==========================================START OF PAGE 1====== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 15160 / November 20, 1996 SEC v. CS FIRST BOSTON CORPORATION, ET. AL. 96-8124 JGD (CTx) The United States Securities and Exchange Commission has sued CS First Boston Corporation and two of its former investment bankers, Jerry L. Nowlin and Douglas S. Montague, for fraud in the offer and sale of $110 million in Series B Pension Obligation Bonds issued by Orange County in September 1994. This lawsuit is the Commission's third enforcement action in its ongoing investigation relating to the financial collapse of Orange County. The Commission is seeking permanent injunctions and civil penalties against each of the Defendants. The Commission alleges in its Complaint that CS First Boston, Nowlin, and Montague misled investors concerning the Orange County Investment Pools ("County Pools"), particularly the County Pools' investment strategy, the risks of that strategy, and the County Pools' investment losses. The Complaint alleges that while participating in drafting and preparing the offering document known as the Official Statement, CS First Boston, Nowlin, and Montague knew, or were reckless in not knowing, significant negative information about the County Pools that was misrepresented in or omitted from the Official Statement. Specifically, CS First Boston, Nowlin, and Montague knew, or were reckless in not knowing, that: * the County Pools' investment strategy was premised on the assumption that interest rates would remain relatively low for at least three years; * the County Pools employed a high degree of leverage through reverse repurchase agreements, which magnified the County Pools' risk of loss in the event of a rise in interest rates; * the County Pools invested heavily in certain risky derivative securities that reacted negatively to a rise in interest rates; * the maturities of the reverse repurchase agreements were not matched with the maturities of the securities purchased with the proceeds of those agreements, which exposed the County Pools to investment risk; * as a result of rises in interest rates during 1994, the County Pools had suffered significant market losses and collateral calls; and ==========================================START OF PAGE 2====== - 2 - * critics had charged that the County Pools' investment strategy was too risky for public funds. Despite this knowledge, CS First Boston, Nowlin, and Montague failed to diligently inquire into these matters and otherwise take steps to assure that the Official Statement's disclosure concerning the County Pools was not false or misleading. To the contrary, CS First Boston, Nowlin, and Montague participated in the preparation of the Official Statement which cast the County Pools in a false light by conveying the impression of safety and security. Information about the County Pools' investment strategy, risks and investment losses was material to investors in the $110 million Series B Pension Bonds because the County Pools guaranteed liquidity of these bonds. Investors in the Series B Bonds had the right to liquidate their investment upon seven- days' notice. If the Series B Bonds could not be resold in seven days, the County Pools agreed to purchase the bonds up to the amount of Orange County's unrestricted funds in the County Pools. As a direct result of the undisclosed risks of the County Pools' investment strategy, by December 1994 the County Pools suffered market losses of $1.7 billion. In response to these losses, in early December 1994, the County and the County Pools filed Chapter 9 bankruptcy, and the County Pools defaulted on their obligation to purchase the Series B Bonds. The Commission has charged CS First Boston, Nowlin and Montague with fraud in the offer and sale of the Series B Pension Bonds in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and with deceptive, dishonest and unfair practices in violation of Rule G-17 of the Municipal Securities Rulemaking Board. The Commission has also charged CS First Boston with fraud by a broker-dealer in violation of Section 15(c) of the Securities Exchange Act and Rule 15c1-2. The Defendants named in this action are: CS First Boston Corporation, a broker-dealer headquartered in New York. CS First Boston was the senior underwriter of $320,040,000 Pension Obligation Bonds issued by Orange County in September 1994. As underwriter, CS First Boston purchased the Pension Bonds from the County and sold them to investors. Jerry L. Nowlin, age 53, and a resident of Park City, Utah. Nowlin was employed by CS First Boston from 1990 to February 1995. In 1994, Nowlin was a Vice President in CS First Boston's San Francisco office and was one ==========================================START OF PAGE 3====== of the two investment bankers assigned to the Pension Bond underwriting. ==========================================START OF PAGE 4====== - 3 - Douglas S. Montague, age 39, and a resident of La Canada, California. Montague was employed by CS First Boston from 1993 to March 1995. In 1994, Montague was a Vice President in CS First Boston's Los Angeles office and was an investment banker assigned to the Pension Bond underwriting. The Commission filed its complaint in the United States District Court for the Central District of California in Santa Ana, California. In a lawsuit filed earlier this year, the Commission obtained injunctions against Orange County's former Treasurer-Tax Collector Robert L. Citron and former Assistant Treasurer Matthew R. Raabe for their fraudulent conduct in the offer and sale of over $2.1 billion in municipal securities issued in 1993 and 1994 by Orange County and two local governmental agencies. In a separate administrative proceeding, the Commission ordered Orange County, the Orange County Board of Supervisors, and a local government agency to cease and desist from future fraudulent conduct in the offer and sale of securities. The Commission also issued a report relating to the conduct of the individual members of the Board of Supervisors in the offer and sale of securities. The Commission's investigation remains ongoing.