United States of America
Securities And Exchange Commission
Securities Act of 1933
Release No. 8013 / September 27, 2001
Securities Exchange Act of 1934
Release No. 44864 / September 27, 2001
File No. 3-10592
In the Matter of
Rauscher Pierce Refsnes, Inc.,
now known as
Dain Rauscher Incorporated.
|ORDER INSTITUTING PUBLIC|
ADMINISTRATIVE AND CEASE-AND-
DESIST PROCEEDINGS PURSUANT
TO SECTION 8A OF THE SECURITIES
ACT OF 1933 AND SECTIONS 15(b),
19(h) AND 21C OF THE SECURITIES
EXCHANGE ACT OF 1934, MAKING
FINDINGS AND IMPOSING
The Securities and Exchange Commission ("Commission") deems it appropriate, in the public interest, and for the protection of investors to institute public administrative and cease-and-desist proceedings against Rauscher Pierce Refsnes, Inc., now known as Dain Rauscher Incorporated ("Rauscher or Respondent"), pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, Respondent Rauscher has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings 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 as to jurisdiction of the Commission over Respondent and over the subject matter of this proceeding and as to the finding contained in Section III paragraph 1. below, which are admitted, Respondent Rauscher by its Offer consents to the entry of findings and remedial sanctions set forth below.
Accordingly, IT IS ORDERED that public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h) and 21C of the Exchange Act be, and, they hereby are, instituted.
On the basis of this Order and the Offer submitted by Respondent Rauscher, the Commission finds that:1
- Rauscher is registered with the Commission as a broker-dealer and, at all relevant times, was a Delaware corporation with its principal place of business in Dallas, Texas.2
- In December 1995, the City of Miami (the "City") offered and sold, on a negotiated basis, $72 million in non-ad valorem revenue bonds to pay for certain of its annual pension and employee compensated absences obligations (the "Pension Bond Offering" or "Pension Bonds").
- The Official Statement for the Pension Bond Offering ("Official Statement") contained the City's audited general-purpose financial statements for the period October 1, 1993 through September 30, 1994 ("fiscal year 1994").
- Rauscher underwrote the Pension Bond Offering and, through its investment bankers, participated along with other professionals, including underwriters' counsel, in the drafting of the Official Statement. The Official Statement was the document that should have provided investors with accurate and complete disclosure of material facts regarding the City's financial condition and the Pension Bonds on which they could rely to make an informed investment decision. The Rauscher investment bankers that participated in the Pension Bond Offering approved the offering on behalf of Rauscher and bound the firm.
The City of Miami's Deteriorating Financial Condition
- The City's financial condition began to decline materially after the close of fiscal year 1994 and continued to worsen through December 1995. Specifically, the City's cash position had deteriorated to the point where the City faced the very credible prospect of being unable to meet its operating expenses for October 1, 1994 through September 30, 1995 ("fiscal year 1995"). The City's top financial officials were keenly aware of the City's dire economic situation.
Material Omissions in the Official Statement
- The Official Statement failed to disclose the City's financial condition to investors at the time of the Pension Bond Offering. Specifically, the Official Statement omitted to state that the City's cash position had materially declined since the close of fiscal year 1994 and that serious consequences could result, including being unable to pay its operating expenses and debt service going forward, if its cash position did not significantly improve. The Official Statement disclosed the existence of operating deficits, declining fund balances and unfunded liabilities as of the close of fiscal year 1994. Further, the Official Statement stated that the pension obligation was putting an "increasing strain on the City's budget," that the City had limited ability to raise revenue from ad valorem taxes because of a constitutional cap, and that using tax receipts to pay the operating expense of regularly required pension payments "could force a curtailment of City services." The Official Statement disclosed that for this reason the City had determined to issue the Pension Bonds and that the City would use the bond proceeds to meet its pension obligations, including reimbursing itself for pension payments made for fiscal year 1995. Finally, the Official Statement disclosed that the City was authorized to issue up to $210 million in additional bonds to fund its future pension obligations.
- While the Official Statement disclosed the existence of Operation Right-Size, a program designed to significantly reduce City expenditures, it failed to disclose that the program was insufficient to remedy the City's immediate economic problems. Specifically, a footnote to the financial statements in the Official Statement stated that as of September 30, 1994, the City "experienced cash deficits in several of its operating funds which were temporarily remedied by loans from other funds," and that the City intended to replenish these cash deficits through, among other things, anticipated savings generated by Operation Right Size. This footnote omitted to state, however, that: (a) the City's cash position had materially declined since the close of fiscal year 1994, (b) the City faced the prospect of being unable to meet its operating expenses going forward absent significant improvement in its cash position and (c) Operation Right Size - a direct result of the city's deteriorating finances - although necessary for subsequent years, was insufficient to remedy the City's immediate cash flow problems because the bulk of the savings from the program would not take effect until the following year.
- In sum, the Official Statement did not reveal the City's true financial condition to investors at the time of the Pension Bond Offering. 3
Rauscher's Knowledge and Insufficient Due Diligence
- At the time of the Pension Bond Offering, Rauscher reasonably should have known certain material information regarding the City's deteriorating financial condition as a result of several meetings held with City officials in which the City's financial goals in undertaking a potential pension bond offering were discussed with Rauscher. In these meetings, the City and Rauscher's investment bankers discussed: (a) the City's goal of funding only two years worth of its annual pension plan obligations through a bond or note offering; and (b) the City's desire for cash up front equal to a minimum of $26 million through a pension bond offering that provided for either upfront debt service savings or reimbursement of previous City pension plan expenditures.
- City officials requested from Rauscher's investment bankers information regarding various possible bond offerings that would provide the City with cash flow relief and debt service savings. When it became apparent to the City that the bond offerings being proposed by Rauscher were insufficient to achieve the City's required level of upfront debt service savings, the City began to explore, with the assistance of Rauscher's investment bankers, potential bond offerings that had cash flow relief as their primary purpose. The City ultimately selected the Pension Bond Offering which permitted the bond proceeds to be used for the purpose of cash flow relief and included a reimbursement provision that permitted the City to reimburse itself for its pension plan expenditures fiscal year 1995. This maximized the City's ability to use the bond proceeds for cash flow relief.
- As a result of the discussions Rauscher's investment bankers had with City officials, Rauscher knew that the City was seeking financing alternatives which would generate immediate cash flow relief and that, based on this, the City might have some sort of cash flow problem. Despite this knowledge, Rauscher, through its investment bankers, failed to sufficiently inquire into the City's cash flow situation and the potential financial problems the City might experience without the proceeds from the Pension Bonds. The facts that the Pension Bonds were fully insured and triple A rated did not relieve Rauscher's bankers from the obligation to inquire further into the City's cash flow and financial problems.
- Based on the above, Rauscher reasonably should have known that the Official Statement failed to disclose the City's true financial condition to investors at the time of the Pension Bond Offering. In particular, the Official Statement did not disclose that the City's cash position had materially declined since the close of fiscal year 1994 and the City's intention that the Pension Bonds be issued in order to address the City's immediate cash flow requirements. Without these disclosures, the Official Statement was inaccurate and lacked complete disclosure regarding the City's deteriorating financial condition which was material to investors in the Pension Bond Offering because it is the type of information an investor would consider important in making an informed investment decision.
Rauscher 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: (a) 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 (b) 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, Rauscher, through negligent conduct, violated Sections 17(a)(2) and (3) of the Securities Act in the offer and sale of the Pension Bonds.
- Information about the City's deteriorating financial condition and cash flow problems were material to investors in the Pension Bonds. 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 available. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
- Accurate and complete disclosure about the City's deteriorating financial condition and cash flow problems was material to investors because as part of the total mix of information, a reasonable investor would have considered it important to know that the City faced the very credible prospect that it would not meet its operating expenses, including its debt obligations, going forward. In addition, this information would have affected the general perception of the City's creditworthiness.
- Rauscher, as senior underwriter of the Pension Bonds, had a duty to conduct a professional review of the Official Statement, including an assessment of the information in its possession or reasonably accessible to it, sufficient to form a reasonable basis for believing in the accuracy and completeness of the key representations in the Official Statement. Rauscher, through its investment bankers, participated in drafting, reviewing and approving the Official Statement. Therefore, Rauscher reasonably should have known that the Official Statement omitted to disclose material information that was in its possession or reasonably accessible to it about the City's cash flow situation and the potential financial problems the City would experience without the proceeds from the Pension Bonds.4
Rauscher 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, Rauscher was subject to Section 15(B)(c)(1) of the Exchange Act and the MSRB rules.
- 19. 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 discussed above, Rauscher violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17.
- Based on the foregoing, the Commission finds that Rauscher willfully violated, and committed or caused violations of, Sections 17(a)(2) and 17(a)(3) of the Securities Act, in that, in the offer and sale of certain securities, namely the Pension Bonds, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, Respondent Rauscher directly and indirectly, obtained money or property by means of untrue statements of material facts and omissions to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; and engaged in transactions, practices and a course of business which would and did operate as a fraud and deceit upon the purchasers and prospective purchasers of such securities.
- Based on the foregoing, the Commission finds that Rauscher willfully violated, and committed or caused violations of, Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB") by not dealing fairly with all persons and by engaging in deceptive, dishonest or unfair practices in the conduct of its municipal securities business.
- Based on the foregoing, the Commission finds that Rauscher willfully violated, and committed or caused violations of, Section 15B(c)(1) of the Exchange Act by effecting transactions in, or inducing or attempting to induce the purchase or sale of, municipal securities in violation of a rule of the MSRB.
- Prior to the date of this Order, Rauscher revised its policies and procedures relating to municipal securities underwriting.
- Respondent Rauscher 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: (a) makes findings, as set forth above; (b) orders Rauscher to 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; (c) orders Rauscher to pay a civil penalty in the amount of $200,000 and (d) undertakes to maintain the policies and procedures referred to in Section IV. above.
In view of the foregoing, the Commission deems it appropriate, in the public interest, and for the protection of investors to accept the Offer of Settlement submitted by Rauscher.
Accordingly, IT IS ORDERED that, pursuant to Section 8A of the Securities Act and Sections 15(b), 19(h) and 21C of the Exchange Act:
- Respondent Rauscher 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.
- Rauscher shall, within thirty (30) days of the date of this Order, pay a civil money penalty in the amount of $200,000 to the United States Treasury. Such payment shall be: (a) made by United States postal money order, wire transfer, certified check, bank cashier's check or bank money order; (b) made payable to the United States Securities and Exchange Commission; (c) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (d) submitted under cover letter that identifies Rauscher as a Respondent in these proceedings, and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to John C. Mattimore, Assistant Regional Director, Southeast Regional Office, Securities and Exchange Commission, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131.
- Rauscher shall comply with the undertakings specified in its Offer as follows: Rauscher undertakes to maintain the policies and procedures referred to in Section IV. above; provided, however, that Rauscher may modify such policies and procedures with alternative policies and procedures designed to achieve the same purposes.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent Rauscher's Offer and are not binding on any other person or entity in this or any other proceeding.
2 Dain Rauscher Incorporated is the corporate successor to Rauscher Pierce Refsnes, Inc. On January 2, 1998, Rauscher Pierce Refsnes, Inc. and Dain Bosworth Inc. were merged to form Dain Rauscher Incorporated. Dain Rauscher Incorporated is a Minnesota corporation with its registered office in Minneapolis, Minnesota. Dain Rauscher Incorporated was acquired by the Royal Bank of Canada on January 10, 2001 and currently operates as its wholly-owned subsidiary.
3 The City of Miami and two former City officials were charged with disclosure violations concerning this offering in a cease-and-desist proceeding instituted on September 22, 1999. See In the Matter of The City of Miami, Florida, Cesar Odio and Manohar Surana, Securities Act Release No. 33-7741 (Sept. 22, 1999). On April 14, 2000 and September 22, 2000, Cesar Odio and Manohar Surana, respectively, without admitting or denying, each consented to the entry of cease-and-desist orders. See In the Matter of Cesar Odio, Securities Act Release No. 33-7851 (April 14, 2000); In the Matter of Manohar Surana, Securities Act Release No. 33-7895 (September 22, 2000). On June 22, 2001, the Chief Administrative Law Judge issued an Initial Decision which found that the City committed fraud in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5, promulgated thereunder, in connection with this offering and two other bond offerings. The Initial Decision ordered the City to cease and desist from committing any violations or any future violations of these provisions. See In the Matter of The City of Miami, Florida, Initial Decision Release No. 185 (June. 22, 2001). On July 12, 2001, the City filed a petition for review of the Chief Administrative Law Judge's decision.
4 For purposes of Rauscher's violations, the conduct of the Rauscher officials and employees may be imputed to the firm. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1089 n.3 (2d Cir. 1972).