U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 15807 / July 13, 1998 Securities and Exchange Commission v. Derryl W. Peden, Civil Action No. 398-CV-483 WS (S.D. Miss) The Securities and Exchange Commission announced today that it filed a civil action against Derryl W. Peden ("Peden"), an attorney in Jackson, Mississippi. The Commission's complaint charges that between 1987 and April 1996, Peden violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5, by, among other things, causing 39 Mississippi counties, cities and towns (collectively "the municipalities") to issue and sell urban renewal revenue notes based on an opinion from Peden, as bond counsel, that interest on the notes was exempt from the federal income tax. The complaint alleges that Peden knew or was reckless in not knowing that a substantial risk existed that interest on the notes was not tax exempt. That risk was not disclosed to investors. On December 2, 1994, the Commission issued a cease-and- desist order against Peden, directing that he cease-and- desist from committing or causing violations or future violations of Section 10(b) and Rule 10b-5. See Securities Exchange Act of 1934 Release No. 35045. That order was based on fraudulent offerings of purportedly tax exempt municipal bonds unrelated to the notes in this case. The Commission's complaint alleges that Peden's subsequent conduct in this case constitutes a violation of the cease-and-desist order. Between 1987 and April 1996, the municipalities individually issued, offered and sold 74 separate urban renewal revenue note issues in amounts ranging from $2 million to $5 million, totaling approximately $287,300,000. The notes were sold based upon unqualified opinions from Peden which concluded that interest on the notes would be exempt from federal income tax. The notes were issued in reliance on the temporary period exception to the anti- arbitrage provisions of the Internal Revenue Code, which permits municipalities to issue securities and invest the proceeds at a higher rate, provided the funds, among other things, are reasonably expected to be used for qualifying municipal projects within a three year period. After issuance, the bulk of the offering proceeds from each offering was used to purchase an investment paying a higher yield than the notes. The remaining proceeds were used to pay the premium or fee paid to the issuer, the fees and expenses of bond counsel, the underwriter, the trustee, and other costs of issuance. The respective official statements and arbitrage certificates for each offering, among other documents, without exception, represented that the issuers intended to spend the full amount of the offering proceeds within three years on various capital projects, such as roads, parks, a courthouse, and other projects. All of the documents were prepared by Peden. Peden knew, or was reckless in not knowing, that these statements were not true. None of the municipalities had the resources, intent or expectation to utilize any proceeds from the offerings, other than the premium or fee, for capital projects. Subsequent to the offerings, none of the municipalities utilized any of the offering proceeds, other than the premium or fee, for any capital project. The lack of a reasonable expectation to utilize more than a small portion of the proceeds for capital projects made the temporary period exception inapplicable, creating a substantial risk that the IRS would declare interest on the notes subject to the federal income tax. The substantial risk to the tax exempt status of interest on the notes was not disclosed to investors or prospective investors in any of the offerings. The Commission's complaint seeks a permanent injunction enjoining Peden from violating the antifraud provisions, disgorgement of his ill-gotten gains from the scheme, and civil penalties. The Commission's complaint also seeks an order directing that Peden comply with the requirements of the cease-and-desist order previously entered against him.