UNITED STATES OF AMERICA
In the Matter of
The Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Sections 15(b), 15B(c)(4), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent Michael Lissack ("Lissack") on September 23, 1997.
Respondent Lissack has submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined 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 as to the jurisdiction of the Commission over the Respondent and over the subject matter of this proceeding, which is admitted, Respondent Lissack by its Offer consents to the entry of findings and remedial sanctions set forth below.
On the basis of the Order Making Findings And Imposing Sanctions And A Cease-And-Desist Order ("Order") and the Offer submitted by Respondent Lissack, the Commission finds that:1
At all relevant times, Lissack was employed by a nationally known broker-dealer (the "National Firm"). Lissack was promoted to the position of Managing Director in the National Firm's public finance department on April 1, 1987. From 1990 to February 1995, Lissack worked within the derivative group of the National Firm's public finance department. The National Firm employing Lissack is a member of the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers, Inc. ("NASD"). At all times relevant, the National Firm maintained a public finance department that was engaged in the business of structuring and implementing transactions with municipal issuers. Through its public finance department, the National Firm, among other things, underwrote offerings by municipalities for a variety of bonds. In the course of conducting this business, it was the general practice of the National Firm to assemble a team of bankers, each of whom had specific responsibilities relating to a purported offering. This team would typically respond to an issuer's request for proposals ("RFP") and, if selected, generally would continue to deal with the issuer throughout the offering process.
At all times relevant, the public finance department of the National Firm maintained a municipal derivatives product group that specialized in offering municipalities certain derivative products and in structuring interest rate swaps. In those instances in which the National Firm intended to propose an interest rate swap to a municipality or where a municipality inquired about the potential use of an interest rate swap, a member of the municipal derivatives product group was generally assigned to the banking team.
In June 1993, Dade County, Florida (the "County") issued an RFP in connection with a proposed bond offering to finance the refunding of existing water and sewer bonds and, in addition, to finance certain construction projects for its water and sewer system. The County initially planned to raise approximately $800 million through such an offering. After issuance of the RFP, the County determined to proceed with separate offerings: a new money offering of approximately $431 million (the "WASA transaction") and a refunding offering.
The National Firm submitted a joint proposal in response to the RFP, whereby it would serve as co-senior managing underwriter. The response to the RFP discussed the National Firm's background, experience and capabilities, including its experience in structuring interest rate swaps. The RFP also included a discussion of alternative plans of finance that the County could consider should market conditions change prior to marketing the bonds. In September 1993, the County selected the National Firm to serve as a co-senior managing underwriter for the WASA transaction.
The County originally had planned for the WASA transaction to consist of traditional, fixed-rate bonds, whereby the County would be obliged to pay a fixed interest rate to bondholders over the life of the bonds. However, over the next several months, the National Firm raised with the County a different financing structure as an alternative to fixed-rate bonds (the "Alternative Financing Structure"). The Alternative Financing Structure provided for the County to issue variable-rate bonds, and thereafter enter into a contract with a third-party (the "Swap Provider"), whereby the County would exchange its obligation to make variable-rate payments for an obligation to make fixed-rate payments2.
The National Firm assigned substantial responsibility for structuring the Alternative Financing Structure and calculating its benefits to Lissack, a senior professional within the National Firm's municipal derivative products group who, at the time of the WASA transaction, was a managing director of the firm. The National Firm's team assigned to the WASA transaction included bankers from the National Firm's Tampa, West Palm Beach, and Miami offices, as well as other bankers from its New York City Office.
The County understood that there were certain additional costs and risks associated with the Alternative Financing Structure that were not present in a fixed-rate financing. Accordingly, to offset these additional costs and risks, the County required a certain economic benefit in the form of present value savings before it would select the Alternative Financing Structure. The County informed the National Firm that it required a certain minimum threshold in present value savings in order to proceed with the Alternative Financing Structure. Lissack knew about the County's minimum savings requirement.
ROLE OF LISSACK
At all times relevant, Lissack was responsible for the National Firm's assessment of the relative costs associated with the two possible financing scenarios in the WASA transaction, fixed-rate versus the Alternative Financing Structure. The National Firm's financing team made numerous presentations to the County concerning the proposed financing. Lissack was responsible for that portion of the presentations relating to the benefits of the Alternative Financing Structure as opposed to a fixed rate structure. The savings evaluations were the centerpiece of such presentations.
From late October 1993 through January 25, 1994, the presentations to the County showed present value savings that the County would realize if it selected the Alternative Financing Structure over a fixed-rate structure. Those presentations were based substantially on assumptions provided by Lissack and calculations carried out pursuant thereto.
Certain savings presentations to the County in 1993 showed that the County would indeed realize savings in excess of its minimurn savings threshold if it implemented the Alternative Financing Structure. However, in late December 1993 or early January 1994, because of a change in interest rates, calculations of the potential savings associated with the Alternative Financing Structure revealed such savings fell below the County's minimum savings threshold, as compared to a traditional fixed-rate model.
Thereafter, Lissack manipulated the use of certain variables in the traditional fixed rate and Alternative Financing Structure models in the presentations made to the County in order to create the false impression that the selection of the Alternative Financing Structure would still result in savings to the County in excess of its stated threshold. Those presentations ultimately persuaded the County to implement the Alternative Financing Structure.
TREATMENT OF THE DEBT SERVICE RESERVE FUND
The County Bond Ordinance, which, authorized the issuance of the bonds, required that a certain amount of the bond proceeds be placed in a DSR. In comparisons run prior to late December 1993, the National Firm calculation of the costs associated with the Alternative Financing Structure and the fixed-rate Structure accrued no interest on the DSR. In late December 1993 or early January 1994, Lissack's savings calculations were changed to include accrued interest on the bond proceeds earmarked for the DSR in the Alternative Financing Structure. Lissack's changes did not include accrued interest on the DSR for the fixed-rate financing model.
This treatment of the DSR resulted in an overstatement of the purported present value savings of the Alternative Financing Structure by at least $4 million. This analysis was incorporated into the savings presentations made to the County.
TREATMENT OF THE CONSTRUCTION FUND
Lissack also skewed the anticipated interest earnings on monies in the Construction Fund in favor of the Alternative Financing Structure. Lissack decided to use an unreasonably low interest rate for calculating interest earnings on the Construction Fund in the traditional fixed-rate analysis. This resulted in an overstatement of the Alternative Financing Structure by at least $1 million. This disparity was also included in the presentations to the County which further inflated the purported savings associated with the Alternative Financing Structure.
Accordingly, the presentations to the County showing present value savings were based on intentional manipulations by Lissack of the underlying calculations and assumptions as to the fixed-rate model and the Alternative Financing Structure, undertaken to fraudulently present the Alternative Financing Structure in an artificially favorable light. The use of these faulty and inaccurate assumptions resulted, under conservative estimates, in an overstatement of the hypothetical savings associated with the Alternative Financing Structure by at least $5 million.
On January 25, 1994, the County decided to implement the Alternative Financing Structure based upon the representation that the County would realize present value savings of more than $8 million if it selected the Alternative Financing Structure. That representation was based on Lissack's faulty methodology, as described above. On January 25, 1994, the County entered into a thirty-year variable-to-fixed rate forward swap. On February 2, 1994, the County issued $431,700,000 in variable-rate bonds.
PRIMARY VIOLATIONS OF THE FEDERAL SECURITIES LAWS
Based on his role in the false presentations to the County, Lissack willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The amount of present value savings associated with the Alternative Financing Structure was material to the County's decision as to which structure to utilize in issuing securities. See Basic, Inc. v. Levinson, 485 U.S. 224 (1988). Lissack's intentional manipulation of the assumptions included within the savings presentations, as described more fully above, demonstrates that he undertook such conduct with an intent to deceive. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). Municipal securities brokers, dealers and municipal finance professionals, such as Lissack, also must comply with the Municipal Securities Rulemaking Board ("MSRB") rules. Section 15B(c)(4) of the Exchange Act makes it unlawful to use the mails or other means or instrumentalities of interstate commerce to effect transactions in or induce the purchase or sale of any municipal security in contravention of the MSRB Rules. MSRB Rule G-17 requires that each broker, dealer, and municipal securities dealer deal fairly with all persons and refrain from engaging in any deceptive, dishonest, or unfair practice. Based on his previously described conduct, Lissack also willfully violated Section 15B(c)(4) of the Exchange Act and MSRB Rule G-17.
In view of the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer submitted by Lissack and impose the sanctions specified therein.
Accordingly, IT IS ORDERED that:
By the Commission.
Jonathan G. Katz
|1||The findings contained herein are not binding on anyone other than Lissack.|
|2||Mechanically, the proposed Alternative Financing Structure involved three steps. First, the County was to issue $431,700,000 in variable rate bonds, whereby the County would be obliged to make interest payments at a rate that would fluctuate over the life of the offering. Second, the proceeds from such an offering allocated for the Construction Fund and for the Debt Service Reserve Fund ("DSR') were to be placed in guaranteed investment contracts ("GIC"). The GIC provider for the construction fund guaranteed interest payments to the County at a rate higher than the amount the County was obliged to pay variable-rate bondholders. Third, the County was to enter into a forward, variable-to-fixed interest rate swap with the Swap Provider, pursuant to which the County would "swap" its variable-rate interest payments for the certainty of a fixed rate payment with the Swap Provider. The Swap Provider paid a fee to The National Firm in connection with this transaction.|
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