and Shupe directly or indirectly made use of the mails or the means and instruments of transportation and communication in interstate commerce, or the means and instrumentalities of interstate commerce.

F. VIOLATIONS

    1. As a result of the conduct described above, the School District violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.

    2. As a result of the conduct described above, Weiss violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.

    3. As a result of the conduct described above, Shupe willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.

    4. As a result of the conduct described above, Weiss caused the School District's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.

    5. As a result of the conduct described above, Shupe willfully aided and abetted and caused the School District's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.

III.

In view of the allegations made by the Division of Enforcement, the Commission deems it necessary and appropriate in the public interest that public administrative and cease-and-desist proceedings be instituted to determine:

    A. Whether the allegations set forth in Section II are true and, in connection therewith, to afford each Respondent an opportunity to establish any defenses to such allegations;

    B. Whether pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Weiss should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;

    C. What, if any, remedial action is appropriate in the public interest against Shupe pursuant to Section 15(b) of the Exchange Act including, but not limited to, disgorgement and civil penalties pursuant to Section 21B of the Exchange Act.

    D. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Shupe should be ordered to cease and desist from committing or causing violations of and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and

    E. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, an order requiring disgorgement, including reasonable interest, should be entered against Weiss and Shupe.

IV.

IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 200 of the Commission's Rules of Practice, 17 C.F.R. § 201.200.

IT IS FURTHER ORDERED that each Respondent shall file an Answer to the allegations contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220. If a Respondent fails to file the directed answer, or fails to appear at a hearing after being duly notified, such Respondent may be deemed in default and the proceedings may be determined against him upon consideration of this Order, the allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 221(f) and 201.310.

This Order shall be served forthwith upon each Respondent personally or by certified mail.

IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of the Commission's Rules of Practice.

In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of investigative or prosecuting functions in this or any factually related proceeding will be permitted to participate or advise in the decision of this matter, except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not "rule making" within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the provisions of Section 553 delaying the effective date of any final Commission action.

By the Commission.

Jonathan G. Katz
Secretary

 

http://www.sec.gov/litigation/admin/33-8412-o.htm


Modified: 04/30/2004