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U.S. Securities and Exchange Commission

Initial Decision of an SEC Administrative Law Judge

In the Matter of
County of Nevada, City of Ione, Wasco Public Financing Authority, Virginia Horler,
and William McKay

Initial Decision Release No. 153
Administrative Proceeding
File No. 3-9542

Before the
Washington, D.C.

In the Matter of

County of Nevada,
City of Ione,
Wasco Public Financing Authority,
Virginia Horler, and
William Mckay

Initial Decision

October 29, 1999

Appearances:  John S. Yun, Nancy E. Allin, and David Bayless for the Division of Enforcement, Securities and Exchange Commission

Richard J. Morvillo, Joseph I. Goldstein, Reed Brodsky, and Jeffrey F. Robertson for the Respondent Virginia Horler

Before:  Brenda P. Murray, Chief Administrative Law Judge

The Securities and Exchange Commission ("Commission") has accepted offers of settlement from four of the five Respondents named in the Order Instituting Proceedings ("OIP") that the Commission issued on February 2, 1998, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").1

On July 21 through July 24, 1998, I held a hearing as to Respondent Horler at three locations in California: in Sacramento, in Represa at Folsom State Prison, and in San Francisco. The Division of Enforcement ("Division") presented seven witnesses, including one expert, and offered sixty-two exhibits. Respondent Horler presented four witnesses, including one expert, and offered ninety-seven exhibits.2

The voluminous posthearing filings included the Division's Proposed Findings of Fact and Conclusions of Law (fifty-eight pages), and Posthearing Brief (seventy-four pages) filed about September 23, 1998. Respondent Horler filed three documents: Proposed Findings of Fact and Conclusions of Law (ninety-one pages), Posthearing Brief (eighty-one pages), and Responses to the Division's Proposed Findings of Fact and Conclusions of Law (fifty-eight pages) about November 17, 1998. The Division filed its Posthearing Reply Brief (thirty-one pages) about December 1, 1998.


The first issue is whether Respondent violated or aided and abetted violations of Sections 17(a)(1), 17(a)(2), or 17(a)(3) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5 thereunder ("antifraud provisions") while acting as financial advisor responsible for preparing the official statement for a municipal bond offering by the County of Nevada, California. To decide this issue it is necessary to decide several subsidiary issues, including: (i) whether Ms. Horler was required by law to conduct a "due diligence" investigation prior to drafting the official statement; (ii) whether Ms. Horler did adequately investigate the representations contained in the official statement; (iii) whether the official statement contained material misrepresentations or omitted to state material facts; and (iv) whether Ms. Horler knew or should have known that the official statement contained the alleged material misrepresentations and omissions.

If I find that Ms. Horler committed the alleged violations of the antifraud provisions, the next issue is whether it is in the public interest to order her to cease and desist from violating or aiding and abetting violations of those provision.

Three Preliminary Matters

1. At the conclusion of the Division's case and again on brief, Respondent moved for involuntary dismissal of the allegations or for a directed verdict. Respondent argued first that the ruling in Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), bars the Commission from imposing a cease and desist order here because to do so would penalize Respondent for actions that occurred more than five years before the Commission initiated the proceeding. Respondent further argued that a financial advisor who drafts an official statement in connection with a municipal bond offering does not have the same disclosure obligations as the issuer or the underwriter. (Tr. 475-95; Respondent's Posthearing Brief at 33-37.)

I deny the motion. First, the holding in Johnson does not, as a matter of law, prohibit the Commission from seeking a cease and desist order against the Respondent. See Warren G. Trepp, 1999 WL 753922 (Sept. 24, 1999). Second, the extent of Ms. Horler's responsibilities depends on the facts surrounding this particular bond offering. It would therefore be premature to reach the legal conclusion that Respondent advocates without first making factual findings.

2. On December 11, 1998, Respondent Horler, pursuant to Rule 340 of the Commission's Rules of Practice, 17 C.F.R. § 201.340, filed both a Motion for Leave to File Supplemental Response to the Division's Posthearing Reply Brief ("Motion"), and a Supplemental Response. Respondent maintains that this additional submission is necessary to provide "a comprehensive understanding of the facts upon which to render a decision in this proceeding" on the issue of "whether Ms. Horler intended to mislead the Nevada County Board of Supervisors when she told it that [the real estate developer] had secured enough financing to construct Phase 1 of the project." Motion at 2. On December 23, 1998, the Division responded with a Brief in Opposition. The Division argues that, among other things, (i) the Motion is an attempt by Respondent to recant critical testimony; (ii) neither good cause nor concerns of essential fairness support the Motion; and (iii) under the briefing schedule the Division had the right to rely on matters already in the record when it made its last filing. On January 5, 1999, Respondent filed a Reply to the Brief in Opposition.

I deny the Motion because the parties have already submitted briefs totaling almost 400 pages, and Respondent has failed to show good cause for allowing more.

3. On August 20, 1999, Respondent wrote to bring to my attention an order issued in SEC v. Dain Rauscher, Inc., No. 98-639 (C.D. Cal. Aug. 18, 1999). In that case, the defendant prepared official statements for six municipal bond offerings in 1993 and 1994. The Commission charged the defendant with failing to provide investors with material information in the official statements, in violation of the antifraud provisions of the securities statutes, Municipal Securities Rulemaking Board Rule G-17, and Section 15B(c)(1) of the Exchange Act. On August 18, 1999, U.S. District Court Judge Gary L. Taylor granted defendant's motion for summary judgment based on his finding that:

The SEC has not shown the existing standard of care and competence in the industry was different from that suggested by [the defendant], and has not, therefore, shown [defendant's] conduct constituted a reckless or negligent departure from the norm.

Id. at 11. Respondent argues that the Dain Rauscher order buttresses her contentions that, in light of the evidence adduced at the hearing: (i) the official statement did not contain material misstatements because the information disclosed conformed to industry standards prevailing in December 1990; and (ii) Ms. Horler's conduct satisfied industry standards prevailing at the time she drafted the official statement.

Pursuant to Rule 340(b), 17 C.F.R. § 201.340(b), I will consider the arguments made by Respondent in her cover letter of August 19, 1999; the Division's responsive letter of September 7, 1999; and Respondent's reply letter of September 9, 1999. Unlike the previous ruling where I refused to allow the filing of supplemental briefs, the arguments contained in the letters address something that occurred after the hearing concluded which the parties could not have addressed in their prior filings.

Findings of Fact

My findings and conclusions are based on the record and hearing the witnesses' testimony and observing their demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91, 102 (1981). I have considered all proposed findings, conclusions, and contentions. I accept those that are consistent with this decision and I reject those that are not.

County of Nevada Special Tax Bonds, Series E-1990, Community Facilities District No. 1990-1 (Wildwood Estates)

Nevada County, California, extends from the Sacramento valley across the Sierra Nevada Range to the California-Nevada border. (Div. Ex. 1 at 12.) By the mid-1980s, two companies had tried and failed to develop a 286-acre parcel of land located in the county which became "Wildwood Estates."3 The land had "reverted back to acreage," meaning that although there was a development map on record, a new plan had to be approved before development could occur. (Tr. 9, 92.) Due to unpaid taxes and special assessment fees on the land, the issue of title to the land was in the hands of the bankruptcy court. (Tr. 9.) G. Michael Montross, a real estate developer, became interested in developing Wildwood Estates in the late 1980s. (Tr. 9-10, 28.)

A California statute, the Mello-Roos Community Facilities Act of 1982 ("Mello-Roos"), provides a method of financing certain public capital facilities and services in the state. The statue authorizes the legislative bodies of local agencies to issue bonds for community facilities districts, and authorizes it to levy and collect a special tax within the district to repay the indebtedness. (Div. Ex. 1; Resp. Ex. 88.)

On February 13, 1990, the County's Board of Supervisors (the "County" or "Board") appointed the San Francisco investment banking firm Wulff, Hansen & Co. managing underwriter of a proposed Mello-Roos bond offering. (Resp. Ex. 9.) The offering was designed to finance the acquisition or construction of certain public improvements to Wildwood Estates. (Div. Ex. 1.) Mr. Montross's firm, Montross Barber Investments, Inc. ("Montross Barber") was to be the project developer. (Div. Ex. 1 at 12-13.) Also on February 13, 1990, the County retained Edwin Ness as bond counsel and Cranmer Engineering as "engineer of work." (Tr. 62; Div. Ex. 1 at ii.) Cranmer Engineering, the largest engineering firm in the county, would also serve as project engineer for Montross Barber.4

On March 20, 1990, pursuant to Mello-Roos, the County formed "Community Facilities District No. 1990-1 (Wildwood Estates)." (Div. Ex. 26.) On the same date, the County entered into an agreement with First California Capital Markets Group ("First California") to perform the same underwriting duties that Wulff, Hansen & Co. had agreed to perform. The switch occurred because Derrick Dumont, who had been with Wulff, Hansen & Co., transferred to First California and took the business with him. (Tr. 530-31, 634-36; Resp. Ex. 9E.)

Selection of the underwriter was on a negotiated, as opposed to a competitive, basis. (Tr. 111-12.) In a competitive underwriting, the issuer selects the underwriter at the end of the process based on sealed bids that result from a public solicitation, whereas in a negotiated underwriting, the underwriter is selected at the beginning of the process for a variety of reasons and the underwriter works with the issuer throughout the process. (Robert Zipf, How Municipal Bonds Work, 198-200 (1995); Tr. 111-12.) In this offering, the underwriter's responsibilities included preparing a "report of due-diligence" and providing "the municipality with [a] securities offering statement." (Resp. Exs. 3, 9A; Tr. 636, 641.) The underwriter assumed liability for the accuracy and completeness of the offering statement. (Resp. Ex. 1 at SN 01259.)

Wildwood Estates was to be a gated private residential community in which the majority of lots offered panoramic views of Lake Wildwood and the Sierras. (Div. Ex. 1, 13.) The County accepted the developer's proposal to complete the improvements in three phases. The developer chose to phase the development because Mr. Montross was unable to raise the money to do the entire subdivision at one time. (Tr. 17.) For tax purposes, it was important to the County that all three phases be completed within two years. (Tr. 167-69.) After hiring Ms. Horler and the company she worked for, Dain Rauscher, Inc. ("Rauscher") to act as the County's financial advisor (see below), the County entered into an Acquisition Agreement with Mr. Montross on July 24, 1990. The Acquisition Agreement specified that the County would pay for the improvements for each of the three phases, provided that each phase was fully completed and certified by the County engineer as being properly completed. (Resp. Ex. 9F.) Because the development involved both public and private facilities, it was necessary to raise funds from sources other than a Mello-Roos offering. (Tr. 177-79.) The proceeds of the Mello-Roos tax-exempt Series E bond offering would cover the construction cost of the public improvements such as underground electric lines, storm drainage facilities, sanitary sewer collection systems, and water distribution systems. (Resp. Ex. 19 at SN 00180; Tr. 30.) The proceeds of a related Series T-1990 bond offering, where interest on the bonds was subject to federal income tax, would be used to finance a portion of the private improvements such as roads. (Tr. 16, 29-30, 177-78.) The developer was to finance a portion of the improvements such as recreational facilities, drainage facilities, roads, and certain fees. (Div. Exs. 1, 13; Resp. Ex. 9F.)

The County had originally intended to make the offering in mid-July 1990. The first attempted offering failed to close, and further delay occurred because of a controversy as to the validity of a final bankruptcy court order awarding legal title to the land.5 (Respondent's Pretrial Brief at 6 n.5.) The controversy concerned whether the judge who signed the order should have done so, it did not question the substance of the order. (Tr. 376.) Mr. Ness and Montross Barber wanted to proceed with the offering, but County Counsel James Curtis and Ms. Horler convinced the Board to wait until legal title was resolved. (Tr. 377-82; Resp. Exs. 51, 53, 55, 57.) On November 5, 1990, the bankruptcy court confirmed that Wildwood Estates, Inc., a California corporation, was and had been owner of the land since January 1990. (Div. Ex. 76.) Mr. Montross acquired the land on December 14, 1989, and he transferred title to Wildwood Estates, Inc. in January 1990. (Tr. 86; Div. Ex. 25 at FCB 00703.)

On December 21, 1990, the County closed the $9.07 million Series E bond offering.6 (Div. Ex. 83 at RPR 00930.) The offering was "not rated" which indicates both a much higher risk to the investor than a rated offering, and a corresponding higher rate of interest. (Tr. 547.)

Respondent Horler

Virginia L. Horler worked for the City of Richmond, California, for twelve years. During this time, she attended St. Mary's College of California in the evening. She earned a bachelors degree from St. Mary's in 1982 and an MBA, with honors, in 1984. (Tr. 98, 505; Div. Ex. 39.)

In 1983, Ms. Horler left her position as a budget analyst with the City of Richmond and joined Rauscher, a registered broker-dealer and one of the largest regional investment banking firms based outside of New York.7 (Tr. 99; Div. Ex. 39.) In 1989, Ms. Horler was appointed a senior vice president and managing director in Rauscher's Public Finance Department, a division of the Fixed Income Department. (Tr. 100-02.) In this capacity, Ms. Horler was the project manager or the person with full responsibility for Rauscher's involvement with various public financing projects. (Tr. 100-02.) Ms. Horler served on Rauscher's Fixed Income Commitment Committee which recommended whether or not the firm should undertake project underwritings. (Tr. 604.)

Ms. Horler is an expert in the field of public finance and in Mello-Roos bond offerings. (Tr. 606-07.) She authored Guide to Public Debt Financing in California in 1982 (revised 1987), which is used extensively by lay persons working in the area, and she has participated in many educational programs related to financing public debt. (Div. Ex. 12; Resp. Ex. 87; Tr. 299-30, 504-09, 640.) Ms. Horler earned Series 7 (General Securities Representative) and Series 63 (Uniform Securities State Law Examination) licenses granted by the National Association of Securities Dealers ("NASD") early in her career. She earned a Series 53 license (Municipal Securities Principal) after 1990. (Tr. 102-03.) In her fifteen-year career with Rauscher, Ms. Horler was involved as an underwriter or financial advisor in about 135 municipal finance transactions which raised over $4 billion. (Tr. 498.) In most instances, she acted as underwriter, and about one-third of her time was spent as financial advisor. Her clients were cities, counties, and special districts, and the types of public financings ranged from general obligation bonds to leased securities – the entire gamut of transactions that local agencies in California could issue. (Tr. 499.) Ms. Horler was one of the public finance professionals whom the California Debt Advisory Commission, the state's clearinghouse for public debt issuance information, thanked for their contributions to the guidelines which the Commission published in 1996. See Disclosure Guidelines for Land-Based Securities, California Debt Advisory Commission, (Sept. 12, 1996) ("Disclosure Guidelines"). Ms. Horler is a Certified California Municipal Treasurer, a certification conferred by the California Municipal Treasurers Association.

In early May 1990, Linda Wheeler, an administrative assistant in the County Counsel's office, alerted Ms. Horler to the upcoming Wildwood Estates bond offering. (Tr. 108, 517-18.) Ms. Horler submitted a proposal to the County on behalf of Rauscher on May 14, 1990, describing the many services Rauscher offered. Later, Ms. Horler learned from Ms. Wheeler that the County only wanted Rauscher to give it financial advice or serve as a "pricing consultant" because the Board had already adopted the special tax formula and the notice of intention to proceed, and it intended to sell the bonds in the middle of July. (Tr. 116.) Mr. Ness confirmed that when Ms. Horler became involved in May-June of 1990 the project had been under consideration for almost two years, and that Mr. Curtis, Mr. Montross, and Mr. Cranmer of Cranmer Engineering, had already done most of the work. (Tr. 634-35, 642-48.) The project was quite far along: the Board had held a public meeting and had already determined a special tax formula; Mr. Ness had filed a "validation proceeding," and he expected the County to sell the bonds in a relatively short time. (Tr. 525-26.) Based on this information, Ms. Horler noted on the Rauscher proposal, "Proposed [not to exceed] $10,000 including expenses, 5/15/90." (Tr. 116; Div. Exs. 5 at 135, 39 at date stamp 657.)

Where the issuer selected the underwriter on a negotiated basis, it was customary for the underwriter to prepare the official statement for the issuer, and Ms. Wheeler informed Ms. Horler that First California would prepare the official statement for this offering. (Div. Ex. 5, 135; Tr. 113, 117; see also Final Rule on Municipal Securities Disclosure 43 SEC Docket 2245, 2249 (July 10, 1989) ("Final Rule").) Ms. Horler knew the County wanted to hire a financial advisor who would prepare the official statement to give it "a comfort level with the project and the bond issue." (Resp. Ex. 5D, page stamp FCB 02696; Tr. 342.) There is conflicting testimony as to why the County delegated responsibility for preparing the official statement to a financial advisor rather than using the underwriter. According to Mr. Curtis, due to the fact that Mr. Montross had recommended the underwriter, the County was aware of a possible conflict of interest and wanted an independent entity to prepare the official statement. (Resp. Ex. 5D, page stamp FCB 02696; Tr. 342.) Ms. Horler testified, however, that the County hired Rauscher to prepare the official statement because the underwriter lacked the staffing capabilities to produce the official statement in a fairly short time. (Tr. 121-22.)

Ms. Horler testified further that she offered to prepare the official statement for the County when she learned the underwriter had done no work towards preparing it, and she knew the County was preparing to go forward with pricing the bonds. (Tr. 117.) Ms. Horler represented that Rauscher had the expertise and staff required to prepare the official statement because the firm customarily drafted official statements when it acted as a financial advisor in competitive bid underwritings. (Tr. 113, 117-18.) Within a week of submitting the proposal to act as financial advisor for $10,000, Ms. Horler noted on the Rauscher proposal, "5/21/90 Proposed $30,000 [plus] out-of-pocket expenses includes preparation of [the official statement]." (Div. Ex. 39; Tr. 122.)

On July 2, 1990, Ms. Horler, acting for Rauscher, signed a "Contract Employing Financial Advisor" ("Contract") with the County for $30,000, plus reimbursable expenses, payable by the County on receipt of bond proceeds. (Div. Ex. 56; Resp. Ex. 36.) The Contract provided that Rauscher would, among other things:

1. Review and analyze all data and information which have a bearing on program to finance the County's community facilities district, including but not limited to . . . cash flow requirements during the design and construction periods . . . coverage ratios and debt capacity . . . .

2. Confer and consult with County staff and elected officials, architects and contractors, property owners, bond counsel and the underwriter, as needed, to assist the County in developing a financing plan that meets the County's specific needs for funds and the property owner's ability and willingness to pay.

8. Prepare the preliminary and final official statements describing the County's financing program, the bonds, security for payment of the bonds, and the economic and financial background of the property owners in accordance with the disclosure required by Securit[ies] and Exchange Commission Rule 15c2-12.

10. Coordinate printing and mailing of the preliminary and final official statement to investors.

(Div. Ex. 56, Resp. Ex. 36.)

Ms. Horler was Rauscher's representative on the project. In this capacity, she supervised Robin J. Rappaport who had been with the firm for two or three years and had earned an MBA from the University of California at Berkeley. (Tr. 524-25.)

Ms. Horler considered Rauscher's position as financial advisor and drafter of the official statement a unique, "hybrid" transaction for the firm. (Tr. 153, 501, 509-10, 526.) Customarily, Rauscher's financial advisory services in a negotiated offering included the selection of underwriters, definition of financial structure, credit review process, document review sessions, pricing and sale of bonds, preparation of pre and post pricing books, and closing of financing. (Div. Ex. 36; Resp. Ex. 17 at RPR 00631.) In this negotiated transaction, however, the County had selected the underwriter prior to Rauscher's involvement with the project. (Tr. 526.) Rauscher submitted an invoice to the County on December 31, 1990 for $31,749.55 which the County paid. (Div. Ex. 92; Tr. 176.)

Ms. Horler believes that she worked very hard on the offering.8 According to Respondent's expert, Ms. Horler: advised the County regarding the offering's financial structure; she evaluated the size, timing, and pricing of the offering; she prepared a pre-pricing book containing interest rates on comparable offerings and descriptions of the municipal bond market at time of the sale; she verified the developer's loan commitment; she encouraged the use of specific language in the Acquisition Agreement; and she assisted in preparation of the official statement in accordance with Commission Rule 15c2-12. (Resp. Ex. 88 at 4-5.) With respect to her role in preparing the official statement, Ms. Horler's position is contradictory. On the one hand, she viewed her role as a passive reviewer of information gathered by others; on the other hand, she claims she checked the accuracy of some, but not all, of the information in the official statement. (Tr. 152.)

On direct examination, Ms. Horler described her role in drafting the official statement:

Q: Can you describe the nature of your responsibilities as you saw them?

A: Yes. It was to carefully review all of the information that I received, compare it with documents that I had read, and look for any inconsistencies in the documents, to continually inquire of others that had more expertise in areas I did not have, and to be sure that there was nothing that had come to my attention that was not adequately and correctly and completely disclosed in the document.

Q: [You had agreed to] "prepare an official statement, describing among other things the economic and financial background of the property owner." What, if anything, did you do to discharge that obligation?

A: Yes. When we were first hired, and began to prepare the official statement, we asked all parties to submit information to be included in the document. With our request for that information, we made sure that the various parties understood that whatever they gave to us was going to be included in the offering document that was part of a securities offering to investors. . . . We stressed that it must be accurate and complete.

Q: Did you understand that you were required . . . to investigate and look behind the assets and experience of the developer?

A: Only if something came to my attention that showed me that what he provided me was untrue, or was inconsistent with what I was learning about the project.

I think it's important to reflect here for a minute that I was coming on this financing team as the last party. So when I talked to people like Ed Ness, and Jim Cranmer, and the County itself, they all had had a much longer knowledge and background with this developer. I was looking to hear if there was anything that anybody could tell me, or any factual basis that would tell me that what [Mr. Montross] provided us for the official statement was not correct. I never did receive anything that showed me it was not.

(Tr. 530, 542-43.) Ms. Horler circulated several drafts of the preliminary and final official statement and she made phone calls gathering or checking information. (Tr. 511-12, 561-67; Resp. Exs. 29, 30, 37, 40.)

On cross-examination, Ms. Horler explained that:

A: I did check the accuracy on many of the statements in the official statements.

Q: [With respect to] the property ownership, and the developer, I thought you acknowledged that you didn't go behind what the developer told you. So you didn't independently check that information, right?

A: [That] is correct, I did not investigate. Other matters I did.

(Tr. 140, 152.)

Although Ms. Horler testified that she believed she had a duty to investigate any "red flags" that indicated the information she had was not accurate, it is evident that she did not adequately investigate any of the matters underlying the alleged material misrepresentations and omissions, and she was aware that other professionals involved in the offering had not done so. (Tr. 152, 509-10.)

Mr. Ness submitted a 10b-5 opinion letter to Ms. Horler which stated that:

Based upon our participation in the preparation of the Official Statement and without having undertaken to determine independently the accuracy or completeness of the statements in the Official Statement, we have no reason to believe that, as of the date of Closing, the Official Statement . . . contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading.

(Resp. Ex. 77.)

Prior to her involvement in the offering, Ms. Horler had not heard of Mr. Montross or Montross Barber. (Tr. 142-43.) At the request of the County's Director of Finance, Ms. Wheeler asked Ms. Horler to look into the developer's financial background, and Ms. Horler agreed to see that an investigation was completed. (Tr. 257-58, 520.) Yet, Ms. Horler did not investigate the finances of either Mr. Montross or the firm, and she did not verify any of the financial information Mr. Montross provided. (Tr. 147-48, 155.)

Ms. Horler retired from Rauscher on February 28, 1998. (Tr. 97.) She does not intend to return to the business of investment banking-public finance. (Tr. 602.)

G. Michael Montross and Montross Barber Investments, Inc.

In 1990, Mr. Montross was president and 60% owner of Montross Barber. (Tr. 213, 413.) Mr. Montross and George A. Barber, a 30% owner, formed the firm in 1981. (Tr. 213, 215; Resp. Ex. 5B.) Mr. Barber met Mr. Montross when they both worked at the National Science Foundation in 1971. (Tr. 215.) Mr. Montross represented to First Commercial Bank that he had held high level positions with several government agencies. (Resp. Ex. 5.) In 1966, Mr. Barber earned a degree in economics from Northeastern University and went on to become a budget analyst with agencies of the federal government for twelve years. Mr. Barber moved to California in 1978 to go into business with Mr. Montross. (Tr. 215.)

Montross Barber's business consisted of syndicating and managing private placement partnership interests in residential real estate, mainly in the area of Sacramento, California. (Tr. 216, 232-33.) The firm did very well in the early 1980s when it earned a 20% return for investors. (Tr. 232.) The Tax Reform Act of 1986, however, eliminated many of the tax benefits that had made real estate an attractive investment and drastically changed the kind of real estate that investors found attractive. (Tr. 232-33.) The firm began forming limited partnerships for land subdivisions in the late 1980s but only managed to completely sell one of several projects. (Tr. 222-24.) By 1989-90 most of the firm's limited partnership residential properties, which had been organized with slight negative cash flows, had used up their contingency reserves. (Tr. 229-30.) At the beginning of 1990, the firm employed about twenty-five people at its main office in San Mateo, California, which handled accounting and investments, and 100 to 200 people at a second office that managed the properties. (Tr. 233-34.)

Mr. Montross originally purchased the land for Wildwood Estates in his own name on December 14, 1989, for approximately $2.2 million. (Div. Ex. 25.) The price included a $793,000 delinquent tax assessment for 1980-81 and all subsequent years up to 1989-90. (Resp. Ex. 5D.) In January 1990, Mr. Montross transferred title to Wildwood Estates, Inc., a corporation he had formed. (Tr. 28-29; Resp. Exs. 19, 89A.) Wildwood Estates, Inc. was a shell corporation whose only asset was the land known as Wildwood Estates. (Tr. 475.) Mr. Montross was the sole shareholder and the only officer of the corporation. Mr. Montross raised close to $3 million from four limited partnerships to invest in Wildwood Estates. (Tr. 226.)

In 1995, Mr. Barber pled guilty to seventeen counts of state securities fraud for not disclosing Montross Barber's financial difficulties to investors in 1990. (Tr. 236; Resp. Ex. 85.) He was sentenced to six years in prison. In July 1998, he was within a month of completing his sentence at Folsom State Prison. (Tr. 236-37.) Mr. Barber testified under use immunity which prohibited him from exerting any Fifth Amendment privilege. (Tr. 212.) Respondent objects to Mr. Barber's testimony on the grounds that it is both irrelevant and lacking in credibility because Mr. Barber is a convicted felon. (Respondent's Responses to the Division's Proposed Findings of Fact and Conclusions of Law at 3.) I disagree. The financial condition of Montross Barber in 1990 is relevant and I observed the witness's demeanor and found him to be credible. See Universal Camera v. N.L.R.B., 340 U.S. 474, 496 (1951); Howard v. Heckler, 782 F.2d 1484, 1487 (9th Cir. 1986); Anthony Tricarico, 51 S.E.C. 457, 460 (1993).

The testimony of Mr. Barber calls into question the favorable financial information that Mr. Montross supplied to First Commercial Bank which the bank relied on to support loans of $200,000 to Montross Barber on December 5, 1989; $1.14 million to Wildwood Estates, Inc. on March 8, 1990; $5.35 million to Wildwood Estates, Inc. on July 25, 1990; and $125,000 to Wildwood Estates, Inc. on November 30, 1990. (Resp. Exs. 5B, 5C, 5D, 5E.) The 1989 bank credit report represented that by 1989 Montross Barber had formed over 100 real estate partnerships with a portfolio value of over $200 million, and that Montross Barber's growth rate over the three previous fiscal years had been 13% with slightly higher annual profit increases of 14.5%. (Resp. Ex. 5B at 2-3.) In the normal course of business, the bank verified information supplied by the borrower by reference to independent sources. However, there is no evidence that the bank did so before making these Wildwood Estate loans. (Tr. 412, 415-17.) The bank credit report noted that Montross Barber's status as the general partner on some projects carried with it indirect liabilities.9 (Resp. Ex. 5B at stamp FCB 01012; Tr. 410-11.) Although Mr. Montross personally guaranteed these loans, his personal guaranty is suspect because the 1989 bank credit report indicated that his "substantial personal real estate holdings . . . are of the same kind and nature as those of the firm." (Resp. Ex. 5B at FCB 01015.)

Mr. Barber's testimony that in 1990 Montross Barber's financial situation was "extremely strapped" is unrefuted. (Tr. 229-30.) In 1990, the firm did not pay taxes on some properties and it avoided foreclosure by filing for bankruptcy protection. (Tr. 231.) In the last half of 1990, it became "very, very difficult" for the firm to acquire additional investment funds. (Tr. 232.) The firm was in "very bad straits" which were complicated by an agent who started a snowball effect by making disparaging remarks about the firm to investors. (Tr. 232.) Things got "very bad" for the firm. In some instances it defaulted on rent payments, and Mr. Montross and Mr. Barber did not get paid on occasion. (Tr. 232-33.) The firm was sold in July 1991.

In November 1997, Mr. Montross was indicted on federal charges of bankruptcy fraud and money laundering.10 (Division's Prehearing Brief at 15.) In December 1997, Mr. Montross was convicted following a jury trial on over seventy counts of violating California state securities laws. (Division's Prehearing Brief at 15; Respondent's Pretrial Brief at 5.) At the time of the hearing, Mr. Montross was incarcerated in a correctional facility in California. (Respondent's Pretrial Brief at 5.)

Legal Arguments on the Merits

The Division of Enforcement

The Division alleges that Ms. Horler failed to satisfy her obligation to prepare a complete and accurate offering statement. The Division further alleges that Ms. Horler violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because the offering's official statement dated December 17, 1990, which was circulated to investors, contained material misstatements and omissions.

Specifically, the Division charges that:

1. Ms. Horler knew but failed to disclose in the official statement that the developer could not receive any of the Mello-Roos bond proceeds until all of the public and private improvements for each phase of the project had been completed, and she knew but did not disclose that the developer's loan commitment was inadequate to complete Phase I.

2. Ms. Horler knew or was reckless in not knowing that Wildwood Estates, Inc. held title to the land, and she erroneously represented in the official statement that Mr. Montross owned the land to be developed.

3. Ms. Horler was reckless in not investigating the developer's background and finances, and in the official statement she created a misleading impression that Mr. Montross and Montross Barber were experienced in creating successful real estate subdivisions and possessed sufficient skills and financial resources to complete the Wildwood Estates project.

(Tr. 481; Division's Posthearing Brief at 50-66, 68; Division's Reply Brief at 3-20.)

The Division also charges that Ms. Horler was reckless in that she: (i) ignored red flags about Mr. Montross's representations concerning himself and Montross Barber; and (ii) assumed that the lending bank had done a thorough due diligence inquiry into Montross Barber's and Mr. Montross's finances which she could reasonably rely on. According to the Division, an investigation could have revealed adverse information about Mr. Montross and Montross Barber. (Division's Posthearing Brief at 62-67.)

The Division rejects Respondent's claim that she had no legal duty to ensure that the official statement was accurate and complete because: (i) she did not offer or sell the bonds, and (ii) her obligation as a financial advisor was only to the County. (Division's Reply Brief at 20-27.) The Division argues that the securities statutes impose an "overlapping," rather than a "divisible," duty to ensure the accuracy. (Division's Posthearing Brief at 3.) The Division notes that Sections 17(a) and 10(b), and Rule 10b-5 impose liability on persons who "directly or indirectly" engage in certain deceptive conduct. (Division's Reply Brief at 22.) Thus, "every offering participant who directly or indirectly makes an expressed or implied representation to investors is jointly and severally liable for his or her misstatements or omissions." (Division's Posthearing Brief at 3; Division's Reply Brief at 22 (citing Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994)) (Division's emphasis).)

The Division maintains that the case law supports the proposition that, in addition to the issuer, professionals may be held primarily liable for violations of the antifraud provisions, even where they did not actually sell or offer shares. (Division's Posthearing Brief at 49. See Kline v. First W. Gov't Sec., Inc., 24 F.3d 480, 486-87 (3d Cir. 1994) (attorney drafters of opinion letter held liable); Eisenberg v. Gagnon, 766 F.2d 770, 776-77 (3d Cir. 1985) (auditor drafters of financial statements); Employers Ins. of Wausau v. Musick, Peeler & Garrett, 871 F. Supp. 381, 389-90 (S.D. Cal. 1994) (attorney and auditor drafters of registration statement and prospectus), amended in part, 948 F. Supp. 942 (S.D. Cal. 1995). See also In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615, 626-29 (9th Cir. 1994) (underwriter and auditor liability for participating in group that drafted misleading response letter to Commission); In the Matter of Peacock, Hilsop, Staley & Given, Inc., 1996 SEC LEXIS 2812 (Settlement Order, Oct. 2, 1996) (financial advisor in municipal bond offering liable for misstatements in official statement).)

In the alternative, the Division charges that Ms. Horler aided and abetted the County's violations of these antifraud provisions by taking on a duty of the issuer and not performing that duty. (Division's Posthearing Brief at 3, 69-71.) The Division alleges that Ms. Horler failed to keep her commitment to the County to determine the developer's ability to pay, and "worse yet, misled Nevada County about the sufficiency of a construction loan commitment to finance Phase 1 of the Wildwood Estates Project." (Division's Posthearing Brief at 3, 69-71.)

In my third ruling under Preliminary Matters, I noted Judge Taylor's recent ruling in Dain Rauscher that a securities professional who prepared official statements for municipal bond offerings had not violated the antifraud provisions where he satisfied industry standards for disclosure. The Division, as could be expected, disagrees with that ruling and argues that, even if the order is correct, it does not support Respondent's position because Ms. Horler's conduct was reckless and "was not consistent with industry practice." (Division's Letter of Sept. 7, 1999.)

Respondent Horler

Respondent maintains that she did not violate or cause a violation of the antifraud provisions because: (i) she did not have a legal duty that could give rise to liability as a primary violator; (ii) the Division has not shown any omission or misrepresentation for which she might be liable; and (iii) she did not act with scienter, and her actions were entirely reasonable under the circumstances. (Respondent's Posthearing Brief at 37-71.) Respondent urges rejection of the allegations on the grounds that the Division's theory of liability has no basis in law. The underwriter, not the financial advisor, was responsible for "due diligence" both as a matter of law and by contract.11 (Respondent's Posthearing Brief at 2.) Respondent argues that the "overlapping" disclosure duty presumed by the Division does not arise simply from drafting the official statement. According to Respondent, "As various courts have recognized, participation in the preparation of an offering document, without more, does not subject one to liability for disclosure inaccuracies in that document." (Respondent's Posthearing Brief at 38.)

Respondent maintains that to be liable for misstatements or omissions in an offering statement, a person must have a disclosure duty that arises from being a seller or from "some other relationship of trust and confidence with the investors upon which they relied." (Respondent's Posthearing Brief at 38.) Respondent contends Ms. Horler had no such duty because: (i) she did not offer or sell securities; and (ii) under the Contract her duties and responsibilities ran only to her client, the County. (Respondent's Posthearing Brief at 39-51.) Respondent cites Pinter v. Dahl, 486 U.S. 622, 650 (1988), as support for the first proposition, and contends that the language from Central Bank that the Division relies on is inapplicable because it assumes the existence of all the requirements for primary liability. (Respondent's Posthearing Brief at 39, 40 n.35.)

On the second proposition, Respondent insists that the record is devoid of evidence that her duties as a financial advisor ran to anyone other than her client. (Respondent's Posthearing Brief at 50.) Respondent contends that courts are reticent to hold accountants, attorneys, and other professionals liable as primary violators of the antifraud provisions when they simply draft securities documents, but do not provide certifications or opinions upon which investors could rely. (Respondent's Posthearing Brief at 50.) Ms. Horler argues that she did not make representations to investors or otherwise create a relationship with investors by preparing the official statement for the issuer. (Respondent's Posthearing Brief at 50-51.)

Respondent further contends that, even assuming that the official statement contained material misrepresentations or omissions, she did not violate the antifraud provisions because there is no showing that she acted negligently or with scienter. She argues, rather, that the substantial evidence is that her actions were all taken in good faith without any hint of intent to deceive. (Respondent's Posthearing Brief at 61-76.)

Finally, Respondent contends that the Dain Rauscher order supports her position that there were no material misstatements in the official statement because, in part, the disclosure was in accord with industry standards at the time. (Respondent's Letter of Aug. 19, 1999.) Ms. Horler also relies on the Dain Rauscher order to support her position that her conduct was neither reckless nor negligent, and that she was entitled to rely on bond counsel's 10b-5 opinion letter. (Respondent's Letter of Aug. 19, 1999.)

Conclusions of Law

The bonds at issue are municipal securities under Section 3(a)(29) of the Exchange Act. Except for the antifraud provisions, the provisions of the Securities Act and the Exchange Act, such as registration and reporting requirements, do not apply to municipal securities. This peculiarity in the federal regulation of the securities markets is attributed to the following factors that existed in 1933-34: (i) the market in municipal securities was considered to be relatively free of abusive practices that required legislative attention; (ii) the municipal markets were dominated by institutional investors who were not perceived as needing the same protections as individual investors; and (iii) the market for most municipal securities largely was confined to limited geographic regions so that, arguably, investors were aware of factors affecting the issuer and its securities. (Proposed Rule on Municipal Securities Disclosure, 41 SEC Docket 1402, 1403 (Sept. 28, 1988) ("Proposed Rule"); Disclosure Guidelines, at 6.

In response to changing conditions, in 1975 Congress enacted legislation that created the Municipal Securities Rulemaking Board and a self-regulatory scheme to prevent abuses in the municipal securities markets. See Proposed Rule. The Commission adopted Rule 15c2-12 in 1989, in part pursuant to authority given by Section 15(c) of the Exchange Act to adopt rules and regulations "reasonably designed to prevent [ ] such acts and practices as are fraudulent, deceptive, or manipulative." See Final Rule, 43 SEC Docket at 2246. In comments adopting the Final Rule the Commission noted that:

[T]he Rule is intended to assist the underwriter in satisfying its responsibilities under the antifraud provisions of the federal securities laws. As emphasized in the Interpretation, by participating in an offering, an underwriter makes an implied recommendation about the securities. This recommendation implies that the underwriter has a reasonable basis for belief in truthfulness and completeness of the key representations contained in the official statement.

Final Rule, 43 SEC Docket at 2249.

Elements of Antifraud Violations

Section 17(a) of the Securities Act is a comprehensive prohibition against using the mails or the instruments of interstate commerce to perpetrate fraud in the offer or sale of securities. Section 17(a)(1) makes it unlawful "to employ any device, scheme, or artifice to defraud." Section 17(a)(2) prohibits the use of false statements or omissions of material fact to obtain money or property. Section 17(a)(3) forbids any person from engaging "in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon" a purchaser of securities. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder make it unlawful for any person, directly or indirectly, in connection with the purchase or sale of a security, to make an untrue statement of material fact; omit to state a material fact; use any device, scheme or artifice to defraud; or engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. The antifraud provisions are catchalls expressly designed to thwart misrepresentations in securities trading. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 859 (2d Cir. 1968) (en banc); SEC v. Softpoint, Inc., 958 F. Supp. 846, 861 (S.D.N.Y. 1997), aff'd, 159 F.3d 1348 (2d Cir. 1998) (unpublished table decision). They are thus liberally construed to embrace a wide range of misconduct. Softpoint, 958 F. Supp. at 862.

Scienter, which has been defined as "a mental state embracing intent to deceive, manipulate, or defraud," is required to establish a violation of Section 17(a)(1), Section 10(b) and Rule 10b-5, but scienter is not required to establish a violation of Section 17(a)(2) or 17(a)(3). Aaron v. SEC, 446 U.S. 680, 697, 701-02 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). Scienter is established by showing that the respondent acted intentionally or with severe recklessness. Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982). Recklessness is defined as "an extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Meyer Blinder, 50 S.E.C. 1215, 1229-30 (1992) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). For purposes of Sections 17(a)(1) and 10(b) and Rule 10b-5, proof of scienter need not be direct but may be "a matter of inference from circumstantial evidence." Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983); Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986); Meyer Blinder, 50 S.E.C. at 1230.

Courts have interpreted broadly the requirement of Section 10(b) and Rule 10b-5 that violative conduct must occur "in connection with" the purchase or sale of a security." Superintendent of Ins. of N.Y. v. Bankers Life and Cas. Co., 404 U.S. 6, 12 (1971); In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 964-66 (2d Cir. 1993). In general, "fraud can be committed by any means of disseminating false information into the market on which a reasonable investor would rely." Ames Dep't Stores, 991 F.2d at 967; SEC v. Hasho, 784 F. Supp. 1059, 1106 (S.D.N.Y. 1992).

Finally, the jurisdictional requirements of the antifraud provisions are interpreted broadly, and are satisfied by intrastate telephone calls and even the most ancillary mailings. Softpoint, 958 F. Supp. at 865.

Applicability of the Antifraud Provisions to Ms. Horler

1. The "Offer or Sale" Requirement

Ms. Horler contends that she cannot have violated the antifraud provisions because she neither offered nor sold the Mello-Roos bonds. In support of that position she cites the U.S. Supreme Court's decision in Pinter. The issues in that case were unrelated to the issues to be decided here. The issues in Pinter were:

"[W]hether the common-law in pari delicto defense is available in a private action under § 12(1) of the Securities Act . . . for the rescission of the sale of unregistered securities, and (b) whether one must intend to confer a benefit on himself or on a third party in order to qualify as a `seller' within the meaning of § 12(1)."

Pinter, 486 U.S. at 624-25. With regard to the second issue, the Pinter Court held that civil liability under Section 12(1) of the Securities Act was limited to sellers of a security or to nonowners who solicit the purchase of a security with the intention of serving either their own financial interests or those of the owner. Pinter, at 642-55. By contrast, the broader "offer or sale" requirement of Securities Act Section 17(a) extends to "any person in the offer or sale of any securities . . . [who] directly or indirectly" commits one of the proscribed acts. (Emphasis added.) The "directly or indirectly" language, which is not included in Section 12(1), is also found in Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Furthermore, the Supreme Court has recognized that "any person or entity . . . who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met." Central Bank, 511 U.S. at 191. I therefore conclude that one does not have to be either an issuer or an underwriter to be held liable for committing fraudulent activities in the offer or sale of securities.

Ms. Horler played a key role in accomplishing the offer and sale of these securities. Her testimony is replete with references to being part of the "key financing team," along with County officials, bond counsel, the underwriter, the developer and the engineer, that achieved the successful offering. (Tr. 656.) Moreover, Rauscher's Contract with the County, which Ms. Horler negotiated, specified that Rauscher would provide services that were essential to the offering. In addition to preparing the official statement, the Contract obligated Rauscher to "[c]oordinate printing and mailing of the preliminary and final official statement to investors" (Div. Ex. 56; Resp. Ex. 36; Tr. 122.) Ms. Horler claims that Rauscher did not offer or sell the bonds because, among other things, it was not obligated to actually do the mailing. (Tr. 122-23.) I disagree. It is not necessary that Rauscher processed the mailing. The determining fact is that Rauscher not only prepared the official statement, it also fulfilled its contractual obligation to accomplish the mailing by coordinating the efforts of the various service providers needed to do so.

2. The "In Connection With" Requirement

As noted above, long-standing case law endorses a flexible, not technical and restrictive, interpretation of conduct that comes within the meaning of "in connection with the purchase or sale of any security" as that phrase is used in Section 10(b) and Rule 10b-5. Superintendent of Ins. of N.Y., 404 U.S. at 12. I find that Ms. Horler's conduct, as described herein, satisfies the nexus requirement of Section 10(b) and Rule 10b-5.

3. Legal Duty to Disclose

I reject Respondent's position that the antifraud provisions of the securities statutes do not apply directly to Ms. Horler because: (i) she was not the underwriter; (ii) her duty of disclosure ran only to the County, her client; and (iii) she did not otherwise assume a disclosure duty to any one else, least of all the investing public. (Respondent's Posthearing Brief at 41-51.) I find that Ms. Horler did have a duty of disclosure to the investing public for the following reasons.

Rule 15c2-12 was in effect when the County of Nevada official statement was issued in December 1990. Rule 15c2-12 requires underwriters participating in primary offerings of municipal securities of $1 million or more to obtain, review, and distribute to investors copies of the issuer's disclosure documents.12 Respondent acknowledges that to prepare an official statement "in accordance with the disclosure" required by Rule 15c2-12, Ms. Horler had to prepare a document that included information "concerning the terms of the proposed issue of securities; information, including financial information or operating data, concerning such issuers of municipal securities and those other entities, enterprises, funds, accounts and other persons material to an evaluation of the offering." (Respondent's Pretrial Brief at 9 n.11.) An official statement is the municipal bond equivalent of a corporate prospectus, which is "a formal written offer to sell securities that sets forth . . . the facts concerning an [existing business enterprise] that an investor needs to make an informed decision." (Tr. 112, 631-32. See also, Rule 15c2-12(e)(3), 17 C.F.R. § 240.15c2-12(e)(3) (1990); Zipf, supra, at 138, 245; Barron's Dictionary of Finance and Investment Terms, 294, 382, 445 (4th ed. 1995).)

Conducting a due diligence investigation and disclosing material information in the official statement are separate endeavors, yet they are inextricably connected in that the material information disclosed in the official statement should be true and complete, attributes that can only be accomplished by a process of verification. See Final Rule, 43 SEC Docket at 2249. The underwriter, First California, agreed to prepare the official statement and to perform the due diligence for the offering. In June 1990, however, the County contracted with Rauscher to:

8. Prepare the preliminary and final official statements describing the County's financing program, the bonds, security for payment of the bonds, and the economic and financial background of the property owners in accordance with the disclosure required by Securit[ies] and Exchange Commission Rule 15c2-12.

(Div. Ex. 56; Tr. 636, 640-41.) First California retained its obligation to perform due diligence, but Rauscher assume the underwriter's duties to disclose all material facts when it prepared the official statement. (Div. Ex. 56; Tr. 636, 640-41.)

Ms. Horler testified at the hearing, "I think that where our roles differed was where the underwriter had additional obligations, because he was making representations to investors. A financial advisor does not do so." (Tr. 530.) I reject Respondent's position that the antifraud provisions do not apply to Ms. Horler because she was not the underwriter on the offering. In a negotiated offering such as this, the underwriter customarily prepared the official statement. Horler, supra, at 11, 64. Moreover, First California had specifically agreed to do so. Ms. Horler contracted to perform this underwriter's responsibility when she agreed to prepare an official statement for the offering that met the requirements of Rule 15c2-12. In doing so, Ms. Horler undertook not only the procedural obligations set forth in the Rule, but also the substantive responsibility to see that the representations contained in the offering statement were accurate and complete.

Finally, Respondent's arguments that she had no duty of disclosure because she "did not issue any opinion . . on which the investing public could rely," and the "record is devoid of any showing that her duties . . . ran to anyone other than her client" are unpersuasive. (Respondent's Posthearing Brief at 50-51.) Ms. Horler recommended that the County hire Rauscher to prepare the official statement because the underwriter had not done so. In promoting Rauscher for the job she stressed its expertise at performing the task. (Tr. 113-14, 117, 613-14; Div. Ex. 39.) Rauscher increased its original $10,000 proposal to act as financial advisor to $30,000 when it agreed to draft the official statement. (Tr. 117.) As a securities professional and an expert in municipal offerings, Ms. Horler knew the significance of the official statement as a disclosure document in such offerings.13 In her widely disseminated guidebook, Ms. Horler acknowledges the importance of disclosure: "It is the responsibility of issuers, financing consultants, underwriters, and bond counsel to make full disclosure of all material information pertinent to securities offered in the municipal bond market." Horler, supra, at 10 (emphasis added). I am at a loss to understand why Ms. Horler did not understand that by taking on the underwriter's responsibility for preparing the official statement she also took on the underwriter's duty to make full and accurate disclosure of material information to the investing public.

4. Material Errors and Omissions In the Official Statement

Information is material if, under all circumstances, there is a substantial likelihood that a reasonable investor would consider the omitted or misstated information significant in making an investment decision. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).

a. Financial Considerations Relevant to the Wildwood Estates Project

The Division alleges that Ms. Horler knew but failed to disclose in the official statement that the Acquisition Agreement provided that the developer could not receive any of the Mello-Roos bond proceeds until the public and private improvements planned for each successive phase of the project had been completed and accepted by the County, and that she knew but did not disclose that the developer's loan commitment was inadequate to complete Phase I.

The official statement disclosed the following information about the developer's intention to build the project in three phases:


Series E-1990 Bonds Series T-1990 Bonds

Phase I $2,937,504.85 $389,463.63 $2,390,589.36

Phase II 1,473,894.15 320,711.29 1,261,456.83

Phase III 2,489,180.41 682,196.79 1,437,710.57

$6,900,579.41 $1,392,371.71 $5,089,756.76

(Div. Ex. 1 at 14.)

Ms. Horler knew but did not tell the Board at a November 13, 1990 meeting, and she did not disclose in the official statement, that the developer did not have a financing commitment for Phases II and III because it "didn't come up for discussion" at the Board meeting. (Tr. 164-66, 169, 459.) At the same meeting, Ms. Horler informed the Board that First Commercial Bank had loaned Mr. Montross $1.14 million for the project and that the bank had provided him with a commitment letter for an additional $4.2 million. (Div. Exs. 74, 78.) Ms. Horler admits that she knew at the time, however, that this level of funding would be insufficient to finance Phase I of the project. (Tr. 164-66.)

Mrs. Horler acknowledged that her representation to the Board that, "In our estimate, this is sufficient money to adequately complete all the improvements necessary" was "not completely accurate. It was something given kind of spur of the moment at the meeting." (Tr. 163-65.) Ms. Horler did not disclose in the official statement that the developer lacked sufficient funding to complete Phase I of the project and lacked any financing for Phases II and III. (Tr. 192-93; Div. Ex. 1.) These omissions were material because: (i) the developer's financial stability was significant to the project's success; (ii) the developer phased the project because "he didn't have enough money to do the whole subdivision at one time"; and (iii) it was important to the County for federal income tax purposes that all three Phases be completed within two years. (Div. Ex. 78 at 21-22; Tr. 12, 167-69.)

The County Counsel was the impetus for the Acquisition Agreement's payment schedule whereby the developer was paid from the proceeds of the bond offering only after he completed all the improvements in a phase, and only after the appropriate County agency accepted the improvements. This acquisition type agreement was thought to offer the issuer more protection. (Tr. 158, 557.) An acquisition or reimbursement agreement is more financially burdensome for a developer than a progressive agreement under which the developer receives periodic payments as it completes the work because it forces the developer to finance expenses up-front and to wait longer for reimbursement. The Division's expert, Patrick A. Gibbons, opined that it was not normal practice in December 1990 to use acquisition type agreements which denied the developer any reimbursement from the Mello-Roos bond proceeds until all facilities in a given phase of construction were accepted by the appropriate public agency.14 (Div. Ex. 171 at 6.) Mr. Gibbons testified that this provision required the developer to raise additional capital during construction, and estimated that it caused the developer to have a shortfall in construction funds of $487,274.15 (Div. Ex. 173.)

Timothy J. Schaefer, Respondent's expert, disagreed with Mr. Gibbons and testified that a variety of both progressive and acquisition type agreements were in use in municipal bond offerings in California in 1990.16 (Tr. 679-80.) In addition, bond counsel Ness, a practicing bond attorney for about sixty years, opined that while an acquisition agreement was not unusual, it was not the most common type of agreement in use at the time. (Tr. 654.) Ms. Horler knew that under the terms of the Acquisition Agreement the developer could not receive the bond proceeds to pay for the Phase I construction costs until Phase I was completed and the County accepted the improvements. (Tr. 166.) Mr. Ness and Respondent's expert support Ms. Horler's decision not to disclose this information in the official statement based on their view of the practice in the industry in 1990. (Tr. 646, 654, 669, 681.)

The terms of the Acquisition Agreement are material because they directly affected the project's possibility of financial success, a significant consideration to a reasonable investor. I find therefore that a reasonable investor would consider it significant in making an investment decision that, unlike the more common situation, in this offering the developer had to advance funds to finance construction until the Phase I improvements were completed and accepted by the County. For developers with limited resources, the additional financial burden of advancing capital could be especially difficult. This developer was not well known and the record indicates that its resources in 1990 were quite limited. Ms. Horler had not heard of Montross Barber before the offering. Ms. Horler characterized the risk that the developer could not raise the additional funds needed because of the terms of the Acquisition Agreement as "significant" in her discussion with the Board. (Tr. 166-67.) A witness with many years of banking experience, who had been a loan official with First Commercial Bank, considered the terms of the Acquisition Agreement important because "it's always important for the bank to know what – what has to happen for it to be repaid." (Tr. 452.) This witness noted in the bank's loan file an August 1990 conversation with a municipal bond counsel who characterized the Acquisition Agreement as the key document between the County and the developer. (Resp. Ex. 5D at FCB 02697.)

Ms. Horler's position that there was no need to disclose that the Acquisition Agreement required up front financing by the developer because investors who bought these kinds of bonds - an unrated offering of a land-based security - understood this fact because the official statement said the County would "acquire" the improvements. (Tr. 191.) The evidence does not support Respondent's assessment of what that term meant or would mean to investors. I have considered and found unpersuasive the opinions of Mr. Ness and Mr. Schaefer that Ms. Horler acted appropriately because the prevailing practice in California in 1990 was not to disclose an acquisition type agreement in the official statement.17

Because of the omissions noted above, Ms. Horler's disclosure in the official statement did not satisfy the terms of Rauscher's Contract with the County that required Rauscher to describe in the official statement the "security for payment of the bonds, and the economic and financial background of the property owners in accordance with the disclosure required by Securit[ies] and Exchange Commission Rule 15c2-12." (Div. Ex. 56 at page stamped RPR 00611.)

Ms. Horler further contends that she is not responsible for material misstatements and omissions in the official statement because drafting the official statement was a collaborative effort. She circulated drafts and held meetings with people who had skills she did not have, and she urged those people to assist her in making the statement accurate. (Tr. 512-13, 543, 565-66.) I find this argument unpersuasive. The County paid Rauscher approximately $20,000 to draft the official statement because Ms. Horler and her firm represented themselves as municipal finance experts experienced in drafting official statements. (Tr. 113, 117, 613-15.) County officials believed Ms. Horler wanted the official statement to be accurate, but they did not think it was their shared responsibility to verify the accuracy of the information in the statement. For example, Mr. Curtis recognized that the County Counsel's office was not expert in municipal bond offerings and it "would entrust the development of those documents to the bond professionals" it hired to prepare them. (Tr. 369.) Ms. Wheeler looked to Ms. Horler and Ms. Rappaport as the source of all information she had about the representations in the official statement. (Tr. 271.) Ms. Dabis thought she received copies of the official statement only as a courtesy. (Tr. 322.) Moreover, it was not that Ms. Horler was uninformed – she knew the terms of the Acquisition Agreement, she knew the developer had insufficient financing for Phase I and had no financing for Phases II and III, yet she chose not to disclose that information to investors in the official statement.

Finally, the official statement's general disclaimer that "Information was obtained from the County and other sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness and is not to be considered as a representation of the financial advisor or the underwriter" does not absolve Ms. Horler from responsibility. (Div. Ex. 1 at i; see Kline, 24 F.3d at 487.)

For all these reasons, I conclude that a reasonable investor would consider the reimbursement arrangement and the insufficient or nonexistent up-front financing to be material information. Ms. Horler was required to disclose this information in the official statement because without it the official statement was misleading.

b. Ownership of Wildwood Estates

The Division alleges that Ms. Horler knew or was reckless in not knowing that Wildwood Estates, Inc. held title to the land which was the site of the Wildwood Estates development, and that she caused the official statement to state that Mr. Montross owned the land, a material misrepresentation.

Ms. Rappaport told Ms. Wheeler that "Montross's land title is clear." (Tr. 261-62; Div. Ex. 71.) The official statement erroneously represented that, "All of the taxable land within the District is currently owned by G. Michael Montross of Montross Barber Investments, Inc. (the `Developer')." (Div. Ex. 1 at 13.)

Respondent's position is that the error was not material because Wildwood Estates, Inc. and Mr. Montross were essentially the same, especially since Mr. Montross personally guaranteed the bank loans to the corporation. I reject this argument. The legal differences between personal liability as opposed to corporate liability are significant. This holding is supported by: (i) Ms. Horler's advice to the County that the issue of clean title was important because "the bond holders look first to the reserve and then to the County's foreclosure obligation with title being a must at the outset"; (ii) the Contract required Rauscher to assist the County in developing a financing plan that would, among other things, take into account the property owner's ability to pay; (iii) the Contract further required Rauscher to prepare an official statement describing the "economic and financial background of the property owner"; and (iv) the testimony of the bank official that "from a practical standpoint, when you have a real estate deed of trust, as a lender you basically have only one recourse. You can look to the real estate, or you can do a judicial foreclosure, and then look to the guarantor." (Tr. 136-37, 382-83, 431-32; Div. Ex. 56.)

Ms. Horler's positions on her responsibility for the error are contradictory and confusing. She testified that she read the materials that were sent to her and she admits to receiving a copy of the bankruptcy court order affirming that Wildwood Estates, Inc. held title to the land. Yet she also testified that she only learned this fact long after the bond offering had closed. (Div. Ex. 70; Tr. 132-34, 582.)

Ms. Horler claims she was not responsible for this error in the official statement because Mr. Curtis, Mr. Cranmer, and Melanie K. Wellner, an attorney in the County Counsel's office, failed to tell her that the draft official statement incorrectly identified Mr. Montross as the land owner.18 (Tr. 90, 370-72, 569-71.) Ms. Horler also testified that in her experience bond counsel was responsible for "resolving or deciding questions of title and ownership." (Tr. 536-37.) Ms. Horler's attempt to shift responsibility to bond counsel is unpersuasive. Bond counsel was adamant that he reviewed the official statement "[o]nly as to . . . the legal issues that are in it. We specifically do not include in our opinion anything that indicates we've delved into the due diligence or disclosure, whatever." (Tr. 632.) Finally, Ms. Horler claims she was justified in relying on the erroneous minutes of the Board meeting on March 20, 1990. Matters of title to land, however, are resolved by checking primary public documents that reveal legal ownership.19 (Tr. 536-37.) Ms. Horler had an obligation to either personally check the official public records, or to otherwise make certain that the official statement disclosed the true owner of the property.

Rauscher had no due diligence obligation. However, Ms. Horler knew the County hired Rauscher to draft the official statement because the underwriter had failed to do so. (Tr. 181.) Mr. Ness expected that the person preparing the official statement would consider the results of the due diligence probe, however, there is no evidence that Ms. Horler did so. (Tr. 660.) Rather, the persuasive evidence is that Ms. Horler caused to be distributed to investors an official statement that misidentified the land owner without confirming, or even asking, whether the underwriter had conducted the most basic due diligence inquiry on this point - a title search to determine who held legal title to the land.20 As an expert in municipal securities, and in land-based financing in particular, Ms. Horler knew that legal title was important to the value of the bonds. (Tr. 553.) The official statement did not satisfy the terms of Rauscher's contract with the County which required Rauscher to describe in the official statement the "security for payment of the bonds, and the economic and financial background of the property owners in accordance with the disclosure required by Securit[ies] and Exchange Commission Rule 15c2-12." (Div. Ex. 56, Resp. Ex. 36.) Ms. Horler erred in omitting information material to an evaluation of the offering.

As drafter of the official statement, Ms. Horler was responsible for the false information in the official statement on the material issue of title to the land. For the reasons previously stated, she cannot shift this responsibility to others.

c. The Background and Resources of Mr. Montross and Montross Barber

The Division further alleges that Ms. Horler was reckless in preparing an official statement that misrepresented the real estate experience and financial resources of Mr. Montross and Montross Barber. According to the Division, the official statement conveyed the misleading impression that in December 1990, Mr. Montross and Montross Barber were experienced, successful real estate developers who possessed sufficient skills and financial resources to complete the Wildwood Estates project.21

Testimony that Montross Barber's properties had declined substantially in value after 1986, that by 1990 the firm was extremely strapped for funds, that it did not pay taxes on some properties, and that it was in "very bad" financial condition is unrefuted. (Tr. 218-20, 223-24, 229-34, 236.) This evidence and the criminal convictions of Mr. Barber and Mr. Montross for securities fraud in connection with their real estate activities in this time period are persuasive that the official statement was false and/or misleading in representing that, in late December 1990:

The firm now holds more that $250 million worth of Northern California property for more than 3,000 investors.

[Mr. Montross] has purchased over $200 million worth of residential units and created over 1,200 subdivision lots in the last eight years. Some of Mr. Montross's substantial real estate interests include the following: El Dorado Estates, Wolf Creek and Bear Lake Estates, El Dorado County; Lake Kensington Park, Folsom; College Oaks, Carmichael; Lakeshire, Sacramento County; Sunnyside Terrace, Martinez and Cameron Park Estates, Cameron Park. Mr. Montross also has significant ownership interests in real estate partnerships for residential and commercial property located in Millbrae, Sacramento and San Francisco.

(Div. Ex. 1 at 13.)

County officials expected that Ms. Horler would do the work called for by the Contract, including developing a financial plan that, among other things, would address "the property owner's ability and willingness to pay." The County Counsel interprets that provision to mean that the financial advisor would conduct an independent examination and reach a determination as to the owner's capacity to meet its payment obligations. (Tr. 344-48; Div. Ex. 56.) Ms. Horler, however, claims that she was not required to do any independent research or analysis, but was entitled to rely on the investigation the bank presumably undertook prior to loaning $7 million to the developer. When asked what caused her to believe that the bank was utilizing due care in evaluating Mr. Montross's credit worthiness, Ms. Horler did not recall any specifics but referred to her general belief that:

Well, I know that when banks give loans . . . and you know, I thought all through this project the loan to Mr. Montross was as a sole individual – they would have to look at his financial statements, his tax returns, his projects. They would have to satisfy themselves that he was a credible developer, that he had the wherewithal and experience to carry through with the project.

(Tr. 534.)

As noted above, First Commercial Bank loaned $200,000 to Montross Barber on December 5, 1989; $1.14 million to Wildwood Estates, Inc. on March 8, 1990; $5.35 million to Wildwood Estates, Inc. on July 25, 1990; and $125,000 to Wildwood Estates, Inc. on November 30, 1990.22 (Resp. Exs. 5B, 5C, 5D, 5E.) Ms. Horler did not know that the bank loans in March 1990 and July 1990, totaling about $6.5 million were to Wildwood Estates, Inc., a California corporation. (Resp. Exs. 5C, 5D.) Mr. Montross gave a "continuing guaranty" on the loans. (Tr. 413-14, 425-27; Resp. Exs. 5B, 5C, 5D, 5E.)

Ms. Horler reiterated her position several times that she could rely on the bank's loans to represent that the bank had conducted a thorough investigation of Mr. Montross and that he was financially successful. "Yes, that's what banks do. And I was familiar with bank loans in other situations, and I felt that it would be obvious to me that that was typical bank procedure." (Tr. 594-95.) Ms. Horler assumed that "as part of the bank's review in processing the loan to Mr. Montross, that they would undoubtedly look at the [real estate development] projects in [the] development history" that Mr. Montross listed on his loan application. (Tr. 538.) Ms. Horler did not consider that the bank's review differed depending on the borrower. The evidence is, however, that that bank's loans to Wildwood Estates, Inc. did not involve a detailed review of the finances of Montross Barber. (Tr. 430-31.)

Ms. Horler offers no support for her position that she knew the bank loans "entailed a detailed background and personal asset check of Mr. Montross." (Tr. 541-42.) When asked whether Mr. Montross was financially sound on November 13, 1990, about a month before the offering, Ms. Horler responded, "that would be obvious, if the bank was willing to lend him money. Because I knew that that would certainly be something that the bank would be checking." (Tr. 594.)

The evidence does not support Ms. Horler's assumption that the bank did a thorough analysis of Mr. Montross's or Montross Barber's finances. The source of the bank's information was the borrowing entity. (Tr. 415-16.) The basis of the bank's approval was the credit report compiled by a loan officer. The senior credit administrator for First Commercial Bank at the time the Wildwood Estates loans were made, Charles E. Gram, testified that he did not know whether the loan officer verified the financial information that Mr. Montross supplied, as he should have, by checking with independent sources. (Tr. 415-16.)

When the official statement was issued in December 1990, Ms. Horler did not know whether Mr. Montross or Montross Barber were financially sound. (Tr. 155.) Moreover, there is no evidence that Ms. Horler asked the bank whether it had conducted a thorough investigation of Mr. Montross's personal finances or the finances of Montross Barber before she finalized the official statement. If it had been asked whether it had done a due diligence examination, First Commercial Bank would have confirmed that it made the loan commitment, but it would not have disclosed any of the documentation it had gathered. (Tr. 460.)

Based on these facts, I reject Ms. Horler's position that her role in preparing the official statement was largely that of a compiler of data. I conclude that she made material errors and omissions in the official statement that conveyed the erroneous impression that Mr. Montross and Montross Barber were experienced in creating successful real estate subdivisions and possessed sufficient skills and financial resources to complete the Wildwood Estates project.

5. Scienter

As noted above, to violate Section 17(a)(1) of the Securities Act or Section 10(b) of the Exchange Act, a person must be shown to have acted with scienter, i.e., a mental state embracing intent to deceive, manipulate, or defraud; scienter can be established by a showing that a person acted intentionally or with severe recklessness. Aaron, 446 U.S. at 697; Ernst & Ernst, 425 U.S. at 193 n.12; Hackbart, 675 F.2d at 1117.

The County did not have either the experience or the personnel to do what was required to prepare the official statement. The County's one prior bond issue financed the cost of its administrative building. (Tr. 263.) The County's analyst on the offering, Ms. Wheeler, who attended meetings, gathered information, and acted as the "communications interface" among the parties and the Director of Finance and the County Administrator, had been in her position for about two months when the County retained Ms. Horler.23 (Tr. 242-44.) Ms. Wheeler had no prior experience in municipal finance. Before joining the County in 1988, her work experience had been as a business manager of a food processing plant and a school district. (Tr. 239-40.) She spent several years with a welfare agency, and had directed the County's community action agency. (Tr. 239-40.)

The County hired Ms. Horler because she was one of the state's leading experts on the subject of municipal finance. In the well-known book Ms. Horler wrote in 1982 as a guide for municipal officials, she stated that it was the responsibility of issuers, financial consultants, underwriters, and bond counsel to make full disclosure of all material information pertinent to securities offered in the municipal bond market. (Div. Exs. 10, 12 at 64; Tr. 184.)

The evidence is persuasive that, due to Ms. Horler's knowing and reckless misconduct, the official statements contained material misstatements and omitted to state material information required to make the information in the statement not misleading. Jay Houston Meadows, 61 SEC Docket 2444, 2453 n.16 (May 1, 1996), aff'd, 119 F.3d 1219 (5th Cir. 1997); SEC v. Steadman, 967 F.2d 636, 643 n.5 (D.C. Cir. 1992) (citing Aaron, 446 U.S. at 701-02); Newcome v. Esrey, 862 F.2d 1099, 1102 n.7 (4th Cir. 1988). Based on the findings and conclusions set forth above I therefore conclude that Ms. Horler, acting with scienter, willfully violated Sections 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Because I conclude that Ms. Horler is primarily liable for these violations, there is no need for an analysis of the aiding and abetting allegations.


Section 8A(a) of the Securities Act and Section 21C(a) of the Exchange Act, authorize the entry of an order requiring a person found to have violated or to have caused violations of the securities statutes and rules thereunder to cease and desist from committing or causing such violations and any future violations. I do not find the entry of such an order necessary or appropriate. I credit Ms. Horler's assurances that, based on her experience with the Wildwood Estates bond offering, she would do things differently today and would not repeat the conduct that is at issue here. (Tr. 600-01.) In 1996, the State of California published the Disclosure Guidelines, which set out the standards for land-based securities and suggest a greater level of disclosure than Ms. Horler observed in 1990. For example, the Guidelines suggest that:

In applying [the] materiality standard, the issuer may assume that a reasonable investor would consider it important to be informed of any foreseeable factor that might jeopardize the timely payment of debt service. . . . [T]he information needs of investors . . . extend to indicators of the feasibility of the development project itself. In particular, a reasonable investor would consider it important to be informed of facts concerning the developer's experience, its plans for financing development, and the sources of capital committed to that financial plan.

(Disclosure Guidelines, at ii.) Ms. Horler willingly followed the Guidelines after their publication in 1996. Over the course of her long and distinguished career as a securities professional, Ms. Horler has never been disciplined for professional misconduct. The wrongdoing at issue here occurred during a very brief period of time some nine years ago, and involved a single bond offering.

Although it is not necessary to find a likelihood of future violations to impose a cease-and-desist order, where, as here, it is highly unlikely that a respondent will commit future violations and no remedial purpose will be served by issuing a cease-and-desist order, such an order need not automatically follow upon finding that a respondent has violated the securities laws. See, e.g., Trepp, 1999 WL 753922, at *1. I therefore deny the Division's request for a cease-and-desist order against Ms. Horler.

Record Certification

Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items described in the record index issued by the Commission's Secretary on September 10, 1999.


Based on the findings and conclusions set forth above, I order that this administrative proceeding is dismissed.

This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party.

Brenda P. Murray
Chief Administrative Law Judge


1   At a prehearing conference on July 17, 1998, I granted the Division of Enforcement's ("Division") Motion to Amend the OIP by withdrawing Paragraphs 39 through 44 and Paragraph 50 as to Respondent Horler. Orders at Prehearing Conference, July 20, 1998. The amendment eliminated two of the five allegations against Ms. Horler.

2   "(Tr. __)" refers to the transcript of the hearing. I will refer to Division and Respondent exhibits as "(Div. Ex. __)," and "(Resp. Ex. __)," respectively.

3   One unsuccessful developer was Boise Cascade which had successfully developed a gated residential community, Lake Wildwood, on adjacent land. Lake Wildwood was also the name of a man-made lake in the immediate area. (Div. Ex. 1 at 12; Tr. 9-11.)

4   In Nevada County, it was not unusual for an engineering firm to work for both the County and the project developer on the same project. (Tr. 62.)

5   Ms. Horler testified that August 21, 1990, was the anticipated preliminary closing date, but there were not enough buyers at the interest rates offered and, in addition, an issue arose as to title to the property. (Tr. 135.)

6   A proposed schedule on Rauscher letterhead shows December 21, 1990 as the closing date. (Div. Ex. 83 at RPR 00930.) The official statement cover page bears two dates: December 17, 1990 and December 20, 1990. (Div. Ex. 1.)

7   When Ms. Horler joined the firm it was registered as Rauscher Pierce Refsnes, Inc. (Div. Ex. 39; Resp. Ex. 17.)

8   In referring to Ms. Horler's efforts, I included work that Ms. Rappaport performed at Ms. Horler's direction, unless otherwise indicated.

9   The indirect liability reference was to the fact that Montross Barber, Mr. Montross, and Mr. Barber were general partners in certain of the projects they developed and these projects had certain financial obligations for which all three had a potential financial responsibility because of their general partner status. (Resp. Ex. 5B.)

10   I did not see the status of this proceeding in my perusal of the record.

11   Respondent's expert, Timothy J. Schaefer, opined that Ms. Horler acted appropriately in drafting the official statement based on data she compiled from various sources without making a thorough, direct check for accuracy because the underwriter had contracted to perform the due diligence investigation. (Tr. 689-90.) According to Mr. Schaefer:

Financial advisors who prepare disclosure documents in negotiated municipal bond offerings have no professional obligation to investigate, or perform due diligence regarding, information provided to them in land-secured offerings, absent any "red flags" concerning the information they received.

(Resp. Ex. 88 at 10; Tr. 632.)

12   The County of Nevada bond offering was for $9.07 million. The comments accompanying publication of Rule 15c2-12 note that, generally, the larger the bond issue the more thorough the disclosure, and that many offerings for less than $10 million are in types of securities that present higher risks to investors that should be highlighted in a complete disclosure document. Final Rule, 43 SEC Docket at 2247.

13   Ms. Horler held two securities licenses and an MBA. She was a senior vice president of a firm that was both a registered broker dealer and a large investment banking firm specializing in public finance.

Members of the securities industry agree to be subject to the statutes, rules and regulations administered by the Commission and self-regulatory organizations, and, before entering the business, generally must apply for registration and pass examinations demonstrating their knowledge of the securities laws. Thereafter, these professionals are subject to ongoing obligations to secure compliance with the law in order to protect public investors from illegality.

Jacob Wonsover, 69 SEC Docket 694, 1712 (Mar. 1, 1999).

14   Mr. Gibbons is president of GCI Group, located in Irvine, California, a real estate consultant in the areas of special district formation, due diligence, and restructuring. A 1985 graduate of New York University, Mr. Gibbons worked for a year with Chemical Bank Capital Markets Group before becoming a consultant. (Div. Ex. 171.)

15   The parties strenuously disagree as to the meaning of First Commercial Bank's loan report dated July 25, 1990 for Wildwood Estates, Inc.'s $5.3 million loan showing total costs of this amount and $1,378,152 in "credits paid by Mello-Roos directly." (Resp. Ex. 5D, date stamp FCB 02695.) I find the Division's position persuasive that inasmuch as Mello-Roos funds could not be disbursed until after the County accepted the improvements, this notation indicates that the developer would need this amount in addition to the loan amount to complete Phase I. (Division Posthearing Brief at 43-44.)

16   Mr. Schaefer has had more than thirty years experience in municipal securities and is executive vice-president of Fieldman, Rolapp & Associates, located in Irvine, California, a regional consulting firm specializing in advising local governments on public finance, financial consulting, and fiscal planning. (Resp. Ex. 88 at 2.) In Mr. Schaefer's expert opinion, Ms. Horler acted appropriately in drafting the official statement based on data she compiled from various sources without a thorough, direct check for accuracy because the underwriter had contracted to perform the due diligence investigation. (Tr. 689-90.)

17   The argument that behavior is acceptable because "everybody is doing it" is not a valid defense to fraudulent conduct. "Proof of adherence to an industry practice is not dispositive on the issue of" liability because "what ought to be done is fixed by a standard of reasonable prudence, whether it usually is complied with or not." Doe v. Cutter Biological, Inc., 971 F.2d 375, 382-83 (9th Cir. 1992) (citations omitted).

18   Persons in the County Counsel's office wrote letters and memoranda that identified Mr. Montross as the owner even though the County Counsel and several others in the office knew that the bankruptcy court order dated November 5, 1990, confirmed that Wildwood Estates, Inc., a California corporation, had owned the property since January 1990. (Div. Ex. 76.)

19   The minutes mistakenly state that Mr. Montross was the land owner even though a transcription of an oral recording of the meeting describes a title document showing title in Wildwood Estates, Inc., a California corporation. (Resp. Ex. 12, minutes at page 987, and transcription at 30.)

20   The only evidence of the underwriter's due diligence activities is bond counsel's testimony that Mr. Dumont with First California "started out pretty well" because he called two or three meetings and he went over a checklist he had prepared that indicated "he was doing pretty well." (Tr. 638.)

21   I have given no weight to the suspicions of Ms. Dabis, the County Treasurer/Tax Collector, who publicly questioned Mr. Montross's trustworthiness, because she could not substantiate her suspicions with credible evidence.

22   On the loans to Wildwood Estates, Inc., the bank earned a 2% loan fee and interest at prime plus 2 - 2%. (Tr. 444-45.)

23   Ms. Wheeler received a BA degree from Chico State in the early 1980s, and was hired by the County on July 13, 1988. She earned a Masters in Public Administration from the University of Southern California in 1996. (Tr. 238-40.)