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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933
Release No. 7762 / October 27, 1999

SECURITIES EXCHANGE ACT OF 1934
Release No. 42062 / October 27, 1999

ADMINISTRATIVE PROCEEDING
File No. 3-9327


________________________________
                                :
     In the Matter of           :
                                : ORDER MAKING FINDINGS
  Aubrey O'Connor, Rick Pierson : AND IMPOSING SANCTIONS
   James Winter, Gregory Bowen, : AND CEASE-AND-DESIST
        and Kenneth Ward,       : ORDER PURSUANT TO SECTION
                                : 8A OF THE SECURITIES ACT OF 1933
           Respondents.         : AND SECTIONS 15(b), 19(h) AND
                                : 21C OF THE SECURITIES EXCHANGE
                                : ACT OF 1934 AS TO AUBREY 
                                : O'CONNOR                      
________________________________: 

I.

In these proceedings instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), respondent Aubrey O'Connor ("O'Connor") has submitted an Offer of Settlement ("Offer") that the Securities and Exchange Commission has determined to accept.1

II.

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 as to the jurisdiction of the Commission over O'Connor and the findings set forth in Section III, Paragraphs A and B, hereof, which are admitted, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.100 et seq., O'Connor consents to the entry of the findings set out below, and the imposition of remedial sanctions and issuance of a Cease-and-Desist Order.

III.

On the basis of the order instituting proceedings, and O'Connor's Offer, the Commission finds as follows2:

GSC

A. The Commission's public files disclose that Government Securities Corporation ("GSC"), formerly known as Government Securities Corporation of Texas, was registered with the Commission as a broker-dealer, pursuant to Section 15(b) of the Exchange Act (File No. 8-36869), from July 25, 1987, until December 8, 1997, when its Form BDW was deemed effective, and its registration as a broker-dealer was withdrawn. GSC was formed in 1980, and, at all times, maintained its offices in Houston, Texas.

RESPONDENT

B. O'Connor was, at relevant times, a fixed income trader, Head Trader of GSC's Fixed Income Division, Sales Manager, Executive Vice President and Managing Director of GSC.

BACKGROUND

C. From 1988 through 1994, GSC sold a variety of mortgage-backed derivative securities to public clients, such as municipalities and state educational institutions. The mortgage-backed derivative securities sold by GSC included Interest-Only Strips ("IOs"), Inverse IOs, and Inverse Floaters. IOs and Inverse IOs are collateralized mortgage obligations ("CMOs") that receive only interest payments from an underlying pool of residential mortgages. IOs and Inverse IOs are highly sensitive to changes in interest rates and resulting mortgage prepayment speeds, and, accordingly, subject investors to significant risks, including market, prepayment and liquidity risks and loss of principal. Inverse Floaters are CMOs that have a guaranteed return of investment principal, but are highly sensitive to changes in interest rates and resulting mortgage prepayment speeds and, therefore, also subject investors to significant risks, including market, extension and liquidity risks.

D. O'Connor, who, with another GSC employee, was primarily responsible for purchasing the IOs, Inverse IOs and Inverse Floaters for GSC's inventory, recommended and encouraged GSC representatives to sell these instruments to GSC's public clients.

E. O'Connor formulated and approved specific transactions involving the sale of IOs, Inverse IOs and Inverse Floaters to GSC's public clients.

VIOLATIONS OF THE ANTIFRAUD PROVISIONS BY O'CONNOR

F. From March 1989 through March 1994, O'Connor willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that, in the offer or sale, and in connection with the purchase and sale, of securities, specifically, IOs, Inverse IOs and Inverse Floaters, by use of the means or instrumentalities of interstate commerce or the mails, he, directly or indirectly, employed devices, schemes or artifices to defraud; obtained money or property by means of, or made, untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon an offeree, purchaser or seller.

G. O'Connor encouraged GSC representatives to make, and they did make, certain oral misrepresentations and omissions to GSC's public clients in connection with the offer and sale of IOs, Inverse IOs and Inverse Floaters, including the following:

1. misrepresenting the high-risk CMOs as suitable investments which were consistent with clients' objectives of safety of principal, liquidity, market stability, short duration and low risk;

2. referring to the high-risk CMOs as "Fannie Mae," "Freddie Mac," or "FNMA" securities, while omitting to disclose that the instruments were volatile CMO tranches;

3. misrepresenting the IOs and Inverse IOs as government guaranteed and that their principal was fully protected;

4. failing to disclose that the IOs and Inverse IOs carry an inherent risk of loss of principal and illiquidity;

5. failing to disclose that the market value and yield of the IOs and Inverse IOs are highly sensitive to changes in interest rates and prepayment speeds;

6. guaranteeing one public client that the client "would not lose a dime" on the Inverse IOs;

7. failing to disclose that the characteristics of the Inverse Floaters, including duration and yield, were highly sensitive to changes in interest rates; and

8. failing to disclose that the Inverse Floaters were subject to extension risk of as much as 30 years.

H. O'Connor produced or approved many misleading documents, including Bloomberg yield tables and cash flow tables, Trade Recaps and Fixed Income Analyses, provided by GSC registered representative to GSC's public clients which materially misrepresented, or failed to fully disclose, the characteristics and risks of the IOs, Inverse IOs and Inverse Floaters.

VIOLATION OF SECTION 15(b)(6)(B)(i) BY O'CONNOR

I. O'Connor willfully violated Section 15(b)(6)(B)(i) of the Exchange Act by engaging in the conduct set forth below.

1. In 1976, the Commission barred O'Connor from associating with any registered broker or dealer, with the right to reapply to become associated with a broker-dealer as a supervised employee in a non-supervisory capacity, after one year.3 As a consequence, O'Connor was subject to a statutory disqualification from exercising supervisory responsibility over GSC's sales personnel.

2. In 1992, O'Connor became Sales Manager of GSC and in 1993, he accepted a promotion to the position of Executive Vice President and Managing Director of GSC. In these positions, contrary to his statutory disqualification, O'Connor was the person chiefly responsible for supervising GSC registered representatives.

 

IV.

In view of the foregoing, the Commission deems it appropriate in the public interest and for the protection of investors to impose the sanctions specified in the Offer O'Connor has submitted.

Accordingly, IT IS HEREBY ORDERED that:

O'Connor, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, shall cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act, and Sections 10(b) and 15(b)(6)(B)(i) of the Exchange Act, and Rule 10b-5 thereunder;

O'Connor be, and hereby is, barred from association with any broker or dealer;

O'Conner shall, within 90 days of the entry of this Order, pay a civil penalty of $75,000 to the United States Treasury. Such payment shall be: 1) made by United States postal money order, certified check, bank cashier's check or bank money order; 2) made payable to the Securities and Exchange Commission; 3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and 4) submitted under a cover letter that identifies O'Connor as a respondent in these proceedings and states the file number of these proceedings, a copy of which, along with the money order or check, shall be sent to Harold F. Degenhardt, District Administrator, Fort Worth District Office, Securities and Exchange Commission, 801 Cherry Street, 19th Floor, Ft. Worth, TX 76102.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

1 The order instituting these proceedings was issued on June 4, 1997.

2 The findings herein are binding only on respondent, and not on any other person.

3 In the Matter of Hibbard & O'Connor, Inc., Securities Exchange Act of 1934, Release No. 12344 (April 14, 1976).

http://www.sec.gov/litigation/admin/34-42062.htm

Modified:10/28/1999