Securities Exchange Act of 1934
Release No. 48095 / June 26, 2003
Administrative Proceeding File No. 3-9884
In the Matter of Pryor, McClendon, Counts & Co., Inc.; Respondents. |
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Order Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order Against Allen W. Counts |
I.
On April 29, 1999, the Commission instituted public administrative and cease-and-desist proceedings against Allen W. Counts ("Counts") pursuant to Sections 15(b)(6), 19(h)(3), and 21C of the Securities Exchange Act of 1934 ("Exchange Act").
II.
Counts has submitted an offer of settlement that the Commission has determined to accept. Solely for the purpose of these proceedings 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 in this order (except that Counts admits that the Commission has jurisdiction over him and over the subject matter of these proceedings), Counts consents to the entry of the findings and the imposition of the remedial sanctions and the cease-and-desist order set forth below.
III.
On the basis of this Order and Counts' Offer, the Commission finds1 the following:
A. FACTS
1. Respondent
Allen W. Counts resides in Muskogee, Oklahoma. Counts has been a principal in, and president of, Pryor, McClendon, Counts & Co., Inc. ("PMC") n/k/a Pryor, Counts & Co., Inc., and its predecessor firm, Pryor, Govan, Counts & Co., Inc., since that firm's founding in 1981. During the relevant period, Counts headed PMC's New York City office.
2. Summary
This matter concerns violations of federal securities laws by Counts, and others scheming with him, in connection with a series of concealed payments and political contributions to public officials and candidates for public office in New York.
As to those violations, Counts funneled political contributions through conduits to the campaign organization of a New York City official in May 1994 and a candidate for New York City office in July 1997. After each of these contributions, PMC participated in New York City negotiated bond offerings in violation of the Municipal Securities Rulemaking Board ("MSRB") rules prohibiting pay-to-play (Rule G-37) and requiring fair dealing (Rule G-17). Further, Counts caused PMC to mischaracterize as consulting expenses in its books and records not only the 1994 and 1997 campaign contributions, but also a campaign contribution in 1993 to a candidate for New York state office and a payment in 1992 to a New York state official.
3. Concealed Payments and Contributions
a. Concealed Political Contributions after Rule G-37 took Effect
In the early 1990's, New York City selected a slate of underwriters to underwrite all of its negotiated bond offerings during a two-year period. In May 1994, while PMC was a member of the existing slate but shortly before the selection of underwriters for the next two-year slate, Counts funneled a $10,000 contribution to the campaign organization of a New York City official through a conduit. In particular, on May 20, 1994, Counts drew a $10,000 "loan" from PMC and wrote a personal check to the conduit for $10,400. On or about that same date, the conduit deposited that check into his personal checking account, and wrote a $10,000 check to the official's campaign organization.
Approximately one month after making the $10,000 contribution, PMC and Counts submitted a proposal to serve as an underwriter for the city's negotiated underwritings for the next two years. The proposal, submitted with a cover letter signed by Counts, addressed conflict-of-interest questions that New York City had posed in its request for proposals. Notwithstanding the $10,000 contribution, PMC's proposal stated that:
In light of the recent action of the MSRB and the SEC in promulgating MSRB Rule G-37 which is founded upon conflict of interest concepts, PMC wishes to advise you of certain facts regarding political contributions. Prior to adopting a voluntary ban on all political contributions in December 1993, PMC did contribute to the election campaigns of a number of state and local New York political figures. In December 1993, however, PMC adopted a voluntary ban prohibiting all firm employees from making political contributions at the state and local levels and from soliciting contributions from outside parties. This voluntary ban remains in effect.
Following the submission of PMC's proposal, New York City selected PMC to serve on the city's slate of underwriters for negotiated bond offerings for the next two years. Between July 1994 and March 1996, PMC served as a co-manager or co-senior manager on more than $8.3 billion in New York City negotiated underwritings.
Three years later, Counts made $750 in contributions, before the primaries, to a candidate for New York City office by way of three money orders made to appear as if they were from persons other than Counts. In early July 1997, Counts gave his administrative assistant $750 in cash, told her to purchase three separate money orders, and told her to make them payable for $250 each to the candidate's campaign. Counts instructed his assistant to make out one of the money orders as if it were from the assistant herself, and to make out the other two as if they were from the wife of a PMC employee and a friend of Counts', respectively. Counts then caused those money orders to be delivered to the candidate's campaign together with Counts' own personal check for $250. Within a week, the campaign returned (undeposited) two of the money orders (the money orders in the assistant's name and in Counts' friend's name). Counts instructed his assistant to deposit the returned $500 into PMC's bank account, which she did. In the 21 months thereafter, PMC participated as a co-managing underwriter in more than $4 billion of New York City negotiated bond offerings.
In total, PMC received between approximately $270,000 to $300,000 in management and other fees for serving as co-senior manager and co-manager on New York City negotiated bond offerings during the two-year periods immediately following the 1994 and 1997 contributions.
b. PMC Makes Secret Payment to a New York State Official and Concealed Political Contribution to a Candidate for New York State Office
In September 1992, PMC wrote a $12,000 check to the conduit, which was mischaracterized on the firm's books and records as a "consulting expense." On the same day and from the same account in which the PMC check was deposited, the conduit wrote a $12,000 check to a New York state official. The following year, in April 1993, Counts and PMC funneled a $2,000 contribution through the conduit to the campaign organization for a candidate for New York state office. Counts wrote a PMC check for $2,000 to the conduit, dated April 29, 1993, with the misleading notation "house repair." The following day, the conduit deposited the check into his personal bank account. By check dated April 29, 1993, the conduit's company made a $2,000 contribution to the candidate's campaign organization. Again, PMC mischaracterized the payment in its books and records as a "consulting expense."
Counts caused PMC to fail to keep accurate books and records in connection with the 1994 and 1997 campaign contributions described above, as well as two other payments made through the conduit mentioned above.
B. LEGAL ANALYSIS
1. Violations Concerning Concealed Payments and Contributions
By violating the MSRB rules discussed below, Counts and others caused PMC to violate Section 15B(c)(1) of the Exchange Act.2
a. Concealed $10,000 Contribution to New York City Official
Counts violated MSRB Rule G-17 by funneling the $10,000 contribution through a conduit to the New York City official at a time when the firm was seeking and obtaining municipal underwriting business from the city. The firm and Counts also violated MSRB Rule G-37 because of the amount of the contribution and concealed manner in which it was made.3
The $10,000 contribution triggered Rule G-37(b)'s ban forbidding PMC from underwriting New York City negotiated bond issues for two years.4 Because PMC underwrote New York City negotiated bond offerings during the two years after the contribution, Counts aided and abetted PMC's violation, and caused its violation, of MSRB Rule G-37(b). By using the conduit to make the contribution, Counts also violated MSRB Rule G-37(d), which prohibits broker-dealers and municipal securities professionals (which Counts was as president of the firm) from violating Rule G-37(b) through other persons or entities.5
b. Concealed Contributions to Candidate for New York City Office
In July 1997, Counts again violated MSRB Rules G-17 and G-37 by making secret contributions to the campaign of a candidate for New York City office by way of three money orders in other persons' names. Because Counts was then a resident of New York City and entitled to vote for New York City candidates, Rule G-37 allowed him to contribute $250 to the New York City candidate's campaign in the primary and in the general election, for a total of $500 during the election cycle. However, Rule G-37 limited contributions to $250 before the primary, with an additional $250 allowed after the primary for the general election. MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5455 (April 1997). Counts exceeded the $250 limit for the primary by making a $250 contribution with a personal check and making $750 in contributions through money orders made to appear as if they were from other people.6 This triggered the two-year ban of Rule G-37. But again PMC participated in underwriting New York City negotiated bond offerings. As a result, PMC violated-and Counts aided and abetted and caused its violation of-MSRB Rule G-37(b). The ban was triggered, and the violations occurred, even though the candidate subsequently lost the election.7
When PMC, through Counts, caused the delivery of three money orders to the campaign along with Counts' own check, Counts also violated MSRB Rule G-37(c) by coordinating contributions during a period when PMC was engaged in municipal securities business with New York City.8
c. Violations of Books and Records Provisions
PMC, as a registered broker-dealer, was required by Section 17(a)(1) of the Exchange Act and the rules promulgated thereunder to create and maintain books and records that accurately reflected its operations and dealings. Pursuant to Section 17(a) and Rule 17a-3 promulgated thereunder, PMC was required, among other things, to maintain ledgers or other records accurately reflecting all expense accounts.9 Deliberate falsification of such records violates the Exchange Act's recordkeeping provisions. In re James F. Novak, Exchange Act Rel. No. 19660 (Apr. 8, 1983), 27 SEC Dkt. 1078, 1083.
PMC was also subject to MSRB recordkeeping requirements. MSRB Rule G-8 sets out books and records requirements that parallel the Commission's, requiring broker-dealers to maintain, "clearly and accurately," specified books and records concerning their municipal securities business. Moreover, PMC was required by MSRB Rule G-8(a)(xvi)(F) to maintain records reflecting all direct or indirect contributions to any official of a municipal bond issuer made by the firm's municipal finance professionals or executive officers.
Counts and others caused PMC to create and maintain inaccurate books and records with respect to the payments to a New York state official, and a candidate for New York state office. With respect to each of those payments, PMC's books and records failed to record the true nature of the payments and characterized them in a misleading manner in violation of Exchange Act Rule 17a-3(a)(2) and MSRB Rule G-8(a)(x). In addition, Counts caused PMC to fail to make accurate records of the contributions he made to an official of New York City and a candidate for New York City office, in violation of MSRB Rule G-8(a)(xvi)(F).
IV.
Based on the foregoing, the Commission finds that:
Counts willfully violated MSRB Rules G-17 and G-37, and willfully aided and abetted and caused PMC's violations of Sections 15B(c)(1) and 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder and MSRB Rules G-8 and G-37.
V.
In view of the foregoing, the Commission finds that it is appropriate to impose the relief agreed to in Counts' offer of settlement.
Accordingly, pursuant to Sections 15(b)(6), 19(h)(3), and 21C of the Exchange Act:
1. IT IS ORDERED that Counts cease and desist from committing or causing any violations, and any future violations, of Sections 15B(c)(1) and 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder, and MSRB Rules G-8, G-17, and G-37.
2. IT IS FURTHER ORDERED that Counts shall pay $25,000 as a civil money penalty, $5,000 of which he must pay within ninety days of the entry of this order, and the remaining $20,000 of which he must pay in three further quarterly payments of $5,000, $5,000 and $10,000, respectively, to be made six months, nine months, and one year, respectively, after the entry of this Order. Each 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 Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted with a cover letter that identifies Counts as a respondent in these proceedings, and the file number of these proceedings. Copies of each cover letter and money order or check shall be sent to Russell Ryan, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 5th Street N.W., Washington, D.C. 20549-0806.
By the Commission.
_______________________
Jonathan G. Katz
Secretary
Endnotes
1 The findings herein are made pursuant to Counts' offer of settlement and are not binding on any other person or entity in these or any other proceedings.
2 Section 15B(c)(1) states that: "No broker, dealer, or municipal securities dealer shall make use of the mails or any instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule of the [MSRB]."
3 Rule G-37 represents an attempt "to insulate the municipal securities industry from the potentially corrupting influence of political contributions that are made in close proximity to the awarding of municipal securities business." In re Morgan Stanley & Co., Exchange Act Rel. No. 39459 (Dec. 17, 1997), 66 SEC Dkt. 351, 353. The core of the rule, which took effect on April 25, 1994, is that "a firm may not engage in municipal securities business with an issuer for a two-year period if an official of the firm has made a contribution covered by the rule." Id. The rule provides a strict, broad prophylactic, and does not require any evidence of a quid pro quo. See Blount v. SEC, 61 F.3d 938, 942 (D.C. Cir. 1995), cert. denied, 116 U.S. 1351 (1996).
4 Rule G-37(b) provides in pertinent part that: "No broker, dealer, or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the broker, dealer or municipal securities dealer; [or] (ii) any municipal finance professional associated with such broker, dealer or municipal securities dealer [except for contributions not exceeding $250 per election to a candidate for whom the contributor is entitled to vote].
5 Rule G-37(d) provides that: "No broker, dealer or municipal securities dealer or any municipal finance professional shall, directly or indirectly, through or by any other person or means, do any act which would result in a violation of sections (b) or (c) of this rule."
6 Even if all three-rather than just two-of the $250 money orders were returned, the two-year underwriting bar of Rule G-37 still would have applied to PMC. The MSRB has stated that the bar applies after any contribution that does not meet the de minimis exception and that even if a refund of a contribution is obtained, dealers are still required to seek an exemption from the bar. MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5462-63 (April 1997).
7 Rule G-37(g)(vi) specifically includes "candidate" within the definition of persons to whom one cannot contribute without triggering the bar. The MSRB has stated that the rule renders the dealer "subject to the two-year ban on business with the issuer, regardless of whether the candidate wins or loses the election." MSRB Interpretations, published in MSRB Manual (CCH) ¶ 3681, at 5469-70 (April 1997).
8 Rule G-37(c) provides that: "No broker, dealer, municipal securities dealer, or municipal finance professional may solicit or coordinate contributions to an official of an issuer with which the broker, dealer, or municipal securities dealer is engaging or is seeking to engage in municipal securities business."
9 As a municipal securities broker subject to the net capital requirements of Exchange Act rule 15c3-1, PMC was also required by MSRB Rule G-8(a)(x) to maintain books and records specified in Rule 17a-3 of the Exchange Act, including ledgers or other records reflecting all expense accounts.