U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission


Release No 7764 / October 27, 1999

Release No. 42064 / October 27, 1999

File No. 3-9327

      In the Matter of         :
                               : ORDER MAKING FINDINGS
 Aubrey O'Connor, Rick Pierson : AND IMPOSING SANCTIONS 
  James Winter, Gregory Bowen, : AND CEASE-AND-DESIST
        and Kenneth Ward,      : ORDER PURSUANT TO SECTION
                               : 8A OF THE SECURITIES ACT OF 1933
           Respondents.        : AND SECTIONS 15(b), 19(h) AND
                               : 21C OF THE SECURITIES EXCHANGE
_______________________________: ACT OF 1934 AS TO RICK PIERSON


In these proceedings instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"), respondent Rick Pierson ("Pierson") has submitted an Offer of Settlement ("Offer") that the Securities and Exchange Commission has determined to accept.1


Solely for the purpose of this proceeding, and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the jurisdiction of the Commission over Pierson and the findings set forth in Section III, Paragraphs A and B, hereof, which are admitted, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.100 et seq., Pierson consents to the entry of the findings set out below, and the imposition of remedial sanctions and issuance of a Cease-and-Desist Order.


On the basis of the order instituting proceedings, and Pierson's Offer, the Commission finds as follows2:

A. The Commission's public files disclose that Government Securities Corporation ("GSC"), formerly known as Government Securities Corporation of Texas, was registered with the Commission as a broker-dealer, pursuant to Section 15(b) of the Exchange Act (File No. 8-36869), from July 25, 1987, until December 8, 1997, when its Form BDW was deemed effective, and its registration as a broker-dealer was withdrawn. GSC was formed in 1980, and, at all times, maintained its offices in Houston, Texas.


B. Pierson was a co-founder and former President of GSC and was, at relevant times, a fixed income trader and Head Trader in the Fixed Income Division of GSC. Pierson was associated with GSC during the period from September 1979 to and including August 1980, and then during the period from September 1990 to and including March 1993.


C. From 1988 through 1994, GSC sold a variety of mortgage-backed derivative securities to public clients, such as municipalities and state educational institutions. The mortgage-backed derivative securities sold by GSC included Interest-Only Strips ("IOs"), Inverse IOs, and Inverse Floaters. IOs and Inverse IOs are collateralized mortgage obligations ("CMOs") that receive only interest payments from an underlying pool of residential mortgages. IOs and Inverse IOs are highly sensitive to changes in interest rates and resulting mortgage prepayment speeds, and, accordingly, subject investors to significant risks, including market, prepayment and liquidity risks and loss of principal. Inverse Floaters are CMOs that have a guaranteed return of investment principal, but are highly sensitive to changes in interest rates and resulting mortgage prepayment speeds and, therefore, also subject investors to significant risks, including market, extension and liquidity risks.

D. Pierson, who, with another GSC employee, was primarily responsible for purchasing the IOs, Inverse IOs and Inverse Floaters for GSC's inventory, recommended and encouraged GSC representatives to sell these instruments to GSC's public clients.

E. Pierson formulated and approved specific transactions involving the sale of IOs, Inverse IOs and Inverse Floaters to GSC's public clients.



F. From March 1989 through March 1994, Pierson willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that, in the offer or sale, and in connection with the purchase and sale, of securities, specifically, IOs, Inverse IOs and Inverse Floaters, by use of the means or instrumentalities of interstate commerce or the mails, he, directly or indirectly, employed devices, schemes or artifices to defraud; obtained money or property by means of, or made, untrue statements of material facts or omitted 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; and/or engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon an offeree, purchaser or seller.

G. Pierson encouraged GSC representatives to make, and they did make, certain oral misrepresentations and omissions to GSC's public clients in connection with the offer and sale of IOs, Inverse IOs and Inverse Floaters, including the following:

1. misrepresenting the high-risk CMOs as suitable investments which were consistent with clients' objectives of safety of principal, liquidity, market stability, short duration and low risk;

2. referring to the high-risk CMOs as "Fannie Mae," "Freddie Mac," or "FNMA" securities, while omitting to disclose that the instruments were volatile CMO tranches;

3. misrepresenting the IOs and Inverse IOs as government guaranteed and that their principal was fully protected;

4. failing to disclose that the IOs and Inverse IOs carry an inherent risk of loss of principal and illiquidity;

5. failing to disclose that the market value and yield of the IOs and Inverse IOs are highly sensitive to changes in interest rates and prepayment speeds;

6. guaranteeing one public client that the client "would not lose a dime" on the Inverse IOs;

7. failing to disclose that the characteristics of the Inverse Floaters, including duration and yield, were highly sensitive to changes in interest rates; and

8. failing to disclose that the Inverse Floaters were subject to extension risk of as much as 30 years.

H. Pierson produced or approved many misleading documents, including Bloomberg yield tables and cash flow tables, Trade Recaps and Fixed Income Analyses, provided by GSC registered representative to GSC's public clients which materially misrepresented, or failed to fully disclose, the characteristics and risks of the IOs, Inverse IOs and Inverse Floaters.


In view of the foregoing, the Commission deems it appropriate in the public interest and for the protection of investors to impose the sanctions specified in the Offer Pierson has submitted.

Accordingly, IT IS HEREBY ORDERED that:

Pierson cease and desist from committing or causing any violations or future violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder;

Pierson be, and hereby is, barred from association with any broker or dealer;

Based on Pierson's demonstrated financial inability to pay a civil money penalty, no penalty shall be imposed on Pierson, although the Commission notes that imposition of a penalty would be appropriate under the facts and circumstances of this case.

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 Pierson provided accurate and complete financial information at the time such representations were made; 2) determine the amount of the civil penalty to be imposed; and 3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Pierson's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Pierson was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed and whether any additional remedies should be imposed. Pierson may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding.

By the Commission.

Jonathan G. Katz


1 The order instituting these proceedings was issued on June 4, 1997.

2 The findings herein are binding only on respondent, and not on any other person.