UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
Release No. 7498 / January 29, 1998
SECURITIES EXCHANGE ACT OF 1934
Release No. 39595 / January 29, 1998
ADMINISTRATIVE PROCEEDING
File No. 3-9535
_______________________________
: ORDER INSTITUTING A PUBLIC
: ADMINISTRATIVE AND CEASE-
In the Matter of : AND-DESIST PROCEEDING
: PURSUANT TO SECTION 8A OF
: THE SECURITIES ACT OF 1933,
Credit Suisse First Boston : AND SECTIONS 15(b) AND 21C
Corporation, Jerry L. Nowlin, : OF THE SECURITIES EXCHANGE
and Douglas S. Montague, : ACT OF 1934, MAKING
: FINDINGS, AND IMPOSING
Respondents. : SANCTIONS AND CEASE-AND-
: DESIST ORDER
_______________________________:
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that a public administrative and
cease-and-desist proceeding be and hereby is instituted pursuant to Section
8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b) and
21C of the Securities Exchange Act of 1934 ("Exchange Act") against Credit
Suisse First Boston Corporation ("First Boston"), Jerry L. Nowlin
("Nowlin"), and Douglas S. Montague ("Montague").
II.
In anticipation of the institution of this proceeding, First Boston,
Nowlin, and Montague each has submitted an Offer of Settlement, which the
Commission has determined to accept. 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 that First Boston, Nowlin,
and Montague each admit the jurisdiction of the Commission over them and
over the subject matter of this proceeding, First Boston, Nowlin, and
======END OF PAGE 1======
Montague, by their Offers of Settlement, consent to the entry of this Order
Instituting a Public Administrative And Cease-And-Desist Proceeding
Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b) and
21C of the Securities Exchange Act of 1934, Making Findings, and Imposing
Sanctions and Cease-and-Desist Order ("Order") and to the entry of the
findings, sanctions, and cease-and-desist order set forth below.
Accordingly, IT IS HEREBY ORDERED that a proceeding pursuant to
Section 8A of the Securities Act and Sections 15(b) and 21C of the Exchange
Act be, and hereby is, instituted.
III.
On the basis of this Order and the Offers of Settlement submitted by
First Boston, Nowlin, and Montague the Commission finds that:<(1)>
A. RESPONDENTS
1. Credit Suisse First Boston Corporation ("First Boston") is
registered with the Commission as a broker-dealer (File No. 8-00422) and is
based in New York, New York. First Boston was the senior underwriter for
the County of Orange, California's ("Orange County") 1994 $320,040,000
offering of Pension Obligation Bonds (the "Pension Bonds"). First Boston
ceased participating as an underwriter in municipal securities offerings in
early 1995.
2. Jerry L. Nowlin ("Nowlin") is a resident of Park City, Utah, and
was employed by First Boston from 1990 to February 1995. In 1994, Nowlin
was a Vice President in the Public Finance Department of the Municipal
Securities Division in First Boston's San Francisco office and was an
investment banker assigned to the Pension Bond underwriting.
3. Douglas S. Montague ("Montague") is a resident of La Canada,
California, and was employed by First Boston from 1993 to March 1995. In
1994, he was a Vice President in the Public Finance Department of the
Municipal Securities Division in First Boston's Los Angeles office and was
an investment banker assigned to the Pension Bond underwriting.
B. FACTS
1. Introduction
First Boston was the underwriter of Orange County's 1994 Pension
<(1)>/ The findings herein are made pursuant to the Offers of
Settlement of First Boston, Nowlin, and Montague and
are not binding on any other person or entity named as
a respondent in this or any other proceeding.
======END OF PAGE 2======
Bonds.<(2)> The Official Statement for the Pension Bond offering
misrepresented and omitted material facts regarding the Orange County
Investment Pools (the "Pools"). Accurate and complete disclosure regarding
the Pools was material to investors in a $110,200,000 portion of the
offering (the "Series B Bonds"), because the Pools provided liquidity for
these bonds.
2. The Orange County Investment Pools
The Pools operated as an investment fund managed by the County
Treasurer-Tax Collector (the "Treasurer") in which the County and various
local governments or districts (the "Pool Participants" or the
"Participants") deposited public funds. As of December 6, 1994 (the date
the County and the Pools filed bankruptcy petitions), the Pools held
approximately $7.6 billion in Participant deposits, which the County had
leveraged to an investment portfolio with a book value of over $20.6
billion.
a. The Pools' Investment Strategy
The Pools' investment policy as stated by the Treasurer to the Pool
Participants was, in order of importance: (1) preservation of investment
capital; (2) liquidity; and (3) investment yield. Contrary to that policy,
the Treasurer caused the Pools to engage in a risky investment strategy.
This strategy involved using a high degree of leverage by obtaining funds
through reverse repurchase agreements on a short-term basis (less than 180
days), and investing in securities with a longer maturity (generally two to
five years), many of which were derivative securities known as inverse
floaters. At the time of the Pension Bond Offering, First Boston had $1.58
billion in reverse repurchase agreements outstanding with the County.
During 1993 and 1994, First Boston sold securities to the County. Neither
Nowlin nor Montague was aware of or inquired into First Boston's reverse
repurchase agreements with the County or sale of securities to the County.
The Pools' investment return was to result principally from the
interest received on the securities in the Pools. Leverage enabled the
Pools to purchase more securities to generate increased interest income.
This strategy was profitable as long as the Pools were able to maintain a
positive spread between the long-term interest rate received on the
securities and the short-term interest rate paid on the funds obtained
through reverse repurchase agreements.
b. The Pools' Portfolio
<(2)>/ The County of Orange, California, was charged with
disclosure violations concerning this offering in a
settled cease-and-desist proceeding instituted on
January 24, 1996. See In re County of Orange,
California, Securities Act Release No. 33-7260 (Jan.
24, 1996).
======END OF PAGE 3======
During 1993 and 1994, the Treasurer, using reverse repurchase
agreements, leveraged the Participants' deposits to amounts ranging from
158% to over 292%. The Treasurer then typically invested the Participants'
deposits and the funds obtained through reverse repurchase agreements in
debt securities issued by the United States Treasury or United States
government sponsored enterprises.
Many of the Pools' securities were derivative securities, comprising
from 27.6% to 42.2% of the portfolio. In particular, the Pools were
heavily invested in derivative instruments known as inverse floaters which
paid interest rates inversely related to the prevailing market interest
rate. Inverse floaters are negatively affected by a rise in interest
rates.
c. The Rise in Interest Rates During 1994 and its Effect on the
Pools
The composition of the Pools' portfolio made it highly sensitive to
interest rate changes. As interest rates rose, the market value of the
Pools' securities fell, and the interest received on the Pools' inverse
floaters also dropped. Thus, the Treasurer's investment strategy was
profitable so long as interest rates, including the cost of borrowing
through reverse repurchase agreements, remained low and the market value of
the Pools' securities remained stable. Indeed, the Treasurer's 1992-93
Financial Statement for the Pools stated that the investment strategy was
"predicated on interest rates to continue to remain low for a minimum of
the next three years."
During 1993, interest rates remained low and relatively stable. Due
to the low interest rates and the Pools' investment strategy, the Pools
earned a relatively high yield of approximately 8% during 1993. Beginning
in February 1994, interest rates began to rise. This rise in interest
rates caused the Pools' yield to decrease, the reverse repurchase costs to
increase, the Pools' interest income on inverse floaters to decrease, and
the market value of the Pools' debt securities to decline. Month-end
reports generated by the Treasurer reflected that the Pools' securities
that were marked-to-market (up to 43% of the entire portfolio) experienced
a sharp drop in value, ranging from over $26 million in January 1994 (or
.45% loss in value), to over $565 million in September 1994 (or 6.27% loss
in value). From January through August 1994, the rising interest rates and
the declining value of the Pools' securities caused the Pools to suffer
collateral calls and reductions in loan amounts totalling over $1 billion.
3. The Pension Bond Offering
On September 28, 1994, First Boston underwrote Orange County's
offering of $320,040,000 in Pension Bonds. The proceeds of this offering
were used to fund the County's accrued, but unfunded, pension liability to
the Orange County Employees Retirement System.
Nowlin and Montague were First Boston's lead investment bankers
======END OF PAGE 4======
assigned to this offering. During the underwriting, First Boston, through
Nowlin and Montague, participated in drafting the Official Statement.
First Boston then offered and sold the Pension Bonds through that Official
Statement. The Official Statement was the document that should have
provided investors with accurate and complete disclosure of material facts
regarding the Pension Bonds upon which they could rely to make an informed
investment decision.
The Series B Bonds, issued in the amount of $110,200,000, were to pay
interest at a rate that was to be reset periodically by First Boston as the
remarketing agent. Under the terms of the Series B Bonds, the investors
had the right to liquidate their investment on seven days' notice. To
exercise this right, the investors were to tender their bonds for
repurchase to First Boston as the remarketing agent. If First Boston could
not resell the tendered bonds within seven days, the Pools were obligated
to purchase the tendered securities in an amount up to the County's
unrestricted funds in the Pools. Thus, the Pools acted as the standby
liquidity provider.
4. Misleading Disclosure in the Official Statement
a. The Pools' Investment Strategy and the Risks of that
Strategy
The Official Statement represented that the Pools' "investment policy
focuses on retaining the safety of investment principal while earning
satisfactory yields." The Official Statement further represented that it
was the Pools' "practice to select quality investments . . . and not
to take any risks which, in the judgment of the Treasurer's Office, would
be unreasonable."
The Official Statement further represented that the Pools:
[I]nvested primarily in United States Government Securities,
including, but not limited to, United States Treasury Notes, Treasury
Bills, Treasury Bonds, and obligations of United States Government
Agencies. When circumstances warrant, the [Pools'] investments may
also include bankers acceptances, negotiable certificates of deposit
of national or state-chartered banks and state or federal thrift,
commercial paper, repurchase agreements, reverse repurchase
agreements, medium term corporate notes and collateralized time
deposits.
These statements were misleading because they omitted to disclose
material information about the Pools' investment strategy. Specifically,
the Official Statement omitted to disclose the material information that
the Pools' investment strategy: (1) was premised on the assumption that
interest rates would remain relatively low for at least three years;
(2) involved an extremely high degree of leverage, which at the time of the
Pension Bond offering was 258.55%; and (3) involved a substantial
investment in inverse floaters, which comprised 33.6% of the Pool's
holdings at the time of the Pension Bond offering.
======END OF PAGE 5======
The Official Statement also omitted to disclose material information
regarding the risks of that strategy if interest rates were to rise,
including: (1) the Pools' cost of borrowing on the substantial reverse
repurchase position would increase; (2) the Pools' interest income on the
substantial investment in inverse floaters would decrease; (3) the Pools'
securities would decline in market value; (4) as the value of the
securities fell, the Pools would suffer collateral calls and reductions in
loan amounts on the reverse repurchase agreements; (5) the Pools' earnings
would decrease; and (6) the Pools would suffer losses of principal at
certain interest rate levels.
The Official Statement also represented that: "To maintain the
liquidity of its investments, the [Pools] invest in securities that are
actively traded in the securities markets." In fact, many of the Pools'
securities, including certain derivatives, were not actively traded.
b. The Pools' Investment Results
Regarding the Pools' investment performance, the Official Statement
stated that the County had earned a net yield of 7.67% on its investment in
the Pools in the fiscal year ended June 30, 1994, that the Pools had earned
an average yield of 7.74% during the fiscal year ended June 30, 1994, and
the Pools had an annualized yield of 7.45% during July 1994. In addition,
in a footnote to the County's financial statements, the chart listing the
Pools' securities indicated that, as of June 30, 1993, the market value of
the investments was above the purchase price, indicating that the Pools had
a market profit.
The inclusion of this market profit without the additional disclosure
of certain material information concerning the Pools' declining investment
results in 1994 was misleading. The Pools had suffered substantial
declines during 1994 in the overall market value of the portfolio.
Contrary to the market profit indicated in the County's 1993 financial
statements, the Treasurer's records indicated that a substantial portion of
the Pools' securities, when marked-to-market as of the end of August 1994,
had declined in value by at least $565 million. These market declines were
not disclosed in the Official Statement. The Pools had also experienced
over $1 billion in collateral calls and reductions in loan amounts under
reverse repurchase agreements. These collateral calls and reductions in
loan amounts were also not disclosed in the Official Statement.
5. The Knowledge of First Boston, Nowlin, and Montague
At the time of the Pension Bond offering, First Boston, Nowlin, and
Montague knew or should have known certain material information regarding
the Pools from: (1) media reports concerning the Pools that were published
in the first half of 1994; and/or
(2) information at the County, including the Treasurer's 1992-93 Financial
======END OF PAGE 6======
Statement received by First Boston.<(3)> This information included:
The Pools' investment strategy was premised on the assumption that
interest rates would remain low for a minimum of three years;
The County used reverse repurchase agreements to leverage the Pools'
$7.5 billion of Participant deposits into an investment portfolio of
$19.5 billion;
The Pools invested in derivative securities, including inverse
floaters;
The Pools had suffered market declines as a result of the rise in
interest rates;
The Pools had suffered collateral calls in early 1994; and
Critics of the Treasurer had charged that the Pools' investment
strategy was too risky for public funds.
6. Review of the Disclosure for the Pension Bond Offering
The County provided the underwriting team with disclosure regarding
the Pools for inclusion in the Official Statement. This disclosure came
from an offering earlier in 1994 in which the Pools had acted as liquidity
provider. Nowlin and Montague adopted the disclosure for incorporation in
the Official Statement with revisions relating to the historical liquidity
of the Pools. Despite the importance of the Pools in the offering and the
media articles voicing concerns about the Pools investment strategy, Nowlin
and Montague did not make any inquiry within First Boston for information
related to the Pools. Given the information known or readily available to
them, First Boston, Nowlin, and Montague made insufficient inquiry into the
Pools' investment strategy and the risks of that strategy, use of reverse
repurchase agreements, investment in derivatives, or decline in investment
results caused by the rise in interest rates.
Nowlin and Montague knew at the time of the Pension Bond offering that
Orange County had conducted other securities offerings relating to the
Pools. Despite this knowledge, they did not review the official statements
for these prior offerings (except for the disclosure provided by the
County) to determine whether the disclosure in the Pension Bond Official
Statement regarding the Pools was consistent with disclosure in the prior
offerings. In fact, the disclosure in the Official Statement for the
Pension Bonds was different from the disclosure in the prior Orange County
offerings.
7. First Boston's Supervision of Its Investment Bankers
<(3)> Neither Nowlin nor Montague received or requested this
Financial Statement.
======END OF PAGE 7======
First Boston failed reasonably to supervise Nowlin and Montague by not
establishing adequate policies and procedures relating to disclosure in
municipal securities transactions. In 1994, First Boston allowed its
investment bankers, such as Nowlin and Montague, to approve official
statements on behalf of the firm. Despite this grant of authority, First
Boston did not have adequate policies or procedures concerning the review
of official statements to guide investment bankers in their review of
disclosure.
8. Orange County's Bankruptcy and Default on the Pension Bonds
As a result of the risks of the Pools' investment strategy, by
December 1994, the Pools had suffered market declines of about $1.5
billion. In response to these declines, Orange County and the Pools filed
Chapter 9 bankruptcy on December 6, 1994. Between mid-December 1994 and
January 20, 1995, Orange County liquidated the Pools' securities portfolio,
suffering a loss of almost $1.7 billion on the Participants' deposits of
$7.6 billion, a 22.3% loss. The Pools also defaulted on their obligation
to repurchase the tendered Series B Bonds. Thus, the investors were unable
to liquidate their bonds, and the Pension Bonds' credit rating was
downgraded to default status.
C. LEGAL DISCUSSION
1. First Boston, Nowlin, and Montague Violated Sections 17(a)(2) and
(3) of the Securities Act in the Offer and Sale of the Pension
Bonds
Sections 17(a)(2) and (3) of the Securities Act make it unlawful for
any person, through the means or instruments of interstate commerce or the
mails, in the offer or sale of any security:
(2) to obtain money or property by means of any untrue statement of a
material fact or any omission to state a material fact necessary in
order to make the statements made, in light of the circumstances under
which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business
which operates or would operate as a fraud or deceit upon the
purchaser.
Scienter is not required to prove violations of Sections 17(a)(2) or
(3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 697 (1980).
Violations of these sections may be established by showing negligence. SEC
v. Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997); SEC v.
Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992). Accordingly, First
Boston, Nowlin, and Montague, through their negligent conduct, violated
Sections 17(a)(2) and (3) of the Securities Act in the offer and sale of
the Series B Bonds.
a. The Misstatements and Omissions Were Material
======END OF PAGE 8======
The Pools' investment strategy, the risks of that strategy, and the
Pools' declining investment results were material to the Series B Bond
investors. Information is material if there is a substantial likelihood
that a reasonable investor in making an investment decision would consider
it as having significantly altered the total mix of information made
available. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC
Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976). As previously
discussed, the Pools were the standby liquidity provider on the Series B
Bonds. The Pools' investment strategy, the risks of that strategy, and the
Pools' declining investment results affected the Pools' ability to fulfill
their obligations to repurchase the Series B Bonds. The safety of the
investment and the Pools' ability to repurchase the Series B Bonds was
material to reasonable investors.
b. First Boston, Nowlin, and Montague Should Have Known that
the Official Statement was Materially Misleading
At the time First Boston, Nowlin and Montague participated in drafting
the Official Statement, they knew or should have known certain information
about the Pools' investment strategy, the risks of that strategy, and the
Pools' declining investment results, which matters affected the Pools'
ability to provide liquidity for the Series B Bonds. From a reasonable
review of the Official Statement, First Boston, Nowlin, and Montague should
have known that the Official Statement was materially misleading because
the disclosure misrepresented or omitted to disclose such material
information about the Pools. For purposes of First Boston's violations,
the conduct of the First Boston bankers may be imputed to the firm. See
SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972).
2. First Boston, Nowlin, and Montague Violated Section 15B(c)(1) of
the Exchange Act and MSRB Rule G-17
Under Section 15B(c)(1) of the Exchange Act, a broker, dealer, or
municipal securities dealer is prohibited from using 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 violation of any rule of the Municipal Securities Rulemaking Board
("MSRB"). As a broker-dealer conducting a municipal securities business,
First Boston was subject to Section 15B(c)(1) of the Exchange Act and the
MSRB rules, as were its associated persons, Nowlin and Montague. See MSRB
Rule D-11.
MSRB Rule G-17 provides that: "In the conduct of its municipal
securities business, each broker, dealer, and municipal securities dealer
shall deal fairly with all persons and shall not engage in any deceptive,
dishonest, or unfair practice." For the reasons set forth above in Section
C.1. with respect to the violations of Sections 17(a)(2) and (3) of the
Securities Act, First Boston, Nowlin, and Montague violated MSRB Rule G-17.
3. First Boston Failed Reasonably to Supervise Its Investment
Bankers
======END OF PAGE 9======
Under Section 15(b)(4)(E) of the Exchange Act, the Commission may
sanction broker-dealers for failing reasonably to supervise a person under
its supervision. Supervision is an essential function of broker-dealers.
The Commission has "made it clear that it is critical for investor
protection that a broker-dealer establish and enforce procedures to
supervise its employees." In re Sheldon, Exchange Act Release No. 31475,
52 SEC Docket 3826 (Nov. 18, 1992). See also In re Dean Witter Reynolds,
Inc., Exchange Act Release No. 26144, 41 SEC Docket 1680, 1684 (Sept. 30,
1988). In large organizations in particular, it is "imperative that the
system of internal control be adequate and effective." In re Prudential
Sec., Inc., Exchange Act Release No. 33082 (Oct. 21, 1993). See also In re
Shearson, Hammill & Co., Exchange Act Release No. 7743, 42 S.E.C. 811, 843
(Nov. 12, 1965). A firm's failure to establish such guidelines is
symptomatic of a failure to supervise reasonably. See In re G.K. Scott &
Co., Exchange Act Release No. 33485 (Jan. 14, 1994).
First Boston failed reasonably to supervise Nowlin and Montague with a
view towards preventing their violations of the federal securities laws
within the meaning of Section 15(b)(4)(E) of the Exchange Act. First
Boston allowed Nowlin and Montague to approve the Official Statement on
behalf of the firm. The firm, however, failed to have adequate policies
and procedures to guide the investment bankers in the review of the
disclosure and to detect and prevent violations in connection with
municipal securities offerings.
4. Conclusion
Accordingly, based on the foregoing, the Commission finds that First
Boston, Nowlin, and Montague willfully violated Sections 17(a)(2) and (3)
of the Securities Act, Section 15B(c)(1) of the Exchange Act, and MSRB Rule
G-17.<(4)> The Commission further finds that pursuant to Section
15(b)(4)(E) of the Exchange Act, First Boston failed reasonably to
supervise Nowlin and Montague with a view towards preventing their
<(4)> In applying the term "willful" in Commission
administrative proceedings instituted pursuant to
Sections 15(b), 15B, 15C, 17A, 19(h), and 21B of the
Exchange Act, Section 9 of the Investment Company Act
of 1940, and Section 203 of the Investment Advisers Act
of 1940, the Commission evaluates on a case-by-case
basis whether the respondent knew or reasonably should
have known under the particular facts and circumstances
that his conduct was improper. In this case as in all
Commission administrative proceedings charging a
willful violation under these statutory provisions, the
Commission applies this standard to persons --
specifically, securities industry professionals -- who
are directly subject to Commission jurisdiction and who
have a responsibility to understand their duties to the
investing public and to comply with the applicable
rules and regulations which govern their behavior.
======END OF PAGE 10======
violations of the federal securities laws.
IV.
First Boston has submitted an Offer of Settlement in which, without
admitting or denying the findings herein, it consents to the Commission's
entry of this Order, which:
(1) makes findings, as set forth above; (2) orders First Boston to cease
and desist from committing or causing any violations and any future
violations of Sections 17(a)(2) and (3) of the Securities Act, Section
15B(c)(1) of the Exchange Act, and MSRB Rule G-17; and
(3) orders First Boston to pay a civil penalty in the amount of $800,000.
As set forth in its Offer of Settlement, First Boston undertakes to
cooperate with Commission staff in preparing for and presenting any civil
litigation or administrative proceedings concerning the transaction that is
the subject of this Order. Furthermore, First Boston has agreed to certain
specific undertakings in the event that it reenters the business of
underwriting municipal securities.
V.
Nowlin has submitted an Offer of Settlement in which, without
admitting or denying the findings herein, he consents to the Commission's
entry of this Order, which: (1) makes findings, as set forth above; (2)
orders Nowlin to cease and desist from committing or causing any violations
and any future violations of Sections 17(a)(2) and (3) of the Securities
Act, Section 15B(c)(1) of the Exchange Act, and MSRB Rule G-17; and (3)
orders Nowlin to pay a civil penalty in the amount of $35,000. As set
forth in his Offer of Settlement, Nowlin undertakes to cooperate with
Commission staff in preparing for and presenting any civil litigation or
administrative proceedings concerning the transaction that is the subject
of this Order.
VI.
Montague has submitted an Offer of Settlement in which, without
admitting or denying the findings herein, he consents to the Commission's
entry of this Order, which:
(1) makes findings, as set forth above; (2) orders Montague to cease and
desist from committing or causing any violations and any future violations
of Sections 17(a)(2) and (3) of the Securities Act and Section 15B(c)(1) of
the Exchange Act and MSRB Rule G-17; and
(3) orders Montague to pay a civil penalty in the amount of $35,000. As
set forth in his Offer of Settlement, Montague undertakes to cooperate with
Commission staff in preparing for and presenting any civil litigation or
administrative proceedings concerning the transaction that is the subject
of this Order.
VII.
In view of the foregoing, the Commission deems it appropriate and in
======END OF PAGE 11======
the public interest to accept the Offers of Settlement submitted by First
Boston, Nowlin, and Montague.
Accordingly, IT IS HEREBY ORDERED that, pursuant to Section 8A of the
Securities Act and Sections 15(b) and 21C of the Exchange Act:
1. First Boston shall, effective immediately, cease and desist from
committing or causing any violation and any future violation of Sections
17(a)(2) and (3) of the Securities Act, Section 15B(c)(1) of the Exchange
Act, and MSRB Rule G-17.
2. First Boston shall, within thirty (30) days of the date of this
Order, pay a civil money penalty in the amount of $800,000 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 United States 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 cover letter that identifies
First Boston as a Respondent in these proceedings, and states the file
number of these proceedings, a copy of which cover letter and money order
or check shall be sent to William E. White, Senior Trial Counsel, Pacific
Regional Office, Securities and Exchange Commission, 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, California 90036.
3. First Boston shall comply with the undertakings specified in its
Offer as follows:
a. Should First Boston reenter the business of underwriting
municipal securities, First Boston undertakes to implement policies and
procedures relating to its review of preliminary official statements and
supervisory procedures concerning such underwritings prior to reentering
such business.
b. Within thirty (30) days of First Boston's reentry into the
business of underwriting municipal securities, First Boston shall engage an
Independent Consultant who is not unacceptable to the Commission staff.
Such Independent Consultant shall have his or her compensation and expenses
borne exclusively by First Boston. The Independent Consultant may retain
such consultants as he or she shall deem reasonably necessary and
appropriate for the task.
c. The Independent Consultant shall review First Boston's
policies and procedures to determine the adequacy of such policies and
procedures to reasonably detect and prevent the violations of the federal
securities laws that gave rise to this proceeding, and with respect to such
policies and procedures, the Independent Consultant shall:
(1) recommend the adoption and implementation of any new and/or revised
procedures deemed necessary or appropriate; and (2) recommend the adoption
and implementation of new and/or revised training program deemed necessary
or appropriate.
======END OF PAGE 12======
d. The Independent Consultant's recommendation shall be made in
the form of an Initial Report submitted to the Chief Executive Officer and
Board of Directors of First Boston and the Commission's staff within sixty
(60) days of the appointment of the Independent Consultant.
e. Within thirty (30) days of receipt of the draft report
submitted by the Independent Consultant, the Chief Executive Officer and
Board of Directors of First Boston shall, in writing, advise the
Independent Consultant of those recommendations that First Boston has
determined not to accept because they are unduly burdensome. Regarding any
recommendation First Boston believes is unduly burdensome, First Boston
shall undertake to propose an alternative policy or procedure designed to
achieve the same result. First Boston and the Independent Consultant shall
then attempt in good faith to reach agreement on any policy and procedure
as to which there is a dispute.
f. If there is a dispute over a policy or procedure recommended
by the Independent Consultant then the Independent Consultant shall
evaluate First Boston's alternative policy or procedure. First Boston
will, however, abide by the determination of the Independent Consultant
with regard thereto and adopt those recommendations deemed appropriate by
the Independent Consultant.
g. The Independent Consultant shall complete the aforementioned
review and submit a written Final Report thereon to First Boston and the
Commission's staff within sixty (60) days following the date of the Initial
Report.
h. First Boston shall cooperate fully with the Independent
Consultant and shall provide such person with access to its files, books,
records, and personnel as reasonably requested for the review by the
Independent Consultant.
i. First Boston shall take all necessary and appropriate steps
to adopt and implement the recommendations contained in the report.
j. Within sixty (60) days of receipt of the Final Report, First
Boston shall file an affidavit with the Commission's staff stating that it
has put in place a system of policies and procedures reasonably designed to
prevent and/or detect the violations of the securities laws which gave rise
to this proceeding or is in the process of so doing, providing a reasonable
estimate not to exceed sixty (60) additional days without the approval of
the Commission's staff, as to when implementation shall be completed.
k. For the period of engagement and for a period of two years
from completion of the engagement, the Independent Consultant shall not
enter into any employment, consultant, attorney-client, auditing or other
professional relationship with First Boston, or any of its present or
former affiliates, directors, officers, employees, or agents acting in
their capacity as such. Any firm with which the Independent Consultant is
affiliated or of which he/she is a member, and any person engaged to assist
the Independent Consultant in performance of his/her duties under this
======END OF PAGE 13======
Order shall not, without prior written consent of the staff of the
Commission's Pacific Regional Office, enter into any employment,
consultant, attorney-client, auditing or other professional relationship
with First Boston, or any of its present or former affiliates, directors,
officers, employees, or agents acting in their capacity as such for the
period of the engagement and for a period of two years after the
engagement.
4. Nowlin shall, effective immediately, cease and desist from
committing or causing any violation and any future violation of Sections
17(a)(2) and (3) of the Securities Act, Section 15B(c)(1) of the Exchange
Act, and MSRB Rule G-17.
5. Nowlin shall, within thirty (30) days of the date of this Order,
pay a civil money penalty in the amount of $35,000 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 United States 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 cover letter that identifies Nowlin as a Respondent
in these proceedings, and states the file number of these proceedings, a
copy of which cover letter and money order or check shall be sent to
William E. White, Senior Trial Counsel, Pacific Regional Office, Securities
and Exchange Commission, 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036.
6. Nowlin shall comply with his undertakings described in Section V
above.
7. Montague shall cease and desist from committing or causing any
violation and any future violation of Sections 17(a)(2) and (3) of the
Securities Act, Section 15B(c)(1) of the Exchange Act, and MSRB Rule G-17.
8. Montague shall, within thirty (30) days of the date of this
Order, pay a civil money penalty in the amount of $35,000 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 United States 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 cover letter that identifies
Montague as a Respondent in these proceedings, and states the file number
of these proceedings, a copy of which cover letter and money order or check
shall be sent to William E. White, Senior Trial Counsel, Pacific
======END OF PAGE 14======
Regional Office, Securities and Exchange Commission, 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, California 90036.
9. Montague shall comply with his undertakings described in Section
VI above.
By the Commission.
Jonathan G. Katz
Secretary
======END OF PAGE 15======