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UNITED STATES OF AMERICA
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In the Matter of DAUPHIN COUNTY GENERAL AUTHORITY, Respondent. |
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ORDER INSTITUTING CEASE- AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 |
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), against Dauphin County General Authority ("the Authority" or "Respondent").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
1. The Authority was incorporated in 1984 under the provisions of the Pennsylvania Municipality Authorities Act, and is based in Harrisburg, Pennsylvania. The Authority's five board members are appointed by the Dauphin County Commissioners.
2. The Authority publicly offered and sold $75.35 million of tax-exempt municipal securities in July 1998, consisting of $72.25 million Office and Parking Revenue Bonds, Series A of 1998, and $3.1 million Subordinated Office and Parking Revenue Bonds, Series B of 1998 (collectively, the "Bonds"), to finance the acquisition by the Authority of the Forum Place building in Harrisburg, Pennsylvania. The Bonds were not secured by a mortgage, and the sole source of funds to repay the Bonds were revenues derived from Forum Place office space or parking leases.
3. In connection with the Authority's offering of the Bonds, the Authority retained a financial advisor, bond counsel and underwriter. The Authority also had available to it a solicitor who provided legal advice to the Authority on this transaction, as well as other business matters conducted by the Authority.
4. The Authority offered the Bonds through a disclosure document known as the Official Statement, which, among other things, contained a description of the Bonds, Forum Place, and the existing Forum Place office space and parking leases. The Authority was responsible for the contents of the Official Statement.
5. The Authority received copies of a Preliminary Official Statement at the Authority's public meeting on July 8, 1998. At that meeting, the Authority members voted to approve the content of the Preliminary Official Statement and authorize the distribution of the final Official Statement. However, the Authority members read little, if any, of the Preliminary Official Statement prior to their vote.
6. The Official Statement was finalized by July 17, 1998. By the closing on July 31, 1998, retail investors had purchased over $1 million of the Bonds. Two hundred copies of the Authority's final Official Statement were printed for distribution to investors.
7. The Authority trusted its professional advisors, including its financial advisor, to use their professional knowledge and expertise in ensuring that the Bond transaction was properly structured, and that all documents, including the Official Statement, were complete, accurate, and contained all necessary disclosures.
8. At the July 8, 1998 meeting, the Authority sold $75.35 million of the Bonds to the underwriter. In addition, the Authority sold on that date $10,900,192.80 Subordinated Office and Parking Revenue Bonds, Series C of 1998 back to the seller of the Forum Place building.
9. Prior to 1995, employees of the Pennsylvania Department of Transportation ("PennDOT") were located in the state-owned Transportation and Safety building ("T&S building"). The T&S building was partially destroyed in a 1994 fire, forcing the State to find alternative space for PennDOT employees until the T&S building could be either renovated or replaced. In 1995, the State entered into a lease for 299,000 square feet of space at Forum Place to house PennDOT's administrative offices. This lease expired in November 2001, and also contained a one-year renewal option.
10. In January 1996, the State announced plans to demolish the T&S building and construct a new building, known as the Keystone building, in its place for use by PennDOT, as well as other State agencies. The target date for completion of the Keystone building was late 2001. The State awarded contracts for demolition, construction management and building design for the Keystone building in September 1996. Site preparation and demolition activities began at the T&S building in January 1997, and the building was imploded on August 1, 1998, the day after the Forum Place transaction closed.
11. When the Authority issued the Bonds in July 1998, over 90% of Forum Place was leased to various State agencies. At that time, PennDOT occupied over 80% of the office space at Forum Place and was responsible for approximately 60% of the building's total lease revenues. PennDOT's lease was specifically designed to permit PennDOT to move to the Keystone building as soon as that building was completed.
12. Various Authority Board members and professional advisors expressed concerns about the future use of PennDOT's space once it was vacated. In an effort to address the concerns, the financial advisor, the Authority's executive director and others met with the Secretary of the Pennsylvania Department of General Services ("DGS") on June 30, 1998, to determine the State's plans for continued use of Forum Place after PennDOT's departure. While the DGS Secretary conveyed to the group that he personally could see using Forum Place to accommodate displaced State employees in the event other aging state-owned buildings were renovated in the future, at that time no such renovation projects had been funded. The DGS Secretary stated that he could not commit to the State's future use of office space at Forum Place.
13. Despite the lack of any oral or written commitment from the DGS Secretary or any other State official, the financial advisor told the Authority at its July 8, 1998, meeting that the DGS Secretary could see using Forum Place for 20 years. None of the professional advisors to the Authority, including the financial advisor, solicitor and bond counsel, discussed with the Authority at any other time the need to disclose to investors in the Official Statement PennDOT's scheduled departure from Forum Place or that the Official Statement failed to make any such disclosure. The financial advisor reassured Authority board members shortly after the closing that Bondholders were taking the risk that the building would remain full.
14. Prior to the Authority's vote on July 8, 1998 on the content of the Official Statement, the Authority members knew that the State planned to construct the Keystone building and that PennDOT would leave Forum Place in 2001 for relocation to the Keystone building. The Preliminary Official Statement and the Official Statement failed to disclose PennDOT's move to the Keystone building. To the contrary, the Official Statement stated "[t]he office leases are scheduled to expire prior to the maturity of the Series 1998 Bonds; there is no commitment, requirement or guarantee that the Commonwealth will renew or extend any of the office leases," implying that there was at least a possibility that the State would renew or extend the leases.
15. PennDOT's move from Forum Place at or near the end of its lease was material to potential bondholders. Among other matters, PennDOT was responsible for more than 60% of the building's total revenues used to repay the Bonds. The State made no guarantee of continued use of Forum Place for any of the space occupied by PennDOT.
16. The Authority was limited in the tenants it could obtain to fill PennDOT's vacated space at Forum Place. In order to maintain the tax-exempt status of the Bonds, only 10% of the space at Forum Place could be leased to entities other than state or local government units or charitable organizations. Following PennDOT's move in November 2000 from Forum Place to the Keystone building, the Authority has been able to fill only a small portion of the vacated space.
17. Prospective investors generally were unaware of PennDOT's scheduled move to the Keystone building, and believed that PennDOT was likely to remain at Forum Place beyond the expiration of its lease. One original investor learned in September 1998 of PennDOT's planned move to the Keystone building in 2001 and, upon concluding that such information was material to the risk that the Bonds would be repaid, promptly sold its entire position.
18. The Authority has defaulted on payment of the Series B Bonds, has technically defaulted on the Series A Bonds, and has drawn down money from the debt service reserve fund to meet its scheduled debt service payments on those Bonds. Some institutional investors have valued the Series A Bonds at fifty cents on the dollar.
19. None of the current Authority board members served on the Authority at the time of the Bond offering in July 1998. The Authority has also replaced its financial advisor and solicitor.
20. Sections 17(a)(2) and (3) of the Securities Act prohibit misrepresentations or omissions of material facts in the offer or sale of any security. Scienter is not required to provide violations of Section 17(a)(2) or (3). Issuers of municipal securities are primarily responsible for the content of their disclosure documents. City of Miami, 2003, Securities Act Release No. 8213, SEC LEXIS 676, at *25 (March 21, 2003). Executing offering documents without first reading the documents to ascertain whether they were accurate may be reckless. City of Carthage, MS, et al., Securities Act Release No. 7554, 1998 SEC LEXIS 1431 (July 13, 1998).
21. As a result of the conduct described above, the Authority violated Sections 17(a)(2) and (3) of the Securities Act, which prohibit fraudulent conduct in the offer or sale of securities.
In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate to impose the sanction specified in Respondent's Offer.
Accordingly, it is hereby ORDERED pursuant to Section 8A of the Securities Act, that the Respondent Authority cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act.
By the Commission.
http://www.sec.gov/litigation/admin/33-8415.htm
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