FOR IMMEDIATE RELEASE 2000-45 SEC Settles With Ten Brokerage Firms As Part of Global Resolution of Yield Burning Claims Total Recovery to Date Exceeds $172 million Washington, DC, April 6, 2000 The Securities and Exchange Commission today brought and settled civil administrative fraud charges against ten Wall Street and regional brokerage firms for overcharging municipalities for government securities in a practice commonly known as "yield burning." The firms are: Dain Rauscher Incorporated, Goldman, Sachs & Co., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, PaineWebber Incorporated, Prudential Securities Incorporated, Salomon Smith Barney Inc., Warburg Dillon Read LLC, and William R. Hough & Co. The settlements announced today are part of a global resolution of all yield burning claims with a total of seventeen brokerage firms by the SEC, NASD Regulation, Inc., the United States Attorney for the Southern District of New York, and the Department of the Treasury. This global resolution requires the firms to pay a total of more than $139 million. Including the actions announced today, more than $172 million will have been paid by 21 firms to resolve charges of yield burning and related claims. As part of the global resolution, NASD Regulation, Inc., announced today settlements with seven other brokerage firms, for allegedly overcharging municipalities for Treasury securities. The firms are: A.G. Edwards & Sons, Inc., CS First Boston Corporation, J.C. Bradford, Co., Inc., Piper Jaffray, Inc., Raymond James & Associates, Inc., Southwest Securities, Inc. and Wheat First Securities, Inc. In conjunction with the SEC and the NASDR enforcement actions, the United States Attorney for the Southern District of New York, and the Department of the Treasury announced jointly that the United States has settled civil fraud charges under the False Claims Act against all seventeen firms. The payments made by the brokerage firms will also resolve certain tax-related claims of the Internal Revenue Service. Significance of the Global Settlement Today's actions are an important development for the municipal securities market for several reasons. As described in more detail below, yield burning involves overcharges by brokerage firms on Treasury securities purchased with proceeds from the sale of municipal bonds. Yield burning by brokerage firms jeopardized the tax-exempt status of interest paid to holders of those bonds. As part of the global resolution today, the seventeen brokerage firms will pay a total of more than $120 million directly to the United States Treasury. Those payments will preserve the tax-exempt status of more than 3600 separate issues of municipal bonds. In addition municipalities will receive directly more than $18 million. The payments made by the firms today are the largest settlement in any municipal securities case, and among the largest ever paid in any SEC settlement. Arthur Levitt, Chairman of the Securities and Exchange Commission, said, "As a result of today's actions, a dark cloud has been lifted from the municipal securities market. This global settlement is a milestone in the federal government's effort to resolve the problem of yield burning in a way that protects innocent municipalities and bondholders." Richard H. Walker, Director of the SEC's Division of Enforcement, said, "Today's actions are among the most important steps in the Commission's crusade to clean up public finance. This global resolution reflects an unprecedented, coordinated effort by the SEC, the NASDR, the Department of Justice, the Department of Treasury and the IRS that will close the book on yield burning." What is Yield Burning? The settlements announced today relate to the practice commonly referred to as yield burning. As the Commission's orders explain, when municipalities wish to refinance their outstanding bonds, they often engage in a municipal securities offering known as an advance refunding. In an advance refunding, a municipality sells new "refunding" bonds and invests the proceeds of that offering in a portfolio of U.S. Treasury securities structured to pay the obligations on the old bonds. In this way, the municipality lowers its overall interest expense. To prevent abuse of the benefit the federal government gives municipalities by not taxing interest paid on municipal bonds, federal law limits the yield that the municipality can earn on the portfolio of Treasury securities purchased for an advance refunding. A brokerage firm that overcharges a municipality for Treasury securities purchased with the proceeds of an advance refunding diverts money to itself at the expense of the U.S. Treasury, or in certain instances, at the expense of the municipality. When money is diverted from the United States Treasury it is known as "yield burning" because the overcharge illegally "burns" the yield down to a level that appears to comply with federal law. If yield burning occurs, the Internal Revenue Service can declare taxable the interest paid to the holders of the new refunding bonds. When the diversion of money is away from the municipality, the brokerage firm, in effect, takes money directly from the municipality by reducing the savings the municipality obtains from the refunding. Today's SEC Enforcement Actions The Commission's orders allege as follows: From 1990 through 1994, each of the ten brokerage firms charged issuers of municipal refunding bonds excessive, undisclosed markups on Treasury securities. The firms also certified that the prices they charged did not exceed the securities' fair market value under the federal tax laws, even though they knew or should have known that they were charging prices above fair market value. The false representations by the firms about the fair market value of the securities were critical to establishing the tax- exempt status of the associated municipal refunding bonds. That tax-exempt status was the bonds' essential investment feature. In some cases, a brokerage firm's overcharging diverted money from the U.S. Treasury to the firm. In the remaining cases, overcharging by the brokerage firm took money away from the municipality by reducing, dollar for dollar, the savings that the municipality received from the refunding. Therefore, each of the firms violated the federal securities laws by selling securities to municipalities at inflated prices and jeopardizing the tax- exempt status of the municipalities' refunding bonds. Without admitting or denying the findings, each firm consented to a censure, a cease-and-desist order prohibiting future violations, and agreed to disgorge the ill-gotten gains it received from the overcharging. The Commission's actions call for payments of $118 million, $103 million of which goes to the federal government and $15 million of which goes to 112 municipalities. Recent SEC Enforcement Efforts Involving Municipal Securities Chairman Levitt has made reform of the municipal securities market a top priority for the Commission. Including today's enforcement actions, the SEC has brought more than 100 cases involving municipal securities since 1994. In January 1998, the SEC brought the first case charging yield burning, SEC v. Rauscher Pierce Refsnes, Inc. et al, CIV 98-0027 PHX ROS (D. Ariz.), see Litigation Release No. 15613 (January 8, 1998). The Commission order entered today against Dain Rauscher Incorporated resolves that case, which has been in litigation in the United States District Court for the District of Arizona, along with other charges of yield burning against the firm. Since filing the first yield burning case, the SEC has filed four settled matters charging yield burning violations, Meridian Securities, Inc. et al, Exchange Act Release No. 39905 (April 23, 1998), Kidder, Peabody & Co., Inc. Exchange Act Release No. 41224 (March 30, 1999), Lazard FrŠres & Co., LLC. Exchange Act Release No. 41318 (April 21,1999) and BT Alex. Brown Inc., Exchange Act Release No. 42145 (November 17, 1999). Together, the four firms paid almost $32.6 million to resolve the SEC charges and the related False Claims Act litigation. Including today's settlements, in the last five years more than $40 million will have gone back to state and local issuers of municipal securities as a result of SEC enforcement efforts, providing stark evidence that the problems in the municipal marketplace had real consequences for municipalities and their taxpayers. Individual SEC Settlements Announced Today * Dain Rauscher Incorporated agreed to pay disgorgement of $12.8 million ($11.2 million to the Treasury and $1.6 million to municipal issuers), to pay a penalty of $100,000, and to consent to a Commission order prohibiting it from violating the antifraud provisions of the federal securities laws in the future. The antifraud provisions charged include: Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (the "Securities Act"), Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (the "Exchange Act"), and Sections 206(1), 206(2), and 206(3) of the Investment Advisers Act of 1940 (the "Advisers Act"). Exchange Act Release No. 42644 (April 6, 2000) In addition to findings that Dain Rauscher charged undisclosed, excessive markups on municipal transactions, the Commission's order also found that a Dain Rauscher predecessor, Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce"), breached its fiduciary duty to one of its financial advisory clients, the Department of Administration of the State of Arizona, by making false statements, failing to make necessary disclosures, and charging excessive, undisclosed markups in connection with a 1992 refunding Simultaneously with the institution of the Commission's order, the Commission will seek a dismissal of its litigation against Dain Rauscher and Rauscher Pierce. SEC v. Rauscher Pierce Refsnes, Inc. et al, Litigation Release No. 15613 (January 8, 1998). In that litigation, Rauscher moved unsuccessfully to dismiss the Commission's enforcement action by challenging the validity of the legal theories underpinning the charges of yield burning. SEC v. Rauscher Pierce Refsnes, Inc., 17 F. Supp. 2d 985 (D. Ariz. 1998). * Goldman, Sachs & Co. agreed to pay $5.2 million ($5.1 million to the Treasury and $100,000 to municipal issuers) and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42636 (April 6, 2000). * Lehman Brothers Inc. agreed to pay $4.95 million ($4.5 million to the Treasury and $450,000 to municipal issuers) and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42638 (April 6, 2000). * Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay $5 million ($4.5 million to the Treasury and $500,000 to municipal issuers) and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42640 (April 6, 2000). * Morgan Stanley & Co. Incorporated agreed to pay $2.5 million to the Treasury and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42642 (April 6, 2000). * PaineWebber Incorporated agreed to pay $26.2 million ($21.6 million to the Treasury and $4.6 million to municipal issuers) and consented to an order prohibiting future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Exchange Act Release No. 42630 (April 6, 2000). * Prudential Securities Incorporated agreed to pay $5.88 million ($5.83 million to the Treasury and $55,000 to municipal issuers) and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42626 (April 6, 2000). * Salomon Smith Barney Inc., as successor to Smith Barney Inc., agreed to pay $45 million ($38 million to the Treasury and $7 million to municipal issuers) and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42634 (April 6, 2000). * Warburg Dillon Read LLC agreed to pay $6.68 million ($6.3 million to the Treasury and $380,000 to municipal issuers) and consented to an order prohibiting the firm from violating Sections 17(a)(2) and 17(a)(3) of Securities Act in the future. Exchange Act Release No. 42628 (April 6, 2000). * William R. Hough & Co. agreed to pay $3.264 million ($3.127 million to the Treasury and $137,000 to municipal issuers) and consented to an order prohibiting future violations of the antifraud provisions of the federal securities laws. Those provisions included Sections 17(a)(2) and 17(a)(3) of the Securities Act as well as Section 10(b) and Rule 10b-5 of the Exchange Act. Exchange Act Release No. 42632 (April 6, 2000). The Commission found that Hough committed violations in connection with two refunding transactions in 1992. First, the Commission found that Hough breached its fiduciary duty to the Canaveral Port Authority, one of its financial advisory clients in Florida, by failing to make necessary and important disclosures to the Port Authority in connection with a refunding and by charging excessive, undisclosed markups on securities sold to the Port Authority. Second, in connection with another refunding, the Commission found that Hough provided a materially misleading certificate concerning the fairness of the price paid to the City of Boynton Beach, Florida by the provider of a type of security known as a forward supply contract. The Commission found that the certificate was materially misleading because Hough failed to disclose the conflict of interest created when - at the same time that it was certifying the fairness of the security's price - the firm was seeking a $300,000 payment from the provider of the security. The Commission thanks the NASD Regulation, Inc., the Office of the United States Attorney for the Southern District of New York, the Department of Justice, the Department of the Treasury, and the Internal Revenue Service for their cooperation and assistance in this matter. Details of the Commission's actions are available at: www.sec.gov. For further information contact: William R. Baker, III, (202) 942-4570 Associate Director, Division of Enforcement Kathleen M. Hamm, (202) 942-4637 Assistant Director, Division of Enforcement # # #