SECURITIES AND EXCHANGE COMMISSION
April 6, 2000
SEC Settles Yield Burning Case Against Dain Rauscher, Inc.
Litigation Release No. 16505
SEC v. Rauscher Pierce Refsnes, Inc., Dain Rauscher Incorporated and James Feltham, CIV98-0027 PHX ROS (D. Ariz.)
In The Matter Of Rauscher Pierce Refsnes, Inc., Dain Rauscher Incorporated and James R. Feltham, Administrative Proceeding File No. 3-10182
The Securities and Exchange Commission today announced that Dain Rauscher Incorporated ("Dain Rauscher") has agreed to pay nearly $13 million in disgorgement, a civil penalty of $100,000, and to consent to the entry of a cease and desist order to settle charges arising out of the Commission's investigation into the practice in municipal bond transactions known as "yield burning." In addition, James R. Feltham ("Feltham") has consented to the entry of cease and desist order to settle charges arising out of the same investigation.
The Commission found that Dain Rauscher breached its fiduciary duties to its financial advisory client, the State of Arizona Department of Administration ("DOA"), in connection with DOA's issuance of the $129,640,000 of Series 1992B Refunding Certificates of Participation (the "1992B COPS"). As part of the 1992B COPs offering, Rauscher charged DOA an excessive undisclosed markup on the sale of certain United States Treasury securities to the DOA. Rauscher breached its fiduciary duties to DOA by failing to inform its client, among other things, that it was taking a $707,037 profit on the sale of the escrow securities. In addition, Rauscher issued a tax certification, which Feltham signed, in connection with the sale of the escrow securities which falsely stated that Rauscher's sale prices for the escrow securities equaled their "fair market value" and that Rauscher's sale of the securities was an "arm's length transaction without regard to any amount paid to reduce the yield on the securities." In an earlier action, the Commission had filed suit against Rauscher, Dain Rauscher and Feltham in Federal Court in Arizona. See SEC v. Rauscher Pierce Refsnes, Inc., Dain Rauscher Incorporated and James Feltham, CIV98-0027 PHX ROS (D. Ariz.). In connection with the settlement, the Commission will request that the court dismiss the court proceedings against Dain Rauscher and Feltham.
In addition to the 1992B COPS transaction, the Commission found that Dain Rauscher sold portfolios of U.S. Treasury securities for defeasance escrows at excessive, undisclosed markups to a number of other municipal bond issuers in connection with advance refundings. At the time, as compared with the markups Dain Rauscher charged in these transactions, dealers generally charged materially lower markups on escrow securities when the prices were determined through competition or bona fide arm's length negotiation.
Under the SEC settlement, Dain Rauscher will pay approximately $13 million to the United States Treasury and to certain issuers of municipal bonds to settle claims related to "yield burning" in municipal bond transactions. This payment includes: disgorgement and prejudgment interest of $647,487 and a civil penalty of $100,000 in connection with the 1992B COPS transaction involved the Arizona Litigation; $10,586,081.59 to the United States Treasury, related to sales of defeasance escrow securities in connection with advance refunding transactions in positive arbitrage (other than the 1992B COPS transaction); and $1,607,623.38 to certain municipal issuers in connection with advance refundings in negative arbitrage.
Without admitting or denying the findings in the Commission's order, Dain Rauscher agreed to be censured, cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206 of the Advisers Act, and to make the payments described above. Without admitting or denying the findings in the Commission's order, Feltham agreed to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act and Sections 206(2) and (3) of the Advisers Act.
In a related civil matter, the United States Attorney for the Southern District of New York today announced that the United States had intervened in, and settled, a lawsuit alleging "yield burning" filed against Dain Rauscher and its predecessor, Rauscher Pierce Refsnes, Inc. ("Rauscher") under the federal False Claims Act. The SEC's settlement with Dain Rauscher was one 10 actions that the Commission brought today against a total of 10 entities and one individual for fraud and other securities violations in connection with a series of refunding bond offerings.http://www.sec.gov/litigation/litreleases/lr16505.htm