UNITED STATES OF AMERICA
In the Matter of
IRA WEISS, and L. ANDREW SHUPE II,
ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933, AND SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AS TO L. ANDREW SHUPE II
In these proceedings instituted on April 22, 2004, pursuant to Section 15(b) of the Securities Exchange Act of 1934 ("Exchange Act") and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Exchange Act, Respondent L. Andrew Shupe II ("Shupe" or "Respondent") has submitted an Offer of Settlement ("Offer") which the Securities and Exchange Commission ("Commission") has determined to accept.
Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Respondent consents to the entry of this Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933, and Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:
1. Shupe was the President and Chief Executive Officer of Quaestor Municipal Group, Inc. ("Quaestor"), a registered broker-dealer. In 2000, he also held numerous securities licenses, including a series 52 (municipal securities representative) and series 53 (municipal securities principal) securities license. Shupe had worked as a public finance investment banker for various broker-dealers registered with the Commission since 1984. Shupe, age 61, is a resident of Franklin Park, Pennsylvania.
2. Neshannock Township School District ("School District") is a school district duly organized under the Pennsylvania School Code of 1949, as amended, and located in Lawrence County, Pennsylvania. The School District is governed by a board ('School Board"), comprised of nine unpaid, elected school directors.
3. Quaestor was a small broker-dealer based in Pittsburgh, Pennysylvania, that specialized in underwriting municipal securities. Quaestor was the corporate successor to Potter, Shupe & Associates, a firm co-founded by Shupe in 1989. In 2000, Quaestor was registered with the Commission as a broker-dealer but voluntarily withdrew its registration in April 2001.
4. Ira Weiss ("Weiss") is an experienced public finance attorney located in Pittsburgh, Pennsylvania. In 2000, Weiss also served as solicitor to numerous school districts, municipalities and authorities in western Pennsylvania. He served as bond counsel to the School District.
5. This matter involves the fraudulent offer and sale in June 2000 by the School District of $9,600,000 General Obligation Notes, Series of 2000, dated May 15, 2000 and maturing May 15, 2003 (the "Notes"). The Notes were offered and sold to investors based on a legal opinion to the effect that the interest thereon was exempt from federal taxation, and a representation that the note proceeds would be used to fund the School District's capital improvement projects. Both of these statements, set forth in the School District's disclosure document (the "Official Statement"), were materially false and misleading.
6. The tax-exempt status of the Notes was dependent upon, among other matters, the School District reasonably expecting on an objective basis to spend substantially all of the Note proceeds on capital projects within three years of the Notes' issuance. However, the School District had not made any final decisions on its primary capital project of renovating or adding to an existing school building, and it did not want to be locked into undertaking the controversial project by virtue of the financing.
7. Shupe had marketed the issuance of the Notes to the School District as a way to earn $225,000 of interest rate arbitrage profit. Indeed, Shupe's profit calculations were based on the assumption that no net Note proceeds would be spent within three years. Shupe's written financing proposal explicitly listed only the $225,000 arbitrage profit as the amount available for capital improvements. Furthermore, the Official Statement, which Shupe prepared, (1) falsely represented that the purpose of the offering was to "provide funds for capital improvement projects of the School District and to pay all costs and expenses related to the issuance of the Notes…[;]" and (2) recited that the School District's bond counsel had rendered a legal opinion to the effect that the interest on the Notes was exempt from federal income taxation.
8. After the closing on the Notes, the Internal Revenue Service ("IRS") issued a preliminary determination that the Notes were taxable arbitrage notes. The School District and the IRS subsequently entered into a closing agreement that, among other things, preserves the tax-exempt status of the Notes.
9. In early 2000 Shupe, as a representative of Quaestor, approached the School District and proposed that it issue up to $10 million of purportedly tax-exempt three-year notes. At all relevant times, Shupe advised the School Board that, given then-current market conditions, if the School District were to issue $9.6 million of tax-exempt three year notes, and to reinvest the proceeds in U.S. Treasury obligations, about $225,000 would be available for capital improvements at closing, an amount equal to the excess investment earnings, net of costs of issuance. Shupe also suggested that the School District retain Weiss as bond counsel.
10. Under the relevant federal tax law provisions, issuers of tax-exempt debt for capital projects must reasonably expect on the date of issuance to satisfy certain "spend-down requirements." These spend-down requirements include (i) within six months of the date of issuance incurring a binding obligation to a third party to expend at least five percent of the net proceeds on the capital project, (ii) proceeding with due diligence on the capital projects until completion, and (iii) expending within three years at least eighty-five percent of the net proceeds of the borrowing on capital projects. Under the relevant IRS regulations, an issuer's expectations are considered reasonable only if a prudent person in the same circumstances as the issuer would have those same expectations, based on all the objective facts and circumstances
11. When Shupe initially approached the School District, it had a general need to either renovate or add to an existing school building. This project, which was estimated to cost about $10 million, was controversial. The School Board had not conducted a demographic study needed to justify an addition, had not formally hired an architect, and had not resolved amongst themselves issues such as whether renovating existing classrooms or constructing new classrooms would be more appropriate. Preliminary cost estimates suggested that the School District also had other, smaller, capital needs totaling $1.5 million, such that in aggregate the School District had about $11.5 million of possible capital expenditures.
12. On or about May 8, 2000, Shupe and Weiss made a joint presentation to the School Board concerning the issuance of the Notes. Shupe submitted a written financing proposal in which he asserted that "school districts have and are borrowing in advance of projects just to invest the proceeds for three years and legally keep the positive investment earnings," and listed $225,000 as the total amount available for capital improvements from the investment of the Note proceeds. Shupe's oral presentation tracked his written proposal.
13. At all relevant times, Shupe knew that his $225,000 estimate of arbitrage profits assumed that the School District would not spend any of the principal of the Note proceeds on capital projects.
14. Quaestor was contractually obligated to prepare the Official Statement for the Notes on behalf of the School District. The Official Statement prepared by Shupe represented that the net proceeds from the sale of the Notes would be used to provide funds for capital improvement projects of the School District. The Official Statement did not accurately describe the use of the Note proceeds, and did not disclose the resulting risk to the Notes' purported tax-exempt status. The Notes were offered and sold by Quaestor to investors at interest rates commensurate with their purported tax-exempt status.
15. At all relevant times, Shupe knew or was reckless in not knowing that the Official Statement failed to disclose the true purpose of the offering which was to gain $225,000 in arbitrage profits.
16. Moreover, at all relevant times Shupe knew, or was reckless in not knowing, that the School Board had yet to resolve whether to proceed with its primary capital project involving renovations and additions to an existing school building, or which of its smaller capital projects had priority.
17. Shortly after the closing on the Notes, the School District, at the suggestion of Shupe, invested the net Note proceeds in a Federal Home Loan Bank obligation maturing within sixty days of the maturity date for the Notes. The School District did not enter into any formal commitment to expend any portion of the Note proceeds within six months, nor did it expend any portion of the net Note proceeds on any capital project within three years.
18. In or about November 2000, the IRS commenced an examination of the Notes. Shortly thereafter, the School District decided to redeem the Notes on May 15, 2001, the first call date. The redemption price for the Notes was paid from the proceeds of the Notes. In September 2001, the IRS issued a preliminary determination that the Notes were taxable arbitrage notes. In the IRS's view, the School District had issued the Notes without any reasonable expectation to expend the proceeds on capital projects. The School District and the IRS entered into a closing agreement that, among other things, provides for a payment by the School District to the IRS and preserves the tax-exempt status of the Notes. The closing agreement also provides that it is not to be construed as an admission by the School District that it acted wrongly with respect to the Notes.
19. While engaged in the foregoing acts Shupe directly or indirectly made use of the mails or the means and instruments of transportation and communication in interstate commerce, or the means and instrumentalities of interstate commerce.
20. As a result of the conduct described above, Shupe willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase, or sale of securities.
21. As a result of the conduct described above, Shupe willfully aided and abetted and caused the School District's violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase, or sale of securities.
22. Shupe has submitted a sworn Statement of Financial Condition dated April 1, 2004 and other evidence and has asserted his inability to pay disgorgement plus prejudgment interest or a civil penalty.
In view of the foregoing, the Commission deems it appropriate, and in the public interest, to impose the sanctions specified in the Respndent's Offer.
Accordingly, it is hereby ORDERED that:
A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Shupe shall cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
B. Pursuant to Section 15(b)(6) of the Exchange Act, Respondent Shupe shall be, and hereby is, barred from association with any broker or dealer;
C. Any reapplication for association by Shupe will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (a) any disgorgement ordered against the Respondent, whether or not the Commission has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the conduct that served as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.
D. Shupe shall pay disgorgement of $15,043.00 plus prejudgment interest. Based upon Shupe's sworn representations in his Statement of Financial Condition dated April 1, 2004 as updated by Shupe's Affidavit as to Financial Condition dated June 3, 2004 and other documents submitted to the Commission, the Commission is waiving Shupe's payment of disgorgement and prejudgment interest, and is not imposing a penalty against Shupe.
E. The Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Shupe provided accurate and complete financial information at the time such representations were made; and (2) seek an order directing payment of disgorgement, prejudgment interest, and the maximum civil penalty allowable under the law. No other issue shall be considered in connection with this petition other than whether the financial information provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any material respect. Respondent may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) assert that payment of disgorgement, interest or a penalty should not be ordered; (3) contest the amount of disgorgement and interest to be ordered; (4) contest the imposition of the maximum penalty allowable under the law; or (5) assert any defense to liability or remedy, including, but not limited to, any statute of limitations defense.
By the Commission.
Jonathan G. Katz
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