SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 15423 / July 28, 1997 SECURITIES AND EXCHANGE COMMISSION v. FIRST CALIFORNIA CAPITAL MARKETS GROUP, INC., H. MICHAEL RICHARDSON and DERRICK DUMONT, United States District Court for the Northern District of California, Civil Action No. 97-2761-SI (N.D. Cal. 1997). The Securities and Exchange Commission ("Commission") today sued a securities brokerage and two of its executives for defrauding investors who bought $69 million worth of municipal bonds in five municipal bond offerings in California. The Commission's Complaint alleges that Defendants lied to investors and omitted to tell them important information in the offering materials for each bond offering about the risks connected with the bonds. The Commission filed its lawsuit against First California Capital Markets Group, Inc. ("First California"), a broker-dealer formerly headquartered in San Francisco (now located in San Diego), H. Michael Richardson, a principal of the firm who lives in the Bay Area, and Derrick Dumont, the former manager of the firm's land-based financing department who now lives in Calistoga. The Complaint was filed in the United States District Court for the Northern District of California. The Complaint alleges that the fraud was committed in connection with the Defendants' underwriting of municipal bonds issued by the County of Nevada ("Nevada County"), the City of Ione ("Ione"), the Avenal Public Financing Authority ("Avenal"), and the Wasco Public Financing Authority ("Wasco"), all located in Central California. The six-count Complaint asks the court to enjoin permanently the Defendants from violating the law, order them to return all ill-gotten gains plus interest, and impose civil penalties. Nevada County raised $9 million, and Ione in two offerings raised a total of $14 million, through the sale of "Mello-Roos" municipal bonds. Such bonds are issued to finance real estate development. The Complaint alleges that in the Official Statement for the Nevada County offering, the Defendants overstated the value of the property, misrepresented the developer's ownership interest in the property and overstated the developer's experience and financial condition. The Complaint alleges that in the Official Statement for the Ione offerings, the Defendants misrepresented that all of the listed improvements could be built with the offerings proceeds, overstated the value of the property to be developed, and failed to disclose that the developer had insufficient capital to complete the development. These misrepresentations and omissions were important to investors because they made the projects and the bonds seem less risky than they actually were. ======END OF PAGE 1====== The Avenal and Wasco offerings, which raised $11 million and $35 million respectively, involved the sale of "Marks-Roos" municipal bonds. Such bonds are issued to form pools of money to finance a number of local projects. The Complaint alleges that First California and Richardson lied to investors or omitted to tell them important information in the Official Statements for these offerings about the need for the amount of money raised and the certainty of the intended use of the proceeds. The Complaint alleges that the Defendants failed to disclose that some of the projects listed in the Avenal Official Statement and nearly all of the projects in the Wasco Official Statement were highly contingent, if not speculative. These misrepresentations were important to investors because they falsely created the impression that the pools were fully subscribed. When a bond issue is not fully subscribed, investors could be exposed to the risk that the bonds would not be able to pay principal and interest. All of this conduct violated the antifraud provisions of the federal securities laws, including Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 issued thereunder. Defendants also violated Section 15B(c)(1) of the Exchange Act and Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB"), which require a municipal securities broker to deal fairly with its customers. The Complaint further alleges that First California and Richardson, when underwriting the Nevada County and Ione offerings, advised Wasco and Avenal to buy large blocks of the Nevada County and Ione bonds, even though they knew that these bonds did not meet certain requirements for Wasco and Avenal which investors had been told would be followed. In addition, First California and Richardson--aware of a representation to Wasco investors that proceeds not invested within a three-year period would be returned to bondholders--advised Wasco to purchase several low quality securities (for one of which First California acted as the underwriter) after the close of the three-year period. All this conduct violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-19, which require municipal securities brokers to recommend only suitable investments to its clients. ======END OF PAGE 2====== Finally, the Complaint alleges that in February 1994, when Nevada County offered to redeem roughly half of its bonds with its remaining proceeds, First California and Richardson recommended to Wasco and Avenal that they not tender their bonds. This advice allowed First California's other clients holding Nevada County bonds to redeem at par while leaving Wasco and Avenal holding Nevada County's troubled bonds. This conduct violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17. ======END OF PAGE 3======