FOR IMMEDIATE RELEASE 98-42 SECURITIES AND EXCHANGE COMMISSION ANNOUNCES FIRST SETTLEMENT OF YIELD BURNING CASE Respondents Agree to Pay $3.8 Million Washington, D.C., April 23, 1998 -- Today, the Securities and Exchange Commission announced the first settlement of a proceeding involving the practice commonly known as "yield burning." As part of the settlement, the Commission issued an Order Instituting Proceedings, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order") against Respondents Meridian Securities, Inc. ("Meridian Securities") and CoreStates Capital Markets ("CoreStates Capital"), both successor entities of Meridian Capital Markets, Inc. ("Meridian"), and Martin J. Stallone, a former registered representative of Meridian. Meridian Securities, CoreStates Capital and Stallone have each consented to entry of the Order without admitting or denying the findings contained in it and have agreed to pay a total of $3.8 million to resolve this action and a related claim by the United States. CoreStates Capital is a division of CoreStates Bank, N.A. The bank's parent company, CoreStates Financial Corp. ("CoreStates Financial"), merged with Meridian Bancorp after the events at issue. Also today, the Commission issued an Order Instituting Public Proceedings against Steven T. Snyder ("Snyder"), another former registered representative of Meridian and the former director of the firm's Public Finance Department. Snyder is charged with violations of the antifraud provisions of the federal securities laws in connection with the conduct described above. Snyder has not settled the charges against him, and pursuant to the Order instituting those proceedings, a date will be set for a hearing on the matter. At the same time that the Commission's enforcement action was announced, the United States Attorney for the Southern District of New York and the Department of the Treasury announced jointly that the United States had intervened in a lawsuit filed against Meridian Securities under the qui tam provisions of the False Claims Act. The United States also filed a stipulation among CoreStates Financial, the United States, and the individual who filed the qui tam action. The stipulation discharges the qui tam suit against Meridian Securities in exchange for consideration set forth in a companion settlement agreement. The companion settlement agreement provides that CoreStates/Meridian will pay $3,400,000 to the United States to resolve False Claim Act liability for specified transactions, as well as exposure to certain claims of the Internal Revenue Service involving the tax status of certain refunding bonds listed in an addendum to the agreement. As a result of the companion settlement agreement, no payment will be required of any issuer or holder of the bonds covered by the agreement. The settled Commission Order charges the Respondents with securities fraud. According to the allegations in the Order, between March 1993 and December 1995, Meridian and Stallone engaged in a scheme to generate profits for Meridian, a former municipal securities dealer, by charging various school districts and other municipalities in Pennsylvania and West Virginia fraudulently excessive prices for U.S. Treasury securities. The securities were sold to the municipalities in connection with certain tax-exempt refinancings known as advance refundings. The Commission alleges that, in carrying out the scheme, Meridian and Stallone engaged in yield burning. In simplest terms, yield burning occurs when a securities dealer purposely inflates the prices it charges its customers on Treasury securities in order to artificially reduce the yield on those securities. The practice is most likely to occur in connection with advance refundings and other types of municipal bond refinancings. "Yield burning is a fraud perpetrated on local governments and taxpayers that compromises the integrity of the municipal securities market. This case signals to municipal finance professionals that this conduct will be vigorously prosecuted," said Arthur Levitt, chairman of the Securities and Exchange Commission. William R. McLucas, the Director of the Division of Enforcement at the Securities and Exchange Commission, said, "This settlement is the culmination of efforts by the SEC, the Treasury Department, the IRS and the Justice Department to achieve a tough but constructive result in this matter, which protects innocent issuers and bondholders. We hope it provides a blueprint for addressing similar situations in the future." In a typical advance refunding, the municipality issues a new offering of tax-exempt bonds to retire a pre-existing issue of bonds bearing higher interest rates. The proceeds of the new bond offering are invested in Treasury securities. Federal tax laws restrict the yield that issuers can receive on these investments and require that the Treasury securities be purchased at fair market value. If the investments generate yields that exceed the yield on the new offering of bonds, an impermissible arbitrage profit might be generated, in violation of the Internal Revenue Code. Under those circumstances, the Internal Revenue Service could declare the bonds taxable. The Commission Order finds that, by charging excessive mark- ups, Meridian and Stallone improperly "burned" the yield. They then pocketed the excess profits. None of these facts, nor the fact that the bonds could lose their tax-exempt status, was ever disclosed to the municipalities. In some of the transactions, Meridian and Stallone also affirmatively misrepresented that the Treasury securities were purchased at fair market value and complied with the federal tax laws. The Commission also alleges that, in order to secure Meridian's selection in certain advance refundings, Meridian and Snyder made undisclosed payments to certain financial consultants in West Virginia. CoreStates Capital and Stallone have agreed to cease and desist from future violations of the antifraud provisions of the federal securities laws. They have further agreed to pay an aggregate amount of $3,820,884, of which $100,000 will be contributed by Stallone. Pursuant to undertakings ordered by the Commission, $3.4 million of this amount will be paid to the United States Treasury. The remaining $420,884 will be paid to two municipalities in Pennsylvania, Borough of Ambler and Reading School Authority, who were overcharged for the Treasury securities they purchased. However, these prices did not violate the federal tax laws. In addition to the above relief, Stallone has consented to a censure and a twelve month suspension from the securities industry, and has agreed to pay a civil penalty of $15,000. Meridian Securities has also consented to the revocation of its broker-dealer registration. Contact: Ronald C. Long District Administrator Philadelphia District Office 215.597.3100