UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7525 / April 23, 1998 SECURITIES EXCHANGE ACT OF 1934 Release No. 39905 / April 23, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9582 : : In the Matter of: : MERIDIAN SECURITIES, INC.,:ORDER INSTITUTING PUBLIC CORESTATES CAPITAL MARKETS:PROCEEDINGS, MAKING FINDINGS (as successors to MERIDIAN:AND IMPOSING REMEDIAL CAPITAL MARKETS, INC.), AND:SANCTIONS AND CEASE-AND- MARTIN J. STALLONE,:DESIST ORDER : Respondents.: : : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 15B and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Meridian Securities, Inc. ("Meridian Securities"), a broker-dealer registered with the Commission, CoreStates Capital Markets ("CoreStates Capital"), a municipal securities dealer registered with the Commission, and Martin J. Stallone ("Stallone"). In anticipation of the institution of these proceedings, Meridian Securities, CoreStates Capital and Stallone have submitted Offers of Settlement which the Commission has determined to accept. Solely for purposes of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, without admitting or denying the findings contained herein, except that Meridian Securities, CoreStates Capital and Stallone admit that the Commission has jurisdiction over them and over the subject matter of these proceedings, Meridian Securities, CoreStates Capital and Stallone consent to the entry of an Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order") as set forth below. Accordingly, IT IS ORDERED that proceedings against Meridian Securities, CoreStates Capital and Stallone be, and hereby are, instituted. II. On the basis of this Order, and the Offers of Settlement submitted by Meridian Securities, CoreStates Capital and Stallone, the Commission finds that: [1] A.At all times relevant to this proceeding, Meridian Securities, headquartered inReading, Pennsylvania, was registered with the Commission as a broker-dealer. It isthe successor, in form, to the municipal securities dealer registration of Meridian Capital Markets, Inc. ("Meridian Capital").[2] B.At all times relevant to this proceeding, CoreStates Capital, a division ofCoreStates Bank, N.A. ("CoreStates Bank"), was registered with the Commission as amunicipal securities dealer pursuant to Section 15B(a)(2) of the Exchange Act.[3]CoreStates Capital is the de facto successor to Meridian Capital and is named as aRespondent solely on that basis. It has continued the operations of Meridian Capital,including advance refunding transactions. Meridian Capital's customer accounts havebeen transferred to CoreStates Capital. Although certain key personnel, formerlyassociated with Meridian Capital, are now employed by CoreStates Capital, the seniormanagement of Meridian Capital and the senior officers of Meridian Capital's Public Finance Department with primary responsibility for the transactions described hereinwere not employed by CoreStates Capital or any of its affiliates following the mergerbetween CoreStates Bank and Meridian Bank. C.At all times relevant to this proceeding, Stallone was registered as a municipalsecurities representative with Meridian Capital. Stallone joined Meridian Capital in1989 at age 24 and became a vice-president of Meridian Capital's Public Finance Department in 1993. Despite his title, Stallone did not have a managerial position atany time during his employment at Meridian Capital, and he voluntarily resigned fromMeridian Capital prior to the merger between CoreStates Bank and Meridian Bank. D.From at least March 1993 through December 1995, Meridian Capital, Stalloneand another employee of Meridian Capital willfully violated Section 17(a) of theSecurities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in theoffer and sale and in connection with the purchase and sale, of securities in that they,directly and indirectly, by the use of the means or instruments of transportation orcommunication in interstate commerce, or the means and instrumentalities of interstatecommerce, or of the mails, employed devices, schemes, or artifices to defraud;obtained money and property by means of, or otherwise made, untrue statements ofmaterial fact or omitted to state material facts necessary to make the statements made,in the light of the circumstances under which they were made, not misleading; orengaged in acts, transactions, practices or courses of business which would and didoperate as a fraud or deceit upon the purchasers of such securities and on other persons,such as the issuers of municipal securities. E.Meridian Capital, Stallone and another employee of Meridian Capital engaged in a scheme to generate substantial profits by charging various Pennsylvania and West Virginia municipalities excessive, undisclosed mark- ups on U.S. Treasury securities ("Treasury securities") sold in connection with various tax-exempt advance refunding transactions and in two other cases involving another type of refinancing. They increased the prices of Treasury securities in order to reduce the yield, thereby purporting to comply with the federal tax laws governing tax-exempt advance refunding transactions. This practice is commonly known as "yield burning." Meridian Capital, Stallone and another employee of Meridian Capital calculated mark-ups on a portfolio basis and, as a result, charged excessive mark-ups on individual Treasury securities ranging as high as 13.78 percent in connection with various advance refunding transactions and as high as 46.29 percent in two other cases involving another type of refinancing. The mark-ups were excessive based upon all of the relevant facts and circumstances surrounding the sales of the particular Treasury securities. On five occasions, Meridian Capital, Stallone and/or another employee of Meridian Capital also falsely certified in writing that the prices charged for the Treasury securities were in essence fair market prices, as defined by federal tax regulations. In addition, Meridian Capital and others engaged in an undisclosed payment arrangement in order to secure Meridian Capital's selection as escrow provider in certain transactions. As a result of this pattern of conduct, Meridian Capital earned substantial profits and Stallone and another employee of Meridian Capital earned substantial commissions. F.Excessive Mark-ups 1.Beginning in 1988, Meridian Capital solicited various municipalities toundertake various financing transactions, including advance refundingtransactions. In an advance refunding transaction, a municipality issues tax-exempt municipal securities (the "refunding bonds") in order to defease a pre- existing issue of bonds usually bearing higher interest rates. Because the pre-existing bonds cannot be paid off immediately, the proceeds of the refundingbonds are invested in Treasury securities, which are deposited into an escrowaccount established on behalf of the municipality and irrevocably pledged to paythe principal and interest on the old bonds as they become due. Advancerefunding transactions generally enable municipalities to realize savings, in partbecause the refunding bonds are issued at lower interest rates. 2.Meridian Capital's Public Finance Department ("Public Finance"), inwhich Stallone and others were employed, handled many advance refunding transactions in addition to other types of municipal financings. In connectionwith these advance refunding transactions, Meridian Capital often acted as theunderwriter for the municipal issuer as well as the escrow provider. As theunderwriter, Meridian Capital sold the bonds that were issued by themunicipalities. As the escrow provider, the firm selected the Treasurysecurities for the escrow account and sold them to the municipalities. 3.The Pennsylvania Public Finance Group ("Pennsylvania Group"), which primarily conducted business in Pennsylvania, New Jersey and Delaware, was a part of Public Finance. The employees of the Pennsylvania Group, which included Stallone, were compensated through commissions based upon a percentage of the profits earned by Public Finance, including mark-ups on Treasury securities sold in connection with advance refunding transactions. 4.Stallone and another employee of Meridian Capital were primarily responsible for selecting and pricing the Treasury securities that Meridian Capital sold to the municipalities. Specifically, they identified the Treasury securities needed for the escrow accounts and set the prices at which Meridian Capital sold these securities. Although an entire portfolio of securities selected for an escrow account was sold to the municipality, Meridian Capital generated a separate confirmation slip for each individual Treasury security. 5.In accordance with the Internal Revenue Code and Internal RevenueService ("IRS") regulations in effect during the relevant time period, where amunicipality issued tax-exempt advance refunding bonds, the overall yield onthe investments held in the escrow account could not materially exceed (whichunder the tax regulations essentially meant that it could not be more than one- thousandth of one percentage point higher than) the yield on the refundingbonds. If the overall yield on the escrow securities materially exceeded theyield on the bonds, the bonds would be deemed "arbitrage bonds" and the tax-exempt status of the refunding bonds would be jeopardized. If the yield on theopen market escrow securities, purchased at fair market value, were to materially exceed the yield on the refunding bonds (a "positive arbitrage"situation), the IRS regulations effectively required that the excess yield (knownas "arbitrage profit") be reduced by investing a portion of the escrow account inState and Local Government Series ("SLGS") - customized securities issued bythe U.S. Treasury at below market interest rates specifically for the purpose ofallowing municipal issuers to comply with the IRS yield restrictions. A mix ofTreasury securities and SLGS in the escrow account can be used to ensure thatthe yield on the escrow account will not be higher than the yield on therefunding bonds. 6.One way to circumvent these yield limitations is through a practice commonly known as "yield burning" - that is, lowering the yield earned on escrowsecurities by excessively increasing the price an issuer pays for those securities.Such an increase in the price paid by the issuer has no direct economic impact onthe issuer in a positive arbitrage situation, because any increased markup paid bythe issuer would otherwise have to be transferred tothe U.S. Treasury through thepurchase of SLGS. Thus, this practice enriches the seller of the escrow securitiesat the expense of the U.S. Treasury, which otherwise would receive the arbitrageprofit. It also exposes the issuer and its investors to the risk of losing the bonds'tax- exempt status. In a negative arbitrage situation (i.e., when the yield of theopen market escrow securities, when purchased at fair market value, would notexceed the yield on the refunding bonds), any increase in the price paid for theescrow securities directly harms the issuer, but does not have federal taximplications. 7.Applicable provisions of the IRS regulations in effect at the time of the transactions at issue here generally required that the escrow investments bepurchased at fair market value. In particular, the Treasury securities had to bevalued at the price at which a willing buyer would purchase the investment froma willing seller in a bona fide, arm's-length transaction. 26 C.F.R.  1.148-5(d)(6), T.D. 8476, 58 F.R. 33510 (June 18, 1993). 8.Pursuant to the IRS regulations, municipalities issuing tax- exempt bondswere required to certify, based on their reasonable expectations, that the bondswere not arbitrage bonds. In various advance refundings handled by MeridianCapital during the relevant time period, the municipalities made suchcertifications. 9.Meridian Capital, Stallone and another employee of Meridian Capital improperly retained the arbitrage profits generated from the sale of Treasury securities without the knowledge or consent of the municipalities. The conduct entailed inflating the prices for certain individual Treasury securities in order to reduce the overall yield earned on the portfolio of Treasury securities, thereby meeting the yield restrictions. The undisclosed mark-ups charged on the individual Treasury securities (which reached as high as 13.78 percent) in the various advance refundings were excessive based upon all of the relevant facts and circumstances surrounding the sales of the particular Treasury securities. 10.In two instances, Meridian Capital, Stallone and another employee of Meridian Capital charged municipalities excessive, undisclosed mark-ups in advance refunding transactions which, notwithstanding the size of the mark- ups, did not exceed applicable yield restrictions and, therefore, did not raise any issue of compliance with IRS regulations. The mark-ups charged on these securities transactions were excessive based upon all of the relevant facts and circumstances, and, as a result, the municipalities involved in these two transactions (the Reading School Authority and the Borough of Ambler) were financially harmed. G.Misrepresentations and Omissions 1.In connection with the sale of Treasury securities to the municipalities, Meridian Capital, Stallone and/or another employee of Meridian Capital also made certain material misrepresentations and omissions. In 5 instances, they provided documents in the form of certifications that in essence represented that the prices on the Treasury securities were at fair market value and established without an intent to reduce yield. In fact, the prices on the Treasury securities in those transactions exceeded their fair market value by reason of the mark-ups that were charged, and were established with an intent to reduce the yield on the Treasury securities. The municipalities relied upon these representations in making their certifications that the bonds were not arbitrage bonds. 2.In certain advance refunding transactions, Meridian Capital served as both underwriter and escrow provider. In such transactions, Stallone and others advised municipalities with respect to how the transactions should be structured, including, but not limited to, the investment of the refunding bond proceeds. The municipalities relied upon Meridian Capital, Stallone and others to provide Treasury securities that were suitable for retiring the pre-existing issue of municipal bonds in accordance with IRS yield restriction requirements. 3.Meridian Capital, Stallone and another employee of Meridian Capital failed to disclose to the municipalities that they had sold the Treasury securities to the municipalities for more than their fair market value by reason of the mark-ups that were charged and, thereby, jeopardized the tax- exempt status of the refunding bonds. 4.As underwriter of various advance refunding bonds, Meridian Capital had an obligation to have a reasonable basis for belief in the truthfulness and completeness of the key representations made in the disclosure documents used in the securities offerings. Exch. Act Rel. No. 26100 (Sept. 22, 1988). In addition, employees of Meridian Capital participated in the preparation of those offering documents, and were responsible for various representations contained in those documents. The offering documents did not disclose to potential bond purchasers that Meridian Capital, Stallone and another employee of Meridian Capital had sold the Treasury securities to the municipalities for more than their fair market value by reason of the mark-ups that were charged. Nor did the documents disclose that they did so in order to receive arbitrage profits in those advance refundings and had, thereby, placed the tax-exempt status of the refunding bonds in jeopardy. Therefore, Meridian Capital, Stallone and another employee of Meridian Capital also failed to disclose material facts in the offering documents which were distributed to the bond purchasers in those advance refunding transactions. H.Undisclosed Payments 1.Meridian Capital and others also engaged in an undisclosedfinancial arrangement involving three advance refundings with municipalities inWest Virginia. In these advance refundings, Meridian Capital was responsiblefor providing the Treasury securities sold to the municipalities, but was not theunderwriter. Meridian Capital secured its role as the escrow provider by payingundisclosed fees to two financial consultants. 2.One of the financial consultants, an independent contractor, providedservices to the underwriter on the three West Virginia advance refundingransactions. Among other things, he was responsible for selecting a broker ora dealer to provide the Treasury securities needed for the escrow accounts. 3. During the fall of 1993, before Meridian Capital became involved in the West Virginia advance refunding transactions, the two financial consultants contacted an employee of Meridian Capital about Meridian Capital becoming the escrow provider in the first of the three advance refundings. In order to ensure Meridian Capital's selection, an employee of Meridian Capital entered into an undisclosed arrangement with the two financial consultants whereby it was agreed that Meridian Capital would pay them a pre-determined percentage of the profits generated from Meridian Capital's sale of Treasury securities to the West Virginia municipality. In addition to securing Meridian Capital's selection in the first advance refunding, the arrangement ensured Meridian Capital's selection as the escrow provider in future advance refundings in which the two financial consultants were involved. 4.In the same manner as they had done in the other advance refundings, Meridian Capital, Stallone and another employee of Meridian Capital charged excessive mark-ups on the Treasury securities sold to the West Virginia municipalities in order to retain the arbitrage profits. 5.After the Treasury securities were sold to the municipalities, Meridian Capital made payments to the two financial consultants, as previously agreed. In addition, an employee of Meridian Capital directed the two financial consultants to generate invoices, which falsely reflected that they had provided services to Meridian Capital in exchange for the payments. Neither of the consultants performed any services in exchange for the payments, other than securing Meridian Capital's selection as escrow provider. 6.In each of the three West Virginia advance refundings, Meridian Capital, Stallone and another employee of Meridian Capital provided certificates directly to the municipalities in which they made affirmative misrepresentations concerning the suitability of the Treasury securities and compliance with the IRS yield restriction requirements. The West Virginia municipalities were unaware of the financial arrangement. I.Other Excessive Mark-ups 1.In June 1994 and May 1995, Meridian Capital, Stallone and another employee of Meridian Capital handled two refinancings that involved the establishment of sinking funds on behalf of two Pennsylvania municipalities. In these refinancings, the municipalities sought to defease prior offerings of tax-exempt municipal bonds. However, rather than using proceeds from the issuance of refunding bonds, the municipalities used other sources of funds to defease the old bonds. 2.Meridian Capital, Stallone and another employee of Meridian Capital were responsible for providing the Treasury securities that were deposited into escrow accounts established on behalf of the municipalities in these two transactions. As with advance refunding transactions, the Treasury securities in the escrow account were subject to yield restriction requirements under the federal tax laws. 3.With respect to these two refinancings, Meridian Capital, Stallone and another employee of Meridian Capital calculated mark-ups on a portfolio basis and, as a result, charged excessive mark-ups on individual Treasury securities that reached as high as 46.29 percent. Neither the mark-ups nor the fact that Meridian Capital had earned arbitrage profits in these refinancings, was ever disclosed to the municipalities. The mark-ups were excessive based upon all of the relevant facts and circumstances. III. On the basis of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offers of Settlement submitted by Meridian Securities, CoreStates Capital, and Stallone: Accordingly, IT IS ORDERED that: A.Meridian Securities' registration as a broker-dealer is revoked; B.Stallone be, and hereby is, censured; C.CoreStates Capital and Stallone shall cease and desist from committingor causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; D.CoreStates Capital and Stallone are directed to comply with their undertakingsto pay an aggregate of $3,820,884, to be apportioned as follows:$3,720,884 shall be paid by CoreStates Capital, and $100,000 shall be paid byStallone; 1. Of the aggregate amount, $414,070 shall be paid to the Reading SchoolAuthority and $6,814 shall be paid to the Borough of Ambler within ten days ofthe date of entry of this Order; 2.The remaining $3.4 million shall be paid to the United States Treasurypursuant to an agreement simultaneously entered into between MeridianSecurities, CoreStates Financial Corp, the Internal Revenue Service and theUnited States Attorney for the Southern District of New York; 3.CoreStates Capital and Stallone shall provide written confirmation to Ronald C. Long, District Administrator, Securities and Exchange Commission, Philadelphia District Office, 601 Walnut Street, Suite 1120E., Philadelphia, PA19106, that the payments specified in sub-paragraphs D.1. and D.2. above,havebeen duly made; E.Stallone shall pay a civil penalty of $15,000 to the United States Treasury. Suchpayment shall be: (1) paid within thirty days of the date of the entry of this Order; (2)made by United States postal money order, certified check, bank cashier's check, or bankmoney order; (3) made payable to the Securities and Exchange Commission; (4) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Mail Stop0-3, 450 Fifth Street, N.W., Washington, D.C. 20549; and (5) submitted under coverletter which identifies Stallone as a Respondent in this proceeding and the file number ofthis proceeding. A copy of the cover letter and money order or check shall besimultaneously sent to Ronald C. Long, District Administrator, Securities and ExchangeCommission, Philadelphia District Office, 601 Walnut Street, Suite 1120E., Philadelphia,PA 19106; F.Stallone be, and hereby is, suspended from association with any broker, dealer,municipal securities dealer, investment adviser, or investment company, for a period oftwelve months, effective on the second Monday following the entry of this Order; and G.Stallone shall provide to the Commission, within thirty days after the end of thetwelve month suspension period described in paragraph F. above, an affidavit that hehas complied fully with the suspension. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]:The findings herein are made pursuant to the Offers of Settlement of Meridian Securities, CoreStates Capital, and Stallone and are not binding on any other person or entity named as a respondent in this or any other proceeding. [2]:Meridian Capital was a municipal securities dealer registered with the Commission pursuant to Section 15B(a)(2) of the Exchange Act from February 1987 through November 1996, when the entity officially ceased operations. [3]:On April 9, 1996, CoreStates Financial Corp., the holding company for CoreStates Bank, N.A. merged with Meridian Bancorp, Inc., the holding company for Meridian Bank. By operation of the merger, on June 27, 1996, Meridian Bank, together with its division Meridian Capital, was dissolved, and its operations and personnel became part of CoreStates Bank and CoreStates Capital.