Municipal Bond Participants - Underwriter's Counsel
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U.S. Securities and Exchange Commission

Municipal Bond Participants:
Underwriter's Counsel

Report under Section 21(a) of the Exchange Act

Attorney's Conduct in Issuing an Opinion Letter Without Conducting An Inquiry Of Underlying Facts Failed to Comport With Applicable Standards of Conduct, Exchange Act Release No. 17831 (June 1, 1981).

See "Bond Counsel" section.

Injunctive Proceedings

Securities and Exchange Commission v. Michael Goodman and Harold Tzinburg, Civ. Action No. 95CV 71563 (E.D. Mich.), Litigation Release No. 14471 (April 19, 1995) (settled injunctive order).

See "The Underwriter" section.

Securities and Exchange Commission v. Matthews & Wright Group, Inc., Matthews & Wright Inc., George W. Benoit, Arthur Abba Goldberg, Rodger J. Burns and Bernard M. Althoff, Civ. Action No. 89-2877 (S.D.N.Y), Litigation Release No. 12072 (April 27, 1989) (complaint).

See "The Underwriter" section.

Securities and Exchange Commission v. Matthews & Wright Group, Inc., Matthews & Wright Inc., George W. Benoit, Arthur Abba Goldberg, Rodger J. Burns and Bernard M. Althoff,, Litigation Release No. 12950 (August 22, 1991) (settled final order).

The Securities and Exchange Commission ("Commission") today announced that Bernard M. Althoff ("Althoff"), an attorney with a New York, New York law firm, consented to the entry of a final judgment of permanent injunction and other relief ("final judgment") with the United States District Court for the Southern District of New York. Under the terms of the settlement, Althoff consented, without admitting or denying the allegations of the Commission's Complaint, to the entry of a final judgment enjoining him against future violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 promulgated thereunder. The final judgment also bars Althoff from appearing or practicing as an attorney before the Commission for a period of two years. The final judgment was entered with the Court on August 15, 1991.

The Complaint filed by the Commission in this matter on April 27, 1989 alleged violations by Matthews & Wright and certain of its officers of the antifraud provisions of the federal securities laws in connection with materially false and misleading statements and omissions in the offering documents for 22 issuances of $768 million worth of municipal bonds underwritten by Matthews & Wright on December 31, 1985.

The Complaint also alleged the use of false and misleading statements and omissions in the registration statement filed with the Commission in connection with an initial public offering of common stock by Matthews & Wright Group in August 1986. The Complaint alleges that Althoff served as counsel for Matthews & Wright Group during its initial public offering of common stock in August 1986. Althoff was alleged to have aided and abetted violations of the antifraud provisions of the Securities Act and Exchange Act relating to the failure of the August, 1986 Matthews & Wright Group registration statement to disclose the potential business and liability risks created by the questionable bond offerings of December 31, 1985 although he knew, or was reckless in not knowing, of the problems with the offerings. See Litigation Release 12072, April 27, 1989.

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Trustee

Injunctive Proceedings

Securities and Exchange Commission v. Robert D. Gersh, Boston Municipal Securities, Inc., and Devonshire Escrow and Transfer Corp., Civ. Action No. 95-12580 (RCL) (D. Mass.), Litigation Release No. 14742 (November 30, 1995) (complaint); Litigation Release No. 15310 (March 31, 1997) (settled final order).

See "The Issuer" section.

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Accountant/Auditor

Commission Orders - Settled Administrative Proceedings

In the Matter of Ronald Blaine., Securities Act Release No. 7224, Exchange Act Release No. 36277, AAE Release No. 717, A.P. File No. 3-8828 (September 26, 1995).

I. The Commission deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Ronald Blaine ("Blaine").

In anticipation of the institution of these administrative proceedings, Blaine has submitted an Offer of Settlement 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to jurisdiction, which is admitted, Blaine consents to the entry of this Order Instituting Proceedings pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Making Findings and Imposing a Cease and Desist Order.

Accordingly, it is ordered that proceedings pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act be, and hereby are, instituted.

II. On the basis of this Order and the Offer of Settlement submitted by Blaine, the Commission makes the following findingsn1:

ENTITY INVOLVED

A. First Humanics Corp. ("First Humanics" or "the company"), a not-for-profit corporation, was in the business of acquiring, renovating and operating nursing homes. From 1984 through 1989, First Humanics renovated and operated 21 nursing homes acquired through 21 separate offerings totalling approximately $82 million in publicly sold municipal and corporate bonds. On October 15, 1987, the Economic Development Corporation of the City of Detroit, Michigan, for the benefit of First Humanics, acquired the Medicos Recovery Care Center (Medicos) through the issuance of $6,955,000 in tax-exempt bonds. This was First Humanics' last offering.

RESPONDENT

B. Blaine was the engagement partner for First Humanics' auditor, Clifton Gunderson & Co. (Clifton). As such, Blaine was primarily responsible for auditing First Humanics' 1986 financial statements which were included as an appendix to the Medicos offering circular. This was Clifton's and Blaine's first engagement with First Humanics.

BACKGROUND

C. In connection with each offering, First Humanics contracted to purchase a particular nursing home. To finance the purchase, the Company arranged for a municipality to issue tax-free municipal bonds. However, the Company remained liable for all payments to bondholders. To finance the issuance costs on certain of the above offerings, the Company also issued a modest amount of corporate bonds in conjunction with the tax-exempt bonds. Again, the Company was liable for all payments to bondholders.

D. Each prospective nursing home was initially located by Lee F. Sutliffe (Sutliffe), the undisclosed control person of First Humanics and the undisclosed promoter of First Humanics' offerings. If he decided the nursing home was acceptable for acquisition, the First Humanics Board of Directors then typically voted to acquire the facility. Subsequent to the Board's approval, Sutliffe initiated the offering process, through which First Humanics obtained the necessary funds to purchase the nursing home. In connection therewith, Sutliffe coordinated the offering process and received an acquisition fee of between $100,000 to $300,000 from each offering.

E. As part of each offering, an offering circular was also prepared with the assistance of company counsel and underwriter's counsel. The offering circular typically contained sections describing First Humanics, the nursing home to be acquired, the bonds, sources and uses of bond proceeds, risk factors and, as appendices, the Company's audited financial statements, and a feasibility study containing forecasts (prepared by other accounting firms). The primary purpose of the offering circular was to provide the investing public with all material facts pertaining to the offering.

F. At each bond closing, the municipal issuer sold the bonds to an underwriter who, in turn, re-sold them to the investing public through various retail broker-dealers. Upon receiving the bond proceeds from the underwriter, the municipal issuer either lent such proceeds to First Humanics so that the Company could purchase the nursing home, or the issuer purchased the nursing home and leased it back to the Company. A certain amount of bond proceeds were also set aside as working capital for the benefit of First Humanics.

G. Upon closing, First Humanics assumed the municipal issuer's repayment obligation to the bondholders. First Humanics was then required to make monthly bond payments to an indenture trustee sufficient for the trustee to meet semi-annual interest payments to the bondholders. At all times, however, effective control of the nursing homes remained with First Humanics. Pursuant to various bond and trust indentures, the Company was also required to allocate a certain amount of the offering proceeds to a debt service reserve fund. The debt service reserve fund was used to offset any insufficiencies in funds available for the semi-annual interest payments to bondholders. However, the Company was required to pay back any monies withdrawn from this account.

H. In addition to his promoting activities, Sutliffe also exercised considerable control over First Humanics. In fact, First Humanics' officers and Board of Directors allowed him to dictate virtually all significant First Humanics' decisions. Sutliffe also served on various First Humanics advisory sub-committees, including a management advisory sub-committee. As such, he was involved in the day-to-day operations of the nursing homes.

I. Revenues from First Humanics' nursing homes were generally paid directly to the company and, from 1984 on, First Humanics freely and openly commingled virtually all such revenues in a central bank account located in Dixon, Illinois (Dixon account). First Humanics then used the revenues from any one nursing home to pay the expenses of other nursing homes, as the need arose. Each nursing home's expenses were paid according to the urgency of the bill and not limited by the amount of revenue generated by the particular nursing home. From 1986 onward, however, most of the nursing homes failed to generate an amount of revenues sufficient to meet their own expenses. As a result, commingling became essential to the operation and survival of First Humanics. Consequently, the success or failure of any one nursing home was thereby dependent upon the success or failure of all other nursing homes. Thus, each municipal offering was, in fact, a de facto investment into First Humanics and its existing nursing homes.

J. Nonetheless, First Humanics experienced severe financial problems. As a result, Sutliffe began contributing large portions of his acquisition fees to First Humanics. During the 1986 calendar year alone, Sutliffe contributed approximately $840,000. Despite these contributions, First Humanics became late in its required monthly bond payments to the offering trustees for certain bond issues. Therefore, First Humanics (through the trustees) began using the funds from some of these delinquent nursing homes' debt service reserve accounts to offset the insufficiencies. Although First Humanics was required to pay back monies withdrawn from such accounts, these payments were often late and insufficient. First Humanics reported a $1.5 million loss for its fiscal year ended November 30, 1986, even including Sutliffe's contributions.

K. Despite First Humanics' financial problems, in early 1987, Sutliffe directed First Humanics to acquire Medicos. In connection therewith, he arranged to have the City of Detroit issue $6,955,000 in tax-exempt bonds. He also directed the Board of Directors to issue $530,000 in taxable bonds to cover the issuance expenses. Both series of bonds were issued pursuant to one offering circular.

L. The Medicos offering closed on October 15, 1987 and the municipal and corporate bonds were sold to the public through underwriters and various broker-dealers. However, the Medicos offering circular misrepresented and omitted to disclose numerous material facts including the commingling of revenues and the resulting interdependence of First Humanics' nursing homes, and Sutliffe's role as promoter and control person of First Humanics.

FIRST HUMANICS' AUDITED FINANCIAL STATEMENTS

M. Attached to the Medicos offering circular as an appendix was First Humanics' 1986 financial statements, including supplemental nursing home schedules, audited by Clifton. Blaine, as the engagement partner, was primarily responsible for the audit of these financial statements. As such, he became aware of First Humanics' deteriorating financial condition, large and increasing losses, commingling and First Humanics' failure to pay back certain debt service reserve funds. However, First Humanics' 1986 audited financial statements failed to disclose the full impact and significance of these conditions and, therefore, the statements did not comply with the disclosure requirements of Generally Accepted Accounting Principles (GAAP). Nonetheless, Blaine permitted these audited financial statements to be included in the Medicos offering circular.

N. Specifically, although Blaine was aware of the commingling of nursing home revenues in the Dixon account and that, in many instances, individual nursing home expenses exceeded revenues, a complete disclosure was not made. Instead, the amount by which each nursing home's expenditures exceeded its revenues was characterized as a "bank overdraft." It was Blaine's decision to use that term. The bank overdraft entries made it appear that each nursing home had a separate bank account and was independent of the other nursing homes. In essence, the bank overdraft entries thereby created the impression that although certain nursing homes were experiencing financial difficulties, these problems were isolated and, therefore, unconnected to the remaining profitable nursing homes. Thus, Medicos investors were led to believe that the financial problems of the existing nursing homes were not necessarily pertinent to their ability to receive interest payments from Medicos.

O. In addition, Blaine knew that indenture trustees for at least two of the bond issues had used debt service reserve funds to pay bondholders. Blaine was also aware that First Humanics had failed to make the required payments to replenish at least one of the funds. In fact, that particular debt service reserve fund had not been repaid by the time the audited financial statements were issued. Such a failure to restore a debt service reserve fund could have constituted an event of default under the underlying bond indenture. Specifically, under the provisions of the First Humanics bond indentures, the bonds became callable upon First Humanics' failure to meet the provision requiring it to make consecutive monthly payments to replenish the debt service reserve fund after monies were withdrawn. When there is such a violation of a provision of a debt agreement for a long-term obligation (e.g., First Humanics municipal and corporate bonds) which, when not cured within a specified grace period, causes the long term obligation to become callable, GAAP requires the callable obligation to be classified as a current liability.n2Although the obligation need not be classified as a current liability if it is probable that the debtor will cure the violation, the underlying circumstances must still be disclosed. Blaine, however, did not question the classification of First Humanics' bonds in the 1986 audited financial statements as long term obligations. Further, even if it were probable that First Humanics would have cured the depletion of the debt service reserve fund, Blaine should have requested that disclosures of the underlying circumstances be made. No additional disclosure was made.

P. Finally, Blaine should have been aware of, or should have taken steps to more fully investigate, Sutliffe's role in First Humanics' management. "During the course of an audit, the auditor should be aware of the possible existence of material related party transactions that could affect the financial statements and of ... management control relationships."n3 In addition, the auditor should obtain an understanding of management responsibilities and the relationship of each component to the total entity.n4 There were a number of events that should have put Blaine on notice of Sutliffe's role. First and foremost was Sutliffe's substantial and continuing contributions to First Humanics. In addition, Clifton's files contained copies of minutes of First Humanics Board of Directors meetings, one of which showed Sutliffe as a member of the management executive advisory committee, and the rest of which showed his attendance at other Board meetings. In fact, Sutliffe was present at the one Board meeting that Blaine attended. In his role, Sutliffe clearly exercised significant influence over the management and operating policies of First Humanics.n5 Under GAAP, the transactions between First Humanics and its management (such as Sutliffe's contributions) should have been disclosed as material related party transactions. n6 Thus, First Humanics' 1986 audited financial statements should have included disclosures describing the nature of Sutliffe's relationship with First Humanics and a description of his contributions. n7 However, no such disclosures were made. Blaine did not exercise the requisite due professional care in not making the necessary inquiries to obtain an adequate understanding of Sutliffe's role in the affairs of First Humanics.

Q. Respondent Blaine caused violations of Section 17(a) of the Securities Act due to an act or omission Blaine knew or should have known would contribute to a violation of Section 17(a) of the Securities Act in that he, in the offer or sale of certain securities, namely Medicos municipal bonds and First Humanics corporate bonds described in paragraphs III.B.1. (a) and (k) above, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly, caused the: employing of devices, schemes or artifices to defraud; obtaining of money or property by means of untrue statements of material facts or omissions 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; or engaging in transactions, practices or courses of business which operated as a fraud or deceit upon purchasers or prospective purchasers. As part of the aforesaid conduct, Respondent, by allowing First Humanics' 1986 financial statements to be included in the Medicos offering circular, caused misrepresentations and omissions of material fact to be made to purchasers and prospective purchasers concerning, among other things, the commingling of revenues and the resulting interdependence of First Humanics' nursing homes, Sutliffe's role and control, and First Humanics' failure to replenish its debt service reserve fund.

R. Respondent Blaine caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder due to an act or omission Blaine knew or should have known would contribute to a violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that he, in connection with the purchase or sale of certain securities, namely Medicos municipal bonds and First Humanics corporate bonds described in paragraphs III.B.1. (a) and (k) above, by use of the means or instrumentalities of interstate commerce or by the use of the mails, directly or indirectly, caused the: employing of devices, schemes or artifices to defraud; making of untrue statements of material facts or omissions 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; or engaging in acts, practices or courses of business which operated as a fraud or deceit. As part of the aforesaid conduct, Respondent, by allowing First Humanics' 1986 financial statements to be included in the Medicos offering circular, caused misrepresentations and omissions of material facts to be made to purchasers and sellers concerning, among other things, the commingling of revenues and the resulting interdependence of First Humanics' nursing homes, Sutliffe's role and control, and First Humanics' failure to replenish its debt service reserve fund.

III. In view of the foregoing, it is in the public interest to impose the sanctions agreed to in the Offer of Settlement.

Accordingly, IT IS HEREBY ORDERED THAT, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Ronald Blaine cease and desist from committing or causing any violation, and committing or causing any future violation, of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

Footnotes

-[n1]-The findings herein are made pursuant to Blaine's Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding.

-[n2]-FAS 78, P 5

-[n3]-AICPA, Codification of Statements on Auditing Standards, AU Section 334.04. (effective after September 30, 1983).

-[n4]-Id. at AU Section 334.05.

-[n5]-SFAS 57, P 24(f)

-[n6]-SFAS 57, P 1

-[n7]-SFAS 57, P 2

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Consultants

Injunctive Proceedings

SEC v. A. L. Busby, et al. Civ. Action No. C-79-2442-M (W.D. Tenn.), Litigation Release No. 8812 (July 5, 1979) (settled final order).

Jule B. Greene, Administrator of the Atlanta Regional Office of the Securities and Exchange Commission, announced that on June 20, 1979, the Honorable Robert M. McRae, Jr., United States District Judge for the Western District of Tennessee, at Memphis, entered an order permanently enjoining A. L. Busby, individually and d/b/a ALB Company and Busby Oil Company, and Steven Grimes, individually and d/b/a Dal-Tex Supply of Tennessee, Inc., of East Tawakoni, Texas, Gayle I. Malone of Trenton and Richard T. Heagy, individually and d/b/a the Atlantic Company and Standard Reports, and Hagen H. Peters of Memphis, Tennessee, from further violations of anti-fraud provisions of the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act").

The Commission's complaint alleged violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in the offer and sale of $4.6 million in revenue bonds issued by the Gibson County Municipal Water District of Gibson County, Tennessee. The complaint alleged, among other things, that investors were not told that Busby, doing business as ALB Company, had an arrangement with the Water District to provide "advisory" services at a fee equal to 2% of the aggregate principal amount of the bond issues. The complaint also alleged that investors in the District's revenue bonds were not informed of the effects of using lower grade pipe to construct a portion of the water system, the number of customers to be served by the water system, the adequacy of funds to complete the water system, or the relationship of Busby to various construction companies and materials suppliers dealing with the District.

The defendants consented to entry of the order without admitting or denying the allegations in the complaint.

SEC v. The Senex Corporation, et al., Civ. Action No. 7453 (E.D. Ky.), Litigation Release No. 6451 (July 24, 1974) (complaint); 399 F. Supp. 497 (E.D. Ky. 1975); Litigation Release No. 6769 (March 5, 1975) (settled final orders); Litigation Release No. 8651 (January 23, 1979) (settled final orders).

See "Obligated Persons" section.

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Commission Orders - Settled Administrative Proceedings

In re County of Nevada, City of Ione, Wasco Public Financing Authority, Virginia Horler and William McKay, Securities Act Release No. 7503, Exchange Act Release No. 39612, A.P. File No. 3-9542 (February 2, 1998).

See "The Issuer" section.

In re William McKay, Securities Act Release No. 7536, Exchange Act Release No. 40225, A.P. File No. 3-9542, (July 17, 1998).

I. The Securities and Exchange Commission ("Commission") has previously instituted a cease-and-desist proceeding pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against William McKay ("McKay" or "Respondent").n1 McKay subsequently has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept.

II. 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 that McKay admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, McKay consents to the issuance of this Order Making Findings and Imposing a Cease-and-Desist Order ("Order") and to the entry of the findings and the imposition of the relief set forth below.

III. On the basis of this Order and McKay's Offer, the Commission finds").n2 the following:

A. Respondent

William McKay ("McKay"), age 69, resides in Sacramento, California, and is a real estate appraiser who does business under the name McKay & Associates.

B. Background

1. On December 20, 1990, the County of Nevadan3 issued $9.07 million in Series E-1990 Special Tax, Community Facilities District 1990-1 Bonds ("the Nevada bonds") pursuant to the California Mello-Roos Community Facilities Act of 1982, Cal. Gov. Code 53311, et seq. (the "Mello-Roos Act").n4 On February 14, 1991, the City of Ionen5 issued $7.5 million in Special Tax Bonds, Community Facilities District No. 1989-2, Series 1991 ("the Ione CFD 89-2 bonds"), and on May 28, 1991, the City of Ione issued $6.55 million in Special Tax Bonds, Community Facilities District No. 1989-1, Series 1991 ("the Ione CFD 89-1 bonds"), both pursuant to the Mello-Roos Act.

The Mello-Roos Bond Act

2. The Mello-Roos Act authorizes municipalities to organize community facilities districts ("CFDs") to finance the building of infrastructure.

3. Mello-Roos bonds are paid off through special taxes levied on the property being developed. The bonds are not personal debts of the landowners or general obligations of the issuing municipality. Because they are paid off using future real property tax levies, the bonds' financial attractiveness depends upon the underlying value of the land being developed, the contemplated improvements to the land and the developer's ability to carry out the contemplated improvements.

Nature of the Value-to-Lien Ratio for a Mello-Roos Bond Financing

4. The value of the land being developed in relation to the amount of bond debt against the land constitutes the value-to-lien ratio. To determine the value of the land, a real estate appraisal is normally performed. Investors rely on the "value-to-lien" ratio to measure the creditworthiness of Mello-Roos bonds because land-secured municipal debt is often sold without a credit rating. If there is a default on a Mello-Roos bond, the issuer will foreclose on the tax lien and use the proceeds to bring the bonds current or possibly pay off the bonds to the extent funds are available to do so. Alternatively, the issuer will attempt to sell the property to another developer who will complete the project.

5. Adequate land values offer the best assurance that bondholders will receive principal and interest payments. A high value-to-lien ratio usually provides greater safety for the investor and leads to a lower interest rate for the issuer. In California during the relevant time period, a 3-to-1 value-to-lien ratio was normally required to complete a Mello-Roos bond offering.

6. The "value" securing a bond issue. and therefore the risk to investors, must be accurately disclosed in Official Statements. Otherwise, no investor can really assess the true level of risk.

C. The Nevada County Bond Offering

Formation of the Wildwood Estates District

1. Located within Nevada County is a contiguous, undeveloped, 286-acre parcel which became known as "Wildwood Estates" and which had been owned by a bankrupt entity. In early 1990, a developer purchased -- subject to final bankruptcy court approval -- Wildwood Estates for $1.98 million using funds raised through four limited partnerships.

2. To finance the development of the property, the developer requested financial assistance from the County of Nevada ("Nevada" or the "County). In February 1990, Nevada initiated the process to issue Mello-Roos bonds to finance the construction of the public improvements for Wildwood Estates. On March 20, 1990, the County Board of Supervisors ("Board") considered an application by the developer to form the Wildwood Estates Community Facilities District ("Nevada County CFD") in accordance with the Mello-Roos Act. The developer presented to the Board a three-page appraisal summary prepared by a Member of the Appraisal Institute ("MAI") valuing the property at $28 million after final completion.

McKay is Retained to Appraise Wildwood Estates

3. On March 23, 1990, the underwriter solicited proposals for the appraisal of Wildwood Estates. The appraisal was required to determine the value-to-lien ratio. Of the five appraisers solicited, two did not respond, one replied that it could not submit a bid within the time allowed, one bid $20,000 and McKay bid $4,000. At the time, McKay was already working with the underwriter on the City of Ione bond offerings (discussed below).

4. McKay was not an MAI, but he had a fee-splitting arrangement with an appraiser who was an MAI. Under this arrangement, the MAI co-signed the appraisal reports in exchange for a 10 percent cut of McKay's fees. In a letter providing McKay instructions for the appraisal, the underwriter stated that McKay should provide three separate values for the property: the "as is" value, the "bulk sale" value and the "project build-out" value. The underwriter specifically instructed McKay that the value of certain improvements (roads, utilities, recreation and other facilities) should not be included in the appraisal because these improvements would not be funded with Mello-Roos bonds.

5. On June 6, 1990, McKay prepared a two-page "preliminary appraisal," in which he valued the property based on three separate sets of assumptions. The first assumed that the property was developed as 396 single family lots, with a 22-acre parcel in the center of the project left undeveloped. The second assumed that the property was developed as 396 single family lots with the 22 acre parcel subdivided into 45 additional single family lots. The third assumed that the property was developed as 396 single family lots with the 22 acre parcel developed as 175 townhouses.

6. On June 23, 1990, McKay issued a 60-page appraisal report for Wildwood Estates. His report incorporated the same three assumptions, and the build-out values remained substantially the same. In this appraisal, McKay found values ranging from $2.98 million to $38 million. McKay also prepared a 14-page summary to be included in the Official Statement to be provided to investors. The summary appraisal only contained the three highest values, ranging from approximately $32 million to $38 million. McKay knew the summary would be included in the Official Statement and relied upon by investors to measure the security of the bonds.

The Official Statement Contains Material Misrepresentations and Omissions

7. The Nevada County Official Statement represented that the build-out value of Wildwood Estates (the estimated value for all the lots after completion of the infrastructure if sold individually to builders or homeowners) was $35,280,000. This representation was important to investors because it indicated that there would likely be adequate security in the event property owners failed to pay the special taxes needed for making principal and interest payments to the bondholders.

8. The $35,280,000 figure in the Official Statement was materially overstated by at least $4 million because it was based on the inclusion of 45 single family lots to be located on a 22-acre parcel in Wildwood Estates when, in fact, the developer had not sought -- and never received -- approval to develop that parcel into 45 single family lots. McKay also assigned a per lot value almost $10,000 higher for these 45 lots than the average value for the approved 384 lots. Without the additional $4 million, the Nevada County Bonds would not have met a 3-to-1 value-to-lien ratio (after the County issued the additional $2 million in taxable bonds necessary to complete the project) Additionally, without a clear and viable plan to develop the 22-acre parcel, the Mello-Roos tax liens against that parcel would go unpaid unless Wildwood Corp. was willing and able to pay the taxes.

9. The Nevada County Official Statement falsely stated that all comparables were cash sales when in fact some of the comparables were only listing prices. McKay's full 60-page appraisal, which the County received, disclosed the basis for his comparables. The full appraisal was not distributed to the bond investors; instead, they received a 14-page summary, which excluded this information, and had to request copies of the full appraisal from the County, the County's financial adviser, or the underwriter.

10. The Nevada County Official Statement failed to disclose that, in addition to the appraised build-out value of $35,280,000 represented in the Official Statement, the land had also been appraised using other methods of valuation which resulted in substantially lower appraised values which did not meet the 3-to-1 ratio.

D. The two City of Ione Bond Offerings

1. The City of Ione ("Ione") wanted to finance the infrastructure for a 460-acre real estate development project called Castle Oaks Country Club Estates ("Castle Oaks"), consisting of a residential subdivision, a golf course, and other recreational and commercial uses. The underwriter recommended that Ione issue two series of Mello-Roos bonds to finance the infrastructure. The first series, Ione CFD-1, was to be used to finance the development of the Castle Oaks golf course, which was to be owned by Ione, but leased to a private, for-profit operator. Because that lease arrangement would prevent that series of Mello-Roos bonds from being tax free, the Ione CFD-1 offering was delayed for several months. The second series, Ione CFD-2, was to be used to develop certain infrastructure at Castle Oaks. Because of the delay in issuing the Ione CFD-1 bonds, the Ione CFD-2 bonds were actually issued first.

2. On February 14, 1991, the Ione issued $7.5 million in Ione CFD-2 bonds under the Mello-Roos Act After the Ione CFD-2 bonds were issued, Ione noticed that the tentative map had not been drawn in conformity with the minimum lot size requirement set forth in the Development Agreement between Ione and the developer. When the lot size was recalculated, the development had only 584 single family lots rather than 667 as originally calculated.

3. On June 6, 1991, in a separate underwriting, Ione issued $6.55 million of Ione CFD-1 bonds under the Mello-Roos Act. The Ione CFD-1 Official Statement represented that the build-out value of the Castle Oaks Project was $44,906,000, an amount that appeared to satisfy the 3-to-1 value-to-lien ratio for the $14.05 million in total bonds (CFD-2 and CFD-1) then issued. The value was based on an appraisal prepared by McKay.

4. This representation was false and misleading. The $44,906,000 appraisal was almost $3 million higher than an appraisal prepared the previous year, despite the fact that in the one year intervening period the number of single family lots in the project had been reduced from 667 to 584 and real estate values in California had declined. In addition, the $44,906,000 appraisal was based on the assumption that part of the land would be developed into 90 high-density single family lots. That assumption, however, was not part of the developer's immediate plans, did not meet the required minimum square foot requirements, had not been approved, and lacked any apparent market.

5. McKay improperly disregarded the developments as planned, and instead included in his appraisal the value of improvements which were not planned, approved or financed.

E. McKay committed or caused the violation of Antifraud Provisions of the Federal Securities Laws

1. McKay's misrepresentations were material. As discussed in Section III.B. above, the value of the underlying property is the key measure of the creditworthiness of a land-secured financing. The lower the value the greater the risk inherent in the bonds. In both the Nevada and Ione CFD-1 offerings, McKay's appraisals led bond holders to falsely believe that their investments were adequately secured by the value of the real estate securing the bonds.

2. McKay's misrepresentations were "in connection with" and "in the offer or sale" of the Nevada and Ione bonds. All were designed to induce investors to purchase the Nevada and Ione CFD-1 bond issues. There was a causal nexus between the statements made and investors' decisions to buy the bonds.

3. McKay knew or recklessly disregarded the fact that the Nevada County and Ione CFD-1 Official Statements contained material misrepresentations and omissions.

4. McKay obtained money or property by means of material misstatements or omissions and engaged in a transaction, practice or course of business which operated as a fraud or deceit upon the purchasers of the Nevada and Ione CFD-1 bonds.

5. Based on the foregoing, the Commission finds that McKay committed or caused the violation of Sections 17(a)(1), (2) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

IV. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21G of the Exchange Act, that McKay cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

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In re Dwight Allen, Securities Act Release No. 7456, Exchange Act Release No. 39122, A.P. File No. 3-9430 (September 24, 1997).

I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a cease-and-desist proceeding be, and hereby is, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Dwight Allen ("Allen" or "Respondent") violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

II. In anticipation of the institution of this proceeding, Allen has submitted an Offer of Settlement ("Offer"), 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 in which the Commission is a party, and without admitting or denying the findings contained herein, except that Respondent admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Allen consents to the issuance of this Order Instituting Cease-and-Desist Proceeding Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") and to the entry of the findings and the imposition of the relief set forth below.

III. On the basis of this Order and Respondent's Offer, the Commission findsn6 the following:

A. The Respondent

Dwight Allen, 51 years old, resides in Greenbrae, California. He is a certified public accountant who operates a sole proprietorship called Allen & Co. located in San Francisco, California. Allen served as the "Independent Financial Consultant" to the Wasco and Avenal Public Financing Authorities for their purchases of City of Ione Community Facilities District 1989-1 Bonds.

B. Background

1. The Relevant Bond Legislation

a. The Marks-Roos Bond Act

The California Marks-Roos Local Bond Pool Act of 1985 ("Marks-Roos ct")n7 permits municipalities to organize "public financing authorities" ("PFAs") that sell bonds to the general public in order to create pools of monies which are, in turn, used to buy bonds, notes and other obligations of other public entities. Marks-Roos bonds are payable from the principal and interest of the local obligations purchased with the pool's proceeds.

Funds raised in a Marks-Roos offering must be used within a certain amount of time to purchase other local obligations. Under Section 149(f) of the Internal Revenue Code, a pooled financing is tax exempt only if the issuer reasonably expects that 95 percent of the net proceeds of the bond pool will be used within three years of the date of issuance. For this reason, bond pools generally require that all funds not applied within three years of issuance be returned to investors.

On June 1, 1989, the Avenal Public Financing Authority ("Avenal") issued $11 million in municipal bonds under the Marks-Roos Act. On September 20, 1989, the Wasco Public Financing Authority ("Wasco") issued $35 million in bonds under the Marks-Roos Act.n8 The Wasco and Avenal Indentures of Trust ("Indentures") both contained a three year limitation on the placement of funds ("the origination period") and required that all funds not used within the origination period be repaid to investors.

b. The Mello-Roos Bond Act

The California Mello-Roos Community Facilities Act of 1982 ("Mello-Roos Act")n9 authorizes cities, special districts, joint power authorities and other municipal corporations to organize community facilities districts ("CFDs") for the purpose of financing the building of infrastructure. CFDs are empowered to issue bonds secured by special taxes to finance both localized improvements such as streets and sewers, and more regional facilities, such as schools and freeway exchanges. However, the vast majority of CFDs are formed to finance the public infrastructure of real estate developments. Mello-Roos bonds are payable from special taxes levied on the property to be developed. The Mello-Roos bonds are not personal debts of the landowners or general obligations of the municipalities.

On May 28, 1991, the City of Ione issued $6.55 million in Special Tax, Community Facilities District 1989-1 Series 1991 Bonds ("the Ione CFD 89-1 bonds") pursuant to the Mello-Roos Act. n10

2. The Value-to-Lien Ratio for a Land-Secured Financing

The relationship between the value of the land and the amount of bond debt is referred to as the value-to-lien ratio. The land is not collateral in the sense that a default on the bonds results in the transfer of title to bondholders. Rather, adequate land values offer the best assurance that bondholders will receive principal and interest payments because, if necessary, the issuer can foreclose on the tax lien and the proceeds from the sale of the delinquent properties can be used to bring the bonds current and repay the bondholders. Special tax liens have no intrinsic value without adequate property values to support them.

Because a substantial portion of California land-secured municipal debt is sold without a credit rating, investors have relied on the value-to-lien ratio to measure the creditworthiness of a land-secured financing. The higher the ratio the lower the degree of risk to the investor and the lower the borrowing cost to the issuer in the form of a lower interest rate on the issue. In California, a 3 to 1 value-to-lien ratio served as the informal standard for a number of years. The belief was that a value-to-lien ratio of 3 to 1 offered a sufficient cushion against declines in land value as well as some protection against the uncertainties of the appraisal process itself.

The Wasco and Avenal Indentures of Trust required that a local obligation had to have a value-to-lien ratio of at least 3 to 1, a requirement the Indentures referred to as the "minimum credit requirement." To satisfy the Wasco and Avenal PFA minimum credit requirement, "the current market value of the land and improvements subject to the lien of such issue . . . , as determined by an appraisal rendered by an MAI certified real estate appraiser selected by the Authority" had to be three times the value of the special tax liens.

3. The Role of the Independent Financial Consultant

The Wasco and Avenal Indentures also required that the Authorities retain an Independent Financial Consultant to verify that a project had a value-to-lien ratio of at least 3 to 1. A local obligation could not be acquired by the Authorities without a certificate from the Independent Financial Consultant stating that the "minimum credit requirement" had been met.

An Independent Financial Consultant was defined in the Indentures as "any financial consultant or firm of such financial consultants appointed by the Authority and who, or each of whom: (a) is judged by the Authority to have experience with respect to the financing of public capital improvement projects; (b) is in fact independent and not under the domination of the Authority; (c) does not have any substantial interest, direct or indirect, with the Authority, other than as Original Purchaser; and (d) is not connected with the Authority as an officer or employee of the Authority, but who may be regularly retained to make reports to the Authority."

C. Facts

1. Limitations on the Local Obligations Wasco and Avenal Could Purchase

The Avenal and Wasco Official Statements disclosed that the bond pools had been established for the express purpose of acquiring the specific projects identified in the Official Statements. The Official Statements stated that if for some reason the money was not used for those specific projects, other public agencies could join the Authorities and participate in the bond pools, as long as their bonds satisfied the minimum credit requirement and other requirements.

2. Allen Represents that the Ione CFD 89-1 Bonds Satisfy the Minimum Credit Requirement

As of June 1991, a number of the specific projects identified in the Avenal and Wasco Official Statements had not been funded by the Authorities. As a result, the Avenal and Wasco PFAs both had millions of dollars in uncommitted funds that had to be used to acquire other projects or returned to investors upon the expiration of the three year origination period. The underwriter recommended that the Authorities consider purchasing the Ione CFD 89-1 bonds that it was then underwriting.

Based on the underwriter's recommendation, the Authorities retained Allen to act as their Independent Financial Consultant in connection with their purchases of the Ione bonds. Allen testified that he was not familiar in detail with the Marks-Roos or Mello-Roos Bond Acts. His prior experience in municipal finance was limited to verifying calculations regarding debt service coverage of bond financing. He had no experience reviewing appraisals for public capital improvement projects. Allen never spoke with anyone from the Avenal or Wasco PFAs.

Allen received the Wasco and Avenal Official Statements which contained the definitions of "minimum credit requirement" before preparing his opinion letters. He received and relied on excerpts of the Wasco and Avenal Indentures (namely, Sections 1.02, 3.05, and 3.06).

In order to prepare his June 7 and 11, 1991 opinion letters, Allen also received and relied on a May 1, 1991, appraisal which had been prepared for Ione. Avenal and Wasco had not contracted to have an appraisal prepared. The appraisal found three values for the property: raw land was $1,380,000; bulk sale value was $27,957,000; and project build out value was $44,906,000. In order to satisfy the minimum credit requirement, the "current market value of the land and improvements" had to be at least $42.15 million. The special tax liens on the property were to total $14.05 million. The raw land and bulk sale values were too low. The project build out value did not reflect the current market value, as it was an estimate of what the land might sell for once the infrastructure was completed. Allen conceded in testimony that without the built out improvements, the current market value of the property was not three times the value of the bonds. This assumes the current market value meant what the property could sell for on the May 1, 1991, appraisal date.

Allen signed two opinion letters to the Wasco and Avenal PFAs, respectively, on June 7 and 11, 1991, which stated in part: We have read Section 3.05, Section 3.06, Section 1.02 (regarding the content of this opinion) and the related definitions thereto of the Indenture of Trust. . . . We have read the terms and conditions of the Local Obligation and are qualified to render the opinion set forth below. We have made or caused to be made such examinations as is necessary to enable us to express an informed opinion with respect to the subject matter herein contained. In our opinion, the provisions of said Section 3.05 of the Indenture have been complied with.

Based on the foregoing, we express the following opinion:

The Local Obligation satisfies the Minimum Credit Requirements as required by Section 3.05(a) and as defined in the Indenture. The MAI certified real restate appraisal reflects a value of approximately 3.2 times the aggregate of Special Tax Bonds issued under the authority of the CFD 1989-1 and CFD 1989-2.

The determined value of the land and improvements is based upon the appraised build-out value as defined in the certified appraisal.

The Ione CFD 89-1 bonds did not satisfy the Indenture's requirements because the current market value of the land and improvements securing the bonds was less than $42.15 million, or three times $14.05 million.

In October 1994, the Ione CFD stopped paying principal and interest on the bonds and the City of Ione declared a default. In December 1995, the bonds were brought current through the sale of the property to an investment group.

D. Findings

During the offer and sale of the Ione CFD 89-1 bonds, Allen made representations that were false to the Wasco and Avenal PFAs. As discussed above, in his Independent Financial Consultant Certificates, Allen represented that the Ione bonds satisfied the minimum credit requirement of the Indentures.

The misrepresentations were material. The minimum credit requirement was intended to measure the creditworthiness of the bonds and to limit the risk being assumed by the Authorities and their bondholders.

The misrepresentations were "in connection with" and "in the offer or sale" of the Ione bonds.

Allen acted with scienter. Given that Allen relied solely on the appraisal to determine the current market value of the property, his conduct was reckless.

Based on the foregoing, and the Offer submitted by Respondent, the Commission finds that Allen violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

IV. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Allen cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

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In re Richard Milbrodt, Securities Act Release No. 7455, Exchange Act Release No. 39121, A.P. File No. 3-9429 (September 24, 1997).

I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a cease-and-desist proceeding be, and hereby is, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Richard Milbrodt ("Milbrodt" or "Respondent") violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

II. In anticipation of the institution of this proceeding, Milbrodt has submitted an Offer of Settlement ("Offer"), 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 in which the Commission is a party, and without admitting or denying the findings contained herein, except that Respondent admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Milbrodt consents to the issuance of this Order Instituting Cease-and-Desist Proceeding Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order") and to the entry of the findings and the imposition of the relief set forth below.

III. On the basis of this Order and Respondent's Offer, the Commission findsn11 the following:

A. The Respondent

Richard Milbrodt, 64 years old, resides in Sacramento, California. He provides financial consulting services to municipalities under the name Administrative Budget Counseling. Milbrodt served as the "Independent Financial Consultant" to the Wasco and Avenal Public Financing Authorities for their purchases of Nevada County Series E-1990 Special Tax Bonds.

B. Background

1. The Relevant Bond Legislation

a. The Marks-Roos Bond Act

The California Marks-Roos Local Bond Pool Act of 1985 ("Marks-Roos Act")n12 permits municipalities to organize "public financing authorities" ("PFAs") that sell bonds to the general public in order to create pools of monies which are, in turn, used to buy bonds, notes and other obligations of other public entities. Marks-Roos bonds are payable from the principal and interest of the local obligations purchased with the pool's proceeds.

Funds raised in a Marks-Roos offering must be used within a certain amount of time to purchase other local obligations. Under Section 149(f) of the Internal Revenue Code, a pooled financing is tax exempt only if the issuer reasonably expects that 95 percent of the net proceeds of the bond pool will be used within three years of the date of issuance. For this reason, bond pools generally require that all funds not applied within three years of issuance be returned to investors.

On June 1, 1989, the Avenal Public Financing Authority ("Avenal") issued $11 million in municipal bonds under the Marks-Roos Act. On September 20, 1989, the Wasco Public Financing Authority ("Wasco") issued $35 million in bonds under the Marks-Roos Act.n13 The Wasco and Avenal Indentures of Trust ("Indentures") both contained a three year limitation ("the origination period") on the placement of funds and required that all funds not used within the origination period be repaid to investors.

b. The Mello-Roos Bond Act

The California Mello-Roos Community Facilities Act of 1982 ("Mello-Roos Act")n14 authorizes cities, special districts, joint power authorities and other municipal corporations to organize community facilities districts ("CFDs") for the purpose of financing the building of infrastructure. Unlike public financing authorities, CFDs are formed for funding purposes only and are governed by the legislative bodies which authorize their formation. CFDs are empowered to issue bonds secured by special taxes to finance both localized improvements such as streets and sewers, and more regional facilities, such as schools and freeway exchanges. However, the vast majority of CFDs are formed to finance the public infrastructure of real estate developments. Mello-Roos bonds are payable from special taxes levied on the property to be developed. The Mello-Roos bonds are not personal debts of the landowners or general obligations of the municipalities.

On December 20, 1990, the County of Nevadan15 issued $9.07 million in Series E-1990 Special Tax, Community Facilities District 1990-1 Bonds ("the Nevada bonds") pursuant to the Mello-Roos Act.

2. The Value-to-Lien Ratio for a Land-Secured Financing

The relationship between the value of the land and the amount of bond debt is referred to as the value-to-lien ratio. The land is not collateral in the sense that a default on the bonds results in the transfer of title to bondholders. Rather, adequate land values offer the best assurance that bondholders will receive principal and interest payments because, if necessary, the issuer can foreclose on the tax lien and the proceeds from the sale of the delinquent properties can be used to bring the bonds current and repay the bondholders. Special tax liens have no intrinsic value without adequate property values to support them.

Because a substantial portion of California land-secured municipal debt is sold without a credit rating, investors have relied on the value-to-lien ratio to measure the creditworthiness of a land-secured financing. The higher the ratio the lower the degree of risk to the investor and the lower the borrowing cost to the issuer in the form of a lower interest rate on the issue. In California, a 3 to 1 value-to-lien ratio served as the informal standard for a number of years. The belief was that a value-to-lien ratio of 3 to 1 offered a sufficient cushion against declines in land value as well as some protection against the uncertainties of the appraisal process itself. n16

The "value" of the land for the purposes of the value-to-lien ratio can be measured in different ways. The Wasco and Avenal Indentures mandated that a project had to have a value-to-lien ratio of at least 3 to 1 as appraised by a member of the Appraisal Institute ("MAI") selected by the Authorities. Furthermore, the 3 to 1 ratio was based on the "current market value of the land and improvements subject to the lien" divided by the total amount of public debt secured by liens against the property. This requirement was defined in the Indentures as the "minimum credit requirement."

3. The Role of the Independent Financial Consultant

To ensure that the "minimum credit requirement" was satisfied, the Wasco and Avenal Indentures required that the Authorities retain an Independent Financial Consultant to verify that a project had a value-to-lien ratio of at least 3 to 1. A local obligation could not be acquired by the Authorities without a certificate from the Independent Financial Consultant stating that the "minimum credit requirement" had been met.

An Independent Financial Consultant was defined in the Indentures as "any financial consultant or firm of such financial consultants appointed by the Authority and who, or each of whom: (a) is judged by the Authority to have experience with respect to the financing of public capital improvement projects; (b) is in fact independent and not under the domination of the Authority; (c) does not have any substantial interest, direct or indirect, with the Authority, other than as Original Purchaser; and (d) is not connected with the Authority as an officer or employee of the Authority, but who may be regularly retained to make reports to the Authority."

C. Facts

1. Limitations on the Local Obligations Wasco and Avenal Could Purchase

The Avenal and Wasco Official Statements disclosed that the bond pools had been established for the express purpose of acquiring the specific projects identified in the Official Statements. While the Official Statements stated that Wasco and Avenal intended to and reasonably expected to purchase these projects, they noted that there could be no guarantee that any of the specified projects would be constructed and, if so, acquired by the Authorities. In such an event, they disclosed that the bond pools had been designed to allow other public agencies to join the Authorities and participate in the bond pools, as long as their bonds satisfied the minimum credit requirement, in addition to other requirements.

2. Milbrodt Represents that the Nevada Bonds Satisfy the Minimum Credit Requirement

As of December 1990, a number of the specific projects identified in the Avenal and Wasco Official Statements had not been funded by the Authorities. As a result, Avenal and Wasco both had millions of dollars in uncommitted funds in their bond pools that had to be used to acquire other projects or returned to investors prior to the expiration of the origination period. The underwriter of the Wasco and Avenal bonds recommended that the Authorities consider purchasing some of the Nevada bonds, which it also was underwriting.

Upon the underwriter's recommendation, the Authorities retained Milbrodt to act as their Independent Financial Consultant in connection with their purchases of the Nevada bonds. Milbrodt testified that he did not read the Indentures and that he was unaware of the Indentures' "minimum credit requirement." Milbrodt also testified that he did not read the Nevada Official Statement before rendering an opinion and did not know that the Nevada CFD had issued $9 million in bonds. Notwithstanding, Milbrodt issued separate certificates to Avenal and Wasco in which he represented that "we have read the terms and conditions of the Local Obligation and are qualified to render the opinion set forth below" that "the Local Obligation satisfies the Minimum Credit Requirements provided in the Indenture." After Milbrodt issued his certificates, Avenal purchased $1 million and Wasco purchased $3.5 of the Nevada bonds.

Milbrodt's certificates were false and misleading. To satisfy the "minimum credit requirement" specified in the Indentures, the land and improvements securing the Nevada bonds had to have a "current market value" that was three times the value of the special tax liens, as determined by a certified MAI appraiser selected by the Authorities. The Nevada bonds did not satisfy these requirements because the current market of value of the land and improvements was far less than three times the principal amount of the bonds.n17 Milbrodt had no evidence that the current market value of the property securing the Nevada bonds was anything close to that amount. In addition, the Authorities had not retained their own MAIs to appraise the property securing the Nevada bonds.

In December 1994, the Nevada CFD stopped paying principal and interest on the bonds and the County declared a default. In February 1996, the bonds were brought current through the sale of a portion of the property securing the bonds. The reserve fund, however, was not replenished. The Nevada CFD will not be able to make future principal and interest payments on the bonds unless there are additional sales of the remaining real estate securing the bonds.

D. Findings

During the offer and sale of the Nevada bonds, Milbrodt made misrepresentations to Wasco and Avenal. As discussed above, in his Independent Financial Consultant Certificates, Milbrodt falsely represented that the Nevada bonds satisfied the "minimum credit requirements" of the Indentures. As a result, Avenal and Wasco were deceived into purchasing the Nevada bonds in violation of the undertakings contained in their Indentures.

The misrepresentations were material. As discussed above, the "minimum credit requirement" was intended to measure the creditworthiness of the bonds and to limit the risk being assumed by the Authorities and their bondholders. Milbrodt's misrepresentations led the Authorities to falsely believe that the Nevada bonds were adequately secured and that the level of risk was appropriate.

The misrepresentations were "in connection with" and "in the offer or sale" of the Nevada bonds. All were designed to induce the Authorities to purchase the Nevada bonds. There was a causal nexus between Milbrodt's misrepresentations and Avenal and Wasco's decisions to purchase the bonds.

Milbrodt acted with scienter. Given that Milbrodt testified that he never received copies of the Indentures, issued his certificates without viewing the minimum credit requirement, did not know the amount of bonds issued by the Nevada CFD, yet certified that the Nevada bonds satisfied the minimum credit requirement, his conduct, at a minimum, was reckless.

Based on the foregoing, and the Offer submitted by Respondent, the Commission finds that Milbrodt violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

IV. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Milbrodt cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

Footnotes

-[n1]-The Commission instituted the cease-and-desist proceeding on February 2, 1998. See Securities Act Rel. No. 7503; Securities Exchange Act Rel. No. 39612.

-[n2]-The findings herein are made pursuant to McKay's Offer and are not binding on any other person or entity in this or any other proceeding.

-[n3]-Nevada County is a political division and legal subdivision of the State of California.

-[n4]-See Article 1, Chapter 2.5, Division 2, Title 5 of the California Government Code ( 53311, et seq).

-[n5]-The City of Ione is a political division and legal subdivision of the State of California.

-[n6]-The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding.

-[n7]-See Article 4, Chapter 5, Division 7, Title 1 of the California Government Code (__ 6500, et seq.).

-[n8]-The Cities of Avenal and Wasco are both located in the State of California.

-[n9]-See Article 1, Chapter 2.5, Division 2, Title 5 of the California Government Code (__ 53311, et seq.).

-[n10]-The City of Ione is a political division and legal subdivision of the State of California. On February 7, 1991, Ione also issued $7.5 million in Special Tax, Community Facilities District 1989-2, Series 1991 Bonds pursuant to the Mello-Roos Act.

-[n11]-The findings herein are made pursuant to Respondent's Offer and are not binding on any other person or entity in this or any other proceeding.

-[n12]-See Article 4, Chapter 5, Division 7, Title 1 of the California Government Code (_ 6500, et seq.).

-[n13]-The Cities of Avenal and Wasco are both located in the State of California.

-[n14]-See Article 1, Chapter 2.5, Division 2, Title 5 of the California Government Code ( 53311, et seq.).

-[n15]-Nevada County is a political division and legal subdivision of the State of California.

-[n16]-In 1994, the 3 to 1 standard was enacted as state law to address investor concerns arising from the collapse in real estate values in many CFDs during the early 1990s.

-[ns17]-In January 1990, the developer of the Nevada project purchased the property for $1,980,000. In a June 23, 1990 appraisal of the property, the appraiser selected by the underwriter valued the raw land at $2,980,000.

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http://www.sec.gov/info/municipal/mbonds/uc.htm


Modified:09/17/1999