Release No. 7535 / May 5, 1998


File No. 3-9542


In the Matter of:







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 the County of Nevada ("Nevada County"). 1 Nevada County subsequently 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 Nevada County admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, Nevada County 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.


On the basis of this Order and Nevada County's Offer, the Commission finds 2 the following:


County of Nevada is a political division and legal subdivision of the State of California invested with corporate powers, and acting through the Nevada County Board of Supervisors. When the term "Nevada County Board of Supervisors" is used herein, it refers to the Board as it was constituted in 1990; none of the current members of the Board of Supervisors was a member of the Board at any time relevant to this proceeding.


The Mello-Roos Bond Act

The California Mello-Roos Community Facilities Act of 1982 (the "Mello-Roos Act")3 3 authorizes municipalities to organize community facilities districts ("CFDs") to finance the building of infrastructure. 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.

Nevada County's Infrastructure Finance Committee Procedure

On February 20, 1990, the Nevada County Board of Supervisors adopted a public resolution setting out a procedure for considering and approving land-based public financings (the "Procedure"). Under the Procedure, each proposal was to be forwarded to the Board of Supervisors with a report from the Infrastructure Finance Committee (comprising County officials and staff) and its recommendation to proceed. The purpose of the Procedure was to guard against unwise public financings including the bonds for the Wildwood Estates public improvements described below.

The Procedure specified a value-to-lien ratio of "at least" 4-to-1 "after the installation of the public improvements to be financed" in order to undertake a Mello-Roos bond offering. Although the Procedure permitted the County Board to consider a lesser value-to-lien ratio on a case-by-case basis, there must first be a "compelling justification" offered by the Financial Adviser or lead underwriter in order to deviate from the 4-to-1 ratio.

Formation of the Wildwood Estates District

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, G. Michael Montross ("Montross") purchased -- subject to final bankruptcy court approval -- Wildwood Estates for $1.98 million using funds raised through four limited partnerships. During early 1990, Montross placed title to the 286 acres into his wholly-owned corporation, Wildwood Estates, Inc. ("Wildwood Corp."), even though he had promised the investors in the four limited partnerships ("Wildwood Partners") that those entities would receive title to some of the property.

In February 1990, Nevada County initiated the process to issue Mello-Roos bonds to finance the construction of the public improvements for Wildwood Estates. On March 20, 1990, the Nevada County Board of Supervisors ("Board") considered an application by Montross to form the Wildwood Estates Community Facilities District ("Nevada County CFD") in accordance with the Mello-Roos Act. The Nevada County Board of Supervisors voted to form the Nevada County CFD and to retain Derrick Dumont ("Dumont") and First California Capital Markets Group, Inc. ("First California") to underwrite its Mello-Roos bonds.

Horler is Retained as a Financial Adviser

Nevada County had limited experience in municipal bond offerings, and none of those offerings involved Mello-Roos bonds. In view of its lack of experience with Mello-Roos bonds, Nevada County believed that it was appropriate to retain independent professionals to advise it on the bond issue and the proper preparation of the Official Statement. Nevada County relied upon the professionals' work and recommendations in connection with the Mello-Roos offering.

Consequently, in May 1990, Nevada County retained Virginia Horler ("Horler"), Senior Vice President of Rauscher Pierce Refsnes, Inc. ("Rauscher"), a San Francisco investment banking firm, as Financial Adviser for the bond offering. On July 2, 1990, Nevada County and Rauscher formally executed a financial advisory contract in which Rauscher represented that "it (was) skilled in making the studies and analyses described in the contract and represent(ed) that it is qualified by training and experience to perform the work required by the county."

Horler accepted the responsibility of carrying out Rauscher's performance under the contract. Rauscher agreed to "prepare the preliminary and final official statements describing ... the economic and financial background of the property owner in accordance with the disclosure required by the Securities and Exchange Commission Rule 15c2-12." Rauscher also agreed to "review and analyze all data and information which have a bearing on the program to finance the County's Community Facilities District, including but not limited to ... the value of the appraisal, coverage ratios and debt capacity (and) projected special taxes." In addition, Rauscher agreed to confer and consult with county staff and elected officials, architects, contractors, property owners, bond counsel and the underwriter "to assist the county in developing a financing plan that meets the county's specific needs for funds and the property owners ability and willingness to pay." Nevada County agreed to pay Rauscher $30,000, but only if and when its bond offering closed.

McKay is Retained to Appraise Wildwood Estates

On March 23, 1990, the underwriter solicited proposals for the appraisal of Wildwood Estates. 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 William McKay ("McKay") bid $4,000.

On June 6, 1990, McKay prepared a "preliminary" appraisal which was discussed at a June 8, 1990 meeting involving the Infrastructure Finance Committee and Horler. None of McKay's appraised values satisfied Nevada County's 4-to-1 value-to-lien guidelines. However, Horler stated that 3-to-1 was the industry standard and focused on the two highest values in McKay's appraisal -- the only two which satisfied the 3-to-1 ratio.

McKay then prepared a 60-page appraisal which was circulated to Horler and Nevada County. 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. McKay, Nevada County and Horler knew the summary would be included in the Official Statement and relied upon by investors to measure the security of the bonds. The summary appraisal only contained the three highest values, ranging from approximately $32 million to $38 million.

Nevada County Issues $9.07 Million in Mello-Roos Bonds

On December 20, 1990, First California underwrote $9.07 million in tax-exempt Mello-Roos bonds for the Nevada County CFD. At the time, the County also intended to issue an additional $2 million in taxable Mello-Roos bonds to finance the remaining public infrastructure which did not qualify for tax-exempt treatment. When its Mello-Roos bond offering closed, Nevada County used over $500,000 of the proceeds to retire a special sewer assessment against the property. That, in turn, allowed the County to recover approximately $160,000 that it had deposited to secure pay-off of the assessment. Additionally, $30,000 of the bond proceeds were used to pay Rauscher for Horler's activities.

Some of the Nevada County Bonds matured between September 1, 1993 and September 1, 2003 and bore an interest rate of between 6.75% and 8.00%, depending upon the maturity date. Most of the Bonds, about $7,370,000, matured on September 1, 2019 and bore a 8.40% interest rate. Those Nevada County Bonds maturing on or after September 1, 2001 could not be redeemed before September 1, 2000. Additionally, if such early redemption for those Bonds occurred before March 1, 2002, a prepayment penalty, along with accrued interest, would have to be paid to the bond holders.

The Official Statement Contains

Material Misrepresentations and Omissions

Horler drafted the Official Statement for the Nevada County bonds. The Official Statement was also reviewed by Nevada County staff and officials, and it was approved by resolution of the County Board of Supervisors.

Misleading Valuations

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 figure 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, Montross 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.

Furthermore, 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.

Misleading Owner and Developer Information

According to the Official Statement, "(a)ll of the taxable land within the District is currently owned by G. Michael Montross of Montross Barber Investments, Inc." In fact, Nevada County knew since the March 20, 1990 Board meeting that Wildwood Corp. owned the property because Montross signed the election ballot on behalf of that entity and provided a title report disclosing Wildwood Corp.'s ownership.

The Official Statement represented the experience of Montross and Montross Barber Investments, Inc. as follows:

"(Montross Barber Investments) now holds more than $250 million worth of Northern California property for more than 3,000 investors.

". . . Montross has invested in and developed commercial and residential properties for the past 18 years. He has purchased over $200 million worth of residential units and created over 1,200 subdivision lots in the last eight years."

In fact, Montross was not an experienced developer. His real estate experience consisted of managing apartment buildings and forming limited partnerships to syndicate the purchase of apartment buildings and commercial properties. In these syndications, Montross and his firm retained a minority interest as general partner, usually no more than 6 percent. Montross did not have 18 years of experience developing vacant land into subdivisions, and he had not created 1,200 subdivision lots. Additionally, the reference to "over $200 million worth of residential units" suggested that Montross Barber Investments, Inc. had enormous financial resources when, in fact, the Montross Barber firm had, as of March 1989, a purported tangible net worth of only $300,000 and was experiencing a negative cash flow from its business operations.

Misleading Financing Description

The Official Statement represented that the "portion of the subdivision improvements that will be financed directly by the Developer includes recreational facilities, drainage facilities, roads and certain fees. The remaining subdivision improvements will be financed from proceeds of the Aggregate Bonds." The Official Statement also stated that $6,900,579.41 in improvements would be financed with public Series E-1990 bonds, $1,392,371.71 in improvements would be financed with public Series T-1990 bonds and $5,089,756.76 would be privately financed. In fact, Nevada County was -- at Horler's recommendation -- requiring the property owner and developer to obtain all of the construction financing from private lending institutions because Nevada County would release the Mello-Roos bond proceeds only after each phase of the project was completed. Nevada County therefore used the Mello-Roos bond proceeds to provide "take out" or "permanent" financing for the public improvements, rather than using the proceeds -- as represented in the Official Statement -- for the construction financing as well. This increased the amounts of liens that would be placed against the property, increased the amount of financing that the owner or developer would have to provide and made the obtaining of financing more difficult.


Section 17(a) of the Securities Act generally prohibits misrepresentations or omissions of material facts in the offer or sale of securities. Scienter is not required to establish a violation of Section 17(a)(2) or Section 17(a)(3) of the Securities Act. Aaron v. SEC, 446 U.S. 680, 702 (1980).

The misrepresentations contained in the Nevada County Official Statements were material to investors because they directly addressed the security of the bonds. These misrepresentations significantly altered the total mix of information available to the investors.

The misrepresentations contained in the Nevada County Official Statements were "in the offer or sale" of the bonds. All were designed to induce investors to purchase the bonds. There was a causal nexus between the statements made and the investors' decisions to buy the bonds.

Despite its retention of professional advisers and appraisers, Nevada County remained legally responsible for any misrepresentations and/or omissions in the Nevada County Official Statement. The Nevada County Board of Supervisors approved the Nevada County Official Statement.


Based on the foregoing, the Commission finds that Nevada County committed violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act.


Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that Nevada County cease and desist from committing or causing any violation and any future violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act.

By the Commission.

Jonathan G. Katz



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

The findings herein are made pursuant to Nevada County's Offer and are not binding on any other person or entity in this or any other proceeding.

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