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Initial Decision of an SEC Administrative Law JudgeIn the Matter of
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Initial Decision December 17, 1999 |
| Appearances: | Christian R. Bartholomew, John C. Mattimore and Nicholas A. Monaco for the Division of Enforcement, Securities and Exchange Commission |
| Thomas Tew and Daniel S. Newman for Respondent Teressa L. Cawley | |
| Michael K. Wolensky, Steven H. Lang and Calvin H. Cobb for Respondent Wheat, First Securities f/k/a First Union Capital Markets Corp. | |
| Before: | Herbert Grossman, Administrative Law Judge |
The Securities and Exchange Commission (SEC) initiated this proceeding on August 27, 1998, under Sections 15(b), 15B(c), 19(h) and 21C of the Securities ExchangeAct of 1934 ("Exchange Act"), against Wheat, First Securities, f/k/a First Union Capital Markets Corp. ("First Union"). On December 23, 1998, the SEC filed an action against Teressa L. Cawley ("Cawley") under the same sections of the Exchange Act. The actions were consolidated on January 25, 1999.
The SEC's Division of Enforcement ("Division") charges First Union and Cawley with violating Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB") and Section 15B(c)(1) of the Exchange Act. The Division alleges that Respondents entered into a financial advisory agreement with Broward County containing a false warranty that First Union had not retained any person, other than a bona fide employee working solely for First Union, or agreed to pay any such person compensation based upon the award of the agreement when, in fact, it had retained an outside lobbyist to secure the agreement and had agreed to pay him compensation based on business generated by the agreement. The Division further alleges that Respondents later omitted to disclose the payments to the lobbyist when required to disclose them in connection with bond issuances under the financial advisory agreement.
Respondents deny these allegations, stating that they were under no duty to disclose their relationship with the individual in question and that even if they had committed violations, the action is time-barred under the applicable statute of limitations.
A hearing was held in Miami from March 2-5, 1999 and March 22-24, 1999. The Division filed its post-hearing brief on May 25, 1999. Respondents Cawley and First Union each filed their post-hearing briefs on July 29, 1999. The Division filed its Reply to the post-hearing briefs on September 10, 1999.
The Division requests four types of relief: (1) that cease-and-desist orders be entered against both Respondents; (2) that First Union disgorge its profits of $175,653 received under the FA Agreement plus $97,654 in prejudicial interest thereon; (3) that both Respondents be required to pay civil monetary penalties in the amount of $175,000 by First Union and $35,000 by Cawley; and (4) that Cawley be suspended from associating with any broker, dealer, or municipal securities dealer for a period of six months.
I find that Respondents have violated MSRB Rule G-17 and Section 15B(c)(1) of the Exchange Act, although not in all particulars alleged by the Division, and issue orders to cease and desist, for suspension, and to pay disgorgement and civil penalties on the violations not barred by the statute of limitations.
Respondent First Union is based in Charlotte, North Carolina and is a principal subsidiary of First Union Corporation, a bank holding company. During the period relevant to this proceeding, First Union was a registered municipal securities dealer and member of the Municipal Securities Rulemaking Board engaged in municipal securities business in the southeastern United States. See, First Union Answer ¶ I; Cawley Answer ¶ ¶ 1-2.
Respondent was employed as an assistant vice-president and manager of First Union's public finance operations in Miami until April 20, 1994. She was the registered municipal securities principal for the South Florida office. Tr. 895. Cawley is presently the sole owner, president and secretary of Southern Municipal Advisors, Inc., a financial advisory services firm providing services in the field of public finance. Tr. 490-91.
As of February of 1992, First Union Corporation and its broker-dealer subsidiary had a public finance operation in North Carolina and Georgia, but it had no presence in South Florida. Steven Martin Johns ran the public finance operation. In February 1992, Johns hired Cawley away from NCNB, the predecessor of Bank of America, to build a public finance business for First Union in Miami. Tr. 495-96 (Cawley); 451-96 (Johns). Cawley was 30 years old when Johns hired her and had been running NCNB's public finance operation; Johns had worked on deals with her in that capacity. First Union had just acquired a Miami bank (Southeast), which had a small bond trading desk, and because Cawley wished to move to South Florida, First Union decided to try to establish a business there. Tr. 1052 (Evans). Accordingly, Cawley was hired to "[s]tart a new operation in Florida in Public Finance" and to "[g]et [First Union] into Florida underwritings." Ex. DX 99C (Cawley 1992-93 Performance Plan)."
Because Cawley spent most of 1992 closing deals in the Carolinas, the Miami office was not fully staffed and operational until March of 1993. Tr. 510-11 (Cawley); Ex. DX 99A (Cawley memo data Jan. 11, 1993). Even then, it was very small, both physically and in terms of employees, of which there were five: Cawley; the secretary Ann-Jeannette Jean Baptiste, a/k/a "AJ"; Orlando Rafael Cruz, Jr.; Eugene Grey; and Sue Levere. Tr. 98-99 (Cruz). Although the employees had different responsibilities, they worked closely together. Tr. 99-100.
Orlando Cruz, who supplied the critical evidence in the proceeding, joined the Miami office during the summer of 1992 as a temporary employee. Tr. 61-62. In November of 1992, Cawley hired Cruz as a full-time municipal analyst. Tr. 59-62.
Cruz had a very good professional relationship with Cawley and greatly admired her as leader. Tr. 67. Cruz described Cawley as a very hands-on-manager who had the "final say" on and was aware of everything the office did. Tr. 135-37. His opinion was later confirmed by the secretary AJ, who stated: "She [Cawley] knew everything that was going on." Tr. 1588.
Upon moving to Miami to run the office, Cawley set about investigating the political lay of the land. As part of her "plan to get out First Union's name among the movers and shakers" of the community, Cawley met with numerous people in the municipal finance area, seeking their views as to who the major players were in the market. Tr. 563-64, 700; Ex. DX 154 (1993 calendar). She also went to dozens if not hundreds of political functions, such as fund raisers and receptions. Tr. 552-55, 564-65.
As of the Winter of 1992 and early Spring of 1993, Ronald L. Book was South Florida's preeminent lobbyist. Book, a North Miami native, spent most of his childhood and all of his professional life in politics. Book served as Florida's then-Governor Bob Graham's chief legislative and cabinet affairs liaison and chief fund raiser during 1978-1982, and then parlayed that position into a lucrative lobbying practice. Tr. 1296-1303. Book has not missed a single session of the Florida legislature since 1978 (Tr. at 1300-01), and his clients have included dozens of municipalities and high-profile business clients. Over the years, Book has made hundreds, if not thousands, of political contributions. By his own admission, contributions secure Book access; they get his phone calls returned and they get him face-to-face meetings. Tr. 1318-20.
In 1992-1993, Book lobbied for the City of Miami, the City of North Miami, the City of North Miami Beach, and "probably" Miami-Dade Country. In February 1993, Broward County hired Book to lobby the State legislature in connection with a half-million dollar damage claim against the County. Book's retention was widely reported in the local newspapers as being due to Book's admittedly long-standing personal and political friendship with Broward County Commissioner Scott Cowan. Tr. 1302-05; Exs. DX 1A-G (Herald and Sun-Sentinel articles); DX 2 (Broward County letter dated March 12, 1993 ratifying Book's retention).
Book also represented a broad variety of private clients, including Wayne Huizenga, then owner of Blockbuster Entertainment, in his efforts to build Blockbuster Park - a massive theme park - on the Date-Broward country line. In fact, Book spent a great deal of 1992 successfully persuading Dade County and Broward County to permit the creation of the necessary special taxing district. Then, when Huizenga sold Blockbuster to Viacom, Book, on behalf of Viacom, lobbied to have those same approvals repealed. Tr. 1309-11.
As a result of these experiences, by 1992-1993, Book had close connections with Broward public officials. In addition to his admitted "long-time friendship with Commissioner Cowan" (Tr. 1305), Book developed relationships with key Broward County Commissioners, including Commissioners Gunzberger and Poitier. Book also worked closely with the County Administrator, Jack Osterholt, whom he knew from the Graham Administration in the 1970s. Book also developed a relationship with Phil Allen, the Director of the Department of Administrative and Finance Services. Tr. 1315-17. All of these people sat on the Broward committee that ultimately selected First Union to be the Financial Advisor under the agreement at issue; Cowan was the chair. Ex. DX 103.
Book also acted as a "finder" for at least two broker-dealers who were seeking municipal finance business in South Florida. In February 1992, Book agreed to represent Dillon Read, Inc. for a monthly retainer of $3,500 in connection with, inter alia, "advis[ing] [Dillon Read] on how best to implement a public finance business expansion program within the State of Florida. " Ex. DX 119 at 2; Tr. 1320-23. In addition to the retainer, Dillon Read agreed to pay Book a "success fee for business obtained by [Dillon Read]" in an amount to be determined based upon Dillon Read's fee and Book's "contribution . . . in obtaining the business." Ex. DX 119 at 3. Book had a similar agreement with Kidder Peabody. See, Ex. DX 120 at Schedule III, page 2 (January 25, 1994 bond purchase agreement disclosing $20,000 fee paid to Book as a finder).
Cawley knew much if not all of this information when she decided to retain Book. Cawley had seen Book in action at Miami-Dade County Commission meetings in late 1992 and early 1993, and it was clear to her that he was extremely well-known and that he had the ear of the commissioners. Tr. 619, 621 (Cawley: "it was very clear when [Book] walked in people took an interest, commissioners motioned for him to speak to them. I mean, he knew everybody in the room"). Accordingly, Cawley sought out information and opinions from many people concerning Book. Tr. 621-22. For example, Cruz told her that Book was a very well-known lobbyist who had access to elected officials through his contributions and friendships. Tr. 85-87. Ultimately, Cawley came to the conclusion that in Miami-Dade and Broward counties and in the State legislature, Book was the number one lobbyist. Tr. 622-23. Cawley also knew, at least at some point in time, that Book was a close political friend and supporter of Scott Cowan, whom she knew as of April 1993 to be the Chairman of the Broward County committee that would select the FA. Tr. 623-26, 737.
Armed with this knowledge, beginning no later than on April 1, 1993, Cawley set out to contact Book and to retain him to assist First Union. Tr. 618-19; see Ex. DX 154 (1993 calendar). Although First Union and Book did not formerly enter into a contract until June 22, 1993, by Cawley's own admission, she and Book discussed his compensation much earlier than that. Indeed, although Cawley sought to place thisconversation after First Union had made its proposal to Broward, i.e., after May 6, it is clear that it occurred no later than during her first luncheon meeting with Book on April 20, 1993.
Thus, in her investigative testimony, Cawley testified that she had only one lunch with Book and that it was then that Book had told her he wanted a $25,000 retainer in advance. At the hearing, Cawley changed her story and asserted that she had had two lunches with Book and that the discussion about money was at the second, later lunch. Cawley admitted that this was flatly contrary to her prior testimony, but claimed that her memory had improved over time. Tr. 637-39.
I find that the earlier testimony is correct and that the discussion of the terms of Book's employment by First Union, including his compensation, occurred on April 20, 1993, a lunch meeting confirmed by a Cawley calendar entry. See, Ex. Dx 154. I also find the alleged discussion of a $25,000 retainer to be a fiction. In his investigative testimony, Book had repeatedly denied any knowledge of a discussion of a flat fee retainer in any amount, despite the coaching of his attorney that the "numbers come to $25,000." Tr. 1371-72. The $25,000 figure, and later suggested figures of $50,000, and $25,000 plus one-half of $25,000, appear to be after-the-fact, contrived attempts at connecting the total amounts paid to Book with an alleged flat fee retainer in order to deny that they were based, at least in part, on a percentage of fees received by First Union on the business Book brought in.
The actual terms of the agreement, as they became clear from the evidence adduced in the proceeding, and as further discussed below, were that Book was to receive 20% of the fees received by First Union from any business generated by him, plus a $2,000 monthly retainer during the period in which he was successfully developing business opportunities.
On April 5, 1993, Broward County issued and First Union received a "Request for Letters of Interest" ("RLI") seeking proposals from firms interested in serving as "financial advisor [to Broward] for the issuance of refunding bonds." Ex. DX 101; Tr. 736. Cawley knew that being an FA was not as lucrative as being the senior managing underwriter on a deal. But Cawley also understood that, in Broward County, "you first needed to be an FA, then you could move up to the underwriting pool and then finally you could become a senior [underwriter]." Tr. 720.
On May 6, 1993, First Union submitted a "Proposal to Provide Financial Advisory" services in response to the RLI. Ex. DX 6. Consistent with the RLI, First Union set forth its "Recommended approach for Broward County" and stated that First Union "currently recommend[ed]" refunding five separate bond issues, all of which could, in First Union'sview, be advance refunded under applicable federal tax laws. Id. at 6357. First Union's proposal then discussed each of the five issues in detail and the savings to be achieved by Broward in refunding the bonds. Id. at 6357-6362.
The Broward County Commission Selection/Negotiation Committee for the FA position was comprised of the following persons all of whom had a relationship with Book, as described above:
Commissioner Scott I. Cowan, Chairman
Commission Suzanne Gunzberger
Commissioner Sylvia Poitier
B. Jack Osterholt, County Administrator
Philip C. Allen, Director, Finance and Administrative Services Department
Ex. Dx 103 (Minutes of May 12, 1993 Meeting). At the Committee's May 12, 1993 meeting, Allen reported that 15 firms had submitted proposals in response to the RLI. Each member of the Committee then listed his or her five top firms. First Union was included on the resulting "shortlist." The five shortlisted firms were then asked to make oral presentations. Id.
On May 21, 1993, the Committee notified First Union that it had been ranked first among the five presenters and invited Cawley to attend a negotiating meeting on May 28, 1993. Ex. RX 4. At that meeting, Cawley and the committee discussed a draft agreement. See, Ex. DX 104 (minutes of meeting and draft agreement). Cawley executed the Agreement on behalf of First Union on June 3, 1993, and the Broward County Commission formally approved and executed it on June 8, 1993. Ex. DX 9.
The agreement provided, among other things, that the County was to pay First Union as compensation $.6875 per $1,000 bond on the first $200,000,000 amount of bonds issued and thereafter at a rate of $.60 per $1,000 bond over $200,000,000 for County refunding bonds issued during the two-year term of the agreement. Id. Thereafter, for three refunding transactions under the agreement, First Union was paid after the closing of the sale of the bonds, as follows:
| Closing Date-Refunding Amounts | First Union Fees | Payment Date |
| Water and Sewer Refunding Bonds September 2, 1993-$134,895,000 | $92,740.31 | October 18, 1993 |
| General Obligation Refunding Bonds October 5, 1993-$92,440,000 | 61,160.69 | November 9, 1993 |
| Tourist Development Refunding Bonds June 30, 1994-$36,255.00 | 21,753.00 | July 29, 1994 |
| Total | $175,654.00 |
Exs. DX 29A, 108, 110, 113. Each of these refunding transactions had been recommended by First Union in its proposal to provide the financial advisory services. Tr. 792-3; compare Ex. DX 6 at FUMC 6357, 6361 with Ex. DX 114.
In addition to having recommended refunding transactions and analyzed them in detail in its proposal to provide its financial services (Ex. DX 6 at FUMC 6357-62), First Union performed all of the duties required of it under the FA Agreement, including preparing requests for proposals to underwriters, assisting in selecting underwriters, assisting in preparation of preliminary and final official statements, obtaining ratings for the refunding bonds and reserve fund accounts, participating in the pricing of the new bonds, and attending the closings. Tr. 783-88.
The agreement included an affirmative warranty by First Union that it had not used a lobbyist to obtain the award of the Agreement, and provided that Broward could terminate the Agreement for breach thereof. Ex. DX 9, Art. 9.3; see, also, Ex. DX107 (Agreement as produced by Broward with note characterizing Article 9.3 as "no lobbyist provision"). Specifically, the warranty made by First Union provided in full, as follows:
9.3 ADVISOR warrants that it has not employed or retained any company or person, other than a bona fide employee working solely for ADVISOR, to solicit or secure this Agreement and that they have not paid or agreed to pay any person, company, corporation, individual or firm, other than a bona fide employee working solely for ADVISOR, any fee, commission, percentage, gift, or other consideration contingent upon or resulting from the award or making of this Agreement. For the breach or violation of this provision, the COUNTY shall have the right to terminate the Agreement without liability at its discretion, to deduct from the contract price, or otherwise recover, the full amount of such fee, commission, percentage, gift or consideration.
Ex. DX 9. It is this warranty that the Division contends that Respondents breached.
Cawley read this warranty at the time and "understood it to mean exactly what it says. Tr. 776. There "was no question in [Crawley's] mind" but that what Browardwanted to know was whether First Union had retained anyone to help them get the deal. Tr. 776-77. Cawley specifically understood the warranty to require disclosure of anyone who had assisted First Union in securing the deal, and believed that that included a "finder" under Florida law. Tr. 778-79. Accordingly, Cawley explained that the warranty was not a concern to her because Book had not assisted First Union in securing the Agreement. Id.
On June 3, 1993, simultaneously with Respondents' executing the FA Agreement and forwarding it to Broward County, Book filed a Lobbyist Registration Statement with Broward County. Dx 13A. Although the form he filed does not disclose the name of his employer as it requested, Book admitted that he had registered to lobby on behalf of First Union in Broward County. Tr.1373.
On June 22, 1993, approximately one month after First Union was awarded the FA Agreement, Book executed a formal agreement with First Union. Tr. 1363; Ex. DX 3. The agreement was dated May 1, 1993, the putative starting date of employment; listed services that Book was to provide, including providing certain specified information about government entities, assisting First Union in strategic planning, and discussing potential projects on a weekly basis; provided compensation to Book of $1,000 for the month of May and $2,000 for each month thereafter; provided for an increase in Book's compensation in the event that his time spent on First Union matters increases; and provided for termination of the agreement six months after the May 1, 1993 starting date, unless extended by First Union. Id.
At hearing, Cawley contended that she had acted in good faith in hiring Book (and two other consulting firms at around the same time), because she had discussed his prospective hiring with her superiors in a conference call in late April 1993, and solicited a written opinion from outside counsel Dennis Haas about the hiring of consultants immediately after the conference call. According to her version of facts, Haas supplied the opinion, of which Exhibit DX 4 is allegedly a copy, on May 1, 1993, as the copy is dated, together with a form of contract that she used as a template for the Book agreement (Ex. DX 3). The Book agreement was dated May 1, 1993, and alleged by Cawley to have been signed by her superior Stephen Johns and by Book one or two weeks after that date, prior to Book's performing any services for First Union. See, Tr. 570-74, 578-82, 599-602.
It became clear, however, that this sequence of events was untrue. To begin with, Cawley admitted that there was nothing in her calendar about the conference call (Tr. 715), and none of the other alleged participants in the conference call could recall any such call taking place (Tr. 480 (Johns); Tr.1050 (Evans); Tr. 1079-80 (Ilario)). More important, it became readily apparent that the Haas opinion letter and template agreementwere drafted in June 1993, after Cawley and Book had established the terms of the consulting arrangement, Book had begun performing his services for First Union, and the FA Agreement had been executed (on June 3, 1993), for the following reasons: Haas did not ordinarily work on Saturdays and there was no urgency in drafting the opinion letter, but the letter was ostensibly dated May 1, 1993, a Saturday. Tr. 1125, 1137. He kept time sheets on which he put down the time he did the work and it was the requirement of the law firm that the time sheets be submitted within the calendar month the work was performed. Tr. 1126-27. The time sheets indicate that Haas billed two hours to First Union on June 7, 1993 for researching, evaluating and preparing an opinion on "Finder" issues, and another hour on June 14, 1993 for preparing the letter and form agreement. Ex. DX 4A. Cawley's calendar indicates that she placed a call to Haas on June 7, 1993, the date of the first billing entry, and another call on June 15, 1993, the day after the second billing entry. Ex. DX 154. Moreover, the agreement signed by Book that was based on Haas's template agreement was sent to Book by First Union's Johns under cover of letter dated June 22, 1993. Ex. DX 15. Book admitted that he received it on or about that date, executed it, and returned it to First Union. Tr. 1363-64. Finally, counsel for First Union indicated that the original of the letter opinion could not be located (Tr. 1150) and, on the copy entered into evidence as Ex. DX 4, the date of "May 1, 1993" is slightly, but perceptibly, darker than the lettering in the body of the document.
It is clear that the opinion letter and the Book employment agreement were drafted after-the-fact to protect First Union from any claim that it was violating the "Finders" statute in hiring consultants and had not been considered when the terms of Book's employment were determined, at least one month earlier. More important, as discussed below, the terms of the agreement were never followed with regard to the services that Book performed or compensation that he received in addition to the specified monthly retainer.
First Union began paying Book his monthly retainers beginning on June 7, 1993, the date that Haas actually began work on the opinion letter and template agreement and four days after First Union executed the FA Agreement, the first payment being in the amount of $3,000, to cover May and June. Ex. DX 94.
On September 2, 1993, Broward County closed on the first the refunding bond sales under the FA Agreement, Water and Sewer Refunding Bonds in the amount of $134,895, and paid First Union $92,740.31 as its fee on October 18, 1993. Exs. DX 29, 29A, 108.
Book, who had been receiving his monthly retainers of $2,000, submitted a "REVISED INVOICE," dated October 19, 1993 (the day after First Union received its fee from Broward), in the amount of $7,700 for the month of October. Ex. DX 93. He alsosubmitted an invoice in the amount of $7,750, dated October 31, 1993, for the month of November, and an invoice in the amount of $7,700, dated November 22, 1993, for the month of December. Id.
In a document signed on behalf of First Union, with a handwritten date of "10-15-93," Cawley increased Book's compensation to $7,700 per month for the months of October, November, and December 1993. The document recited the provision in the formal agreement with Book that provided for an increase in compensation "in the event the amount of the Firm's [Book's] time dedicated to First Union matters increases." Ex. DX 34.
In her investigative deposition, Cawley admitted that the increase in compensation was not due to Book's putting in extra time on First Union activities. Tr. 833-36. Book claimed not to remember why the compensation was increased or whether Cawley had told him that First Union had been paid by Broward. Tr. 1392-94. Thereafter, for the months of January, February, and March 1994, Book submitted invoices that reverted back to the $2,000 per month retainer. Id.
The additional $17,150 paid Book for October, November, and December over Book's standard $2,000 per month retainer amounted to 18.5% of the $92,740.31 fee paid by Broward to First Union for the first refunding transaction under the FA Agreement.
In addition to claiming a loss of memory with regard to why his compensation was increased, Book was unable to remember anything that he had done for First Union under the agreement. Tr. 1356. And when asked specifically about each of the services specified in the agreement, he was unable to recall performing them. See, e.g. Tr. 1330-44. Nor could Cawley support Book's having performed the services specified in either the agreement or invoices submitted by Book under the agreement. Although she claimed that Book had performed legal services for First Union, they amounted to little more than helping her fill out pro forma anti-apartheid and anti-Cuba affidavits. See, Tr. 651-55, 763-69, 849. Book eventually received a total of $48,050 in fees from First Union. DX 94; First Union Br. 14; Cawley Br. 60, n.82.
The evidence was clear, however, that Book and two other lobbyist-consulting firms had been hired during 1993 by First Union and Cawley to secure access to public officials and thereby assist First Union in getting municipal business. This was admitted by Cruz, who was Cawley's subordinate and, later, her successor as head of the office (Tr. 95-98), by Stephen Johns, who was Cawley's supervisor (Tr. 471-72), and by John P. Evans, who was Johns' superior (Tr. 1046-48). In fact, Johns' understanding was that Book was to receive more compensation than his standard monthly retainers (of $1,000 for the first month and $2,000 per month thereafter) if Book were successful in gettingbusiness in Broward County. Tr. 471-72. And, although Evans didn't recall exactly how the consultants were paid, he never thought it a problem for them to be paid on the basis of the business they generated, in the form of finders' fees. Tr. 1049.
That the formal agreements with the consultants merely disguised the actual arrangements was confirmed by the testimony of another of the lobbyist-consultants retained by Cawley and First Union at the time, James L. Watt, who was influential in the Palm Beach area of Florida. His firm's employment agreement with First Union (Ex. DX 32), was in the identical form and had almost identical provisions for Services and Compensation as the Book agreement that had been drafted by Haas (Ex. DX 3). Watt testified that he had been hired to introduce Cawley and First Union around to the political leadership for the purpose of getting First Union's participation in municipal bond issuances and that he didn't perform any of the services specified by the agreement. Tr. 1276-78.
On October 5, 1993, Broward County closed on the second refunding bond sales under the FA Agreement, General Obligation Refunding Bonds in the amount of $92,440,000, for which it paid First Union a fee of $61,160.69 on November 9, 1993. Exs. DX 29A, 110. There is no evidence that Book received any commission on this transaction. Although, as I find, First Union and Cawley had informally agreed to pay Book 20 percent of its fees for transactions under the FA Agreement, the evidence suggests that Book was not informed of the second refunding transaction and knew nothing of it even at the time of the evidentiary hearing in this proceeding so as to have demanded his commission, as he later did on the third refunding transaction, discussed below. On two separate occasions, Book testified that he knew of only two "deals" that First Union transacted with Broward, apparently referring only to the first and third refunding transactions. Tr. 1357-58, 1392.
On April 20, 1994, Cawley left First Union and accepted a position with the Smith Mitchell Investment Group as Senior Vice-President and Manager of the Florida office. Tr. 919-24. As the lead underwriter, Smith Mitchell later purchased the bonds issued pursuant to the third refunding transaction covered by the FA Agreement between First Union and Broward. Tr. 157, 994-98. Cawley signed the Bond Purchase Agreement and other operative documents on behalf of Smith Mitchell. Id. At the time Cawley left First Union, Cruz had also planned on resigning to go with another firm, but was asked to accept a promotion to assistant vice president, which he did, and became the only remaining public finance officer for First Union in Miami. Tr.158-63.
On June 30, 1994, Broward County closed on the third bond refunding transaction under the FA Agreement, Tourist Development Refunding Bonds in the amount of $36,255,000, on which it paid First Union $21,753.00. Ex. DX 113. According to Cruz,prior to the closing, on June 20, 1994, he received a call from Book, who said that "he wanted to get paid for Broward," and Cruz asked him, "which deal?" Tr.180-81, 185. Book replied that it was the last deal, the upcoming June 30, 1994 deal. Tr. 186. Cruz then asked what the arrangement was, and Book replied that it was $2,000 per month, plus 20 percent. Tr.186-87. Cruz then called Cawley, who confirmed Book's statement, agreeing with the $2,000, plus 20 percent, and that Book had helped in Broward County. Tr.191, 201-2. Thereupon, Cruz called his superior in Charlotte, Gene Calahan, who was in charge of First Union's entire public operation in the southeast region, and told him what Book had said about the $2,000 and 20 percent, and that Cawley had confirmed it. Tr. 192-93. Calahan then asked Cruz to send him the file and write him a memo. Tr. 192. As a result, Cruz wrote the following memorandum, dated June 22, 1994:
On June 20, 1994, I received a call from Mr. Ronald L. Book inquiring as to how we would settle our accounts with him. Mr. Book served as our consultant for about one year and was instrumental in securing our position as financial advisor for Broward County.
He informed me that the arrangement he had with First Union was a monthly retainer of $2000 plus 20% of the profits. In looking through the files, I did not find this agreement in the contract, however, I did find invoices that were for substantially more than $2000 (his monthly retainer). I believe that this was a good faith agreement and not a written agreement.
Gene, I informed Ronnie, that I would look into it and get back to him. Please call me if you have any questions.
Ex. DX 70.
In writing this memorandum, Cruz tried to be as accurate as possible. Tr. 194. There was no doubt in his mind that it was true. Tr. 202. A handwritten memorandum written to by Cruz to himself and dated the same day ("6/22") reads: "Ask Ronnie [Book] if the arrangement was inclusive of the retainer or in addition to retainer." Ex. DX 69. Apparently, although Cruz was certain that Book was to receive 20 percent of the Broward fees paid to First Union on the refunding transactions, he was uncertain as to whether Book was to receive the standard $2,000 per month retainer in addition.
Shortly after drafting the June 22 memorandum, Cruz received an invoice from Book for $4,350 for services "related to Broward financing and other matters." Ex. DX 72A. The invoiced sum amounted to 20 percent of First Union's earnings of $21,753 on the Tourist bond refunding sale. In light of his prior communications with Book, asconfirmed by Cawley, this invoice was what Cruz expected and did not surprise him. Tr. 219-22. Cruz forwarded the bill to Calahan. Tr. 222-23.
At some point, Calahan asked Cruz for more information and, on August 9, 1994, Cruz sent him another memorandum about First Union's relationship with Ronnie Book. Tr. 227; Ex. DX 80. This time, Cruz conducted an even more detailed investigation, and asked AJ, the office secretary, to assist him in writing the memorandum both because he knew that she knew how Book had been paid, and because he valued her input. Tr. 227-29. Cruz wanted to set forth the most "accurate summary possible of First Union's relationship with Book," so he asked AJ to "research it." Tr. at 229.
In the August 9 memorandum, Cruz told Calahan that, based on his review of the file, certain matters had become "manifest." Ex. DX 80. First, Cruz explained that Book "was never retained as a legal counsel. Our contractual relationship establishes him as a consultant and lobbyist, an expertise for which he is well known in South Florida." Id. Second, Cruz told Calahan that the increase in Book's compensation to $7,700 for each of the months of October, November and December 1993 was "directly related to work with Broward County." Finally, Cruz told Calahan, as he had in the June 22 memorandum, that Book's efforts "were a force behind [First Union's] award" of the Financial Advisory Agreement in Broward County. Id. First Union paid Book's $4,350 invoice for services "related to Broward financing," amounting to 20% of First Union's fee on the transaction, on October 3, 1994. Ex. DX 94.1/
On September 2, 1993, October 5, 1993, and June 30, 1994, respectively, the closing dates for the three refunding transactions, the County's Bond Counsel on the transactions, filed documents with the Division of Bond Finance of the Florida state government as required by law, including Bond Disclosure Forms, referred to as BF Forms. Exs. DX 109, 111, 114. The BF Forms included an item 11, which requested a listing of "Any fee, bonus, or gratuity paid in connection with the bond issue, by any underwriter or financial consultant to any person not regularly employed or engaged by such underwriter or consultant." Id. The BF Forms stated that they were to be filed as required by Section 218.38(1)(c)1 of the Florida Statutes. Id. Subsection e of Section 218(1)(c)1 contained language identical to Item 11 of the BF Form. On the first two refunding transactions, Item 11 was left blank. Exs. DX 109, 111. On the third refunding transaction, two firms engaged by the underwriter were listed, but Book was not. Ex. DX 114.
The standard procedure, which was followed in these refunding transactions, is to send out the closing documents, including the completed BF Forms, to all involved parties ten days to two weeks before the closing for their corrections. Tr.1165. The documents are also available for review and comment on a big closing table at a pre-closing held in the office of underwriter's counsel the day before the closing. Any party could request a change at any time. Tr. 1165-66. At the closing, the next day, the documents remained in the same place, and anyone noticing a mistake or inaccuracy could request that the documents be changed. Tr. 1166.
Cawley testified that she was familiar with the BF Forms and had seen at least the one filed with the first refunding transaction (Ex. DX 109), and believed that she had seen the one filed with the second refunding transaction (Ex. DX 111). Tr. 799. Her calendars for 1993 and 1994 confirm that the closings for the three refunding transactions under the FA Agreement were held on the September 2, 1993, October 5, 1993, and June 30, 1994, respectively, and that the pre-closings for each had been held on the day before the closings. Exs. DX 154, 158. In her calendar for 1993 (Ex. DX 154), Cawley inserted her "ok" next to "Preclose Broward County" on September 1, and next to "CLOSE Broward County" on September 2, indicating that she was aware of, and had attended, both the preclosing and closing of the first refunding transaction under the FA Agreement, involving the Water and Sewer Refunding Bonds, on those respective dates.
Cawley took item 11 of the BF forms at face value and understood it to ask whether the Financial Advisor for the refunding transactions had paid anyone in connection with the transaction who didn't work for it. Tr. 801-02. She testified that the sole reason she did not have Book listed as receiving payment, or even mention Book to First Union's attorney for the closing, was that Book had done nothing on the deal. Tr. 802-03. Kenneth M. Myers, Bond Counsel for Broward County on the first and second refundingtransactions under the FA Agreement, testified that he was not aware of any relationship between First Union and Book on those transactions and that if he had known of one that fit the literal terms of item 11, he would have reported it to the state on the form as requested in Item 11 and in compliance with the language of Section 218.38 of the Florida Statutes on which Item 11 was based. Tr. 1170-73. He was not aware of any rules or regulations issued by the Division of Bond Finance on how to construe the BF Form or fill it out, particularly with regard to item 11. Tr. 1172.
Orlando Cruz, who had succeeded to Cawley's position when she left First Union, and his supervisor in Orlando, Phil Roberts, represented First Union at the closing of the third refunding transaction. Neither of them notified the Broward County officials that Book was involved in the transaction or that he had recently requested to be paid out of First Union's fees from the transaction. Tr. 219. Cawley, who had left First Union two months earlier, represented Smith Mitchell, the underwriter on that transaction. She signed the Bond Purchase Agreement on behalf of Smith Mitchell and all other documents for that transaction unless she happened to be unavailable when they needed to be signed. Tr. 994-97. On her calendar for 1994, she put her "ok" next to her listing of the pre-closing on June 29, 1994, and next to her listing of the closing on June 30, 1994, signifying that she was aware of and had attended each. Ex. DX 158.
On the basis of the primary facts discussed above, I find the evidence overwhelming that, prior to First Union's receiving the award of the FA Agreement, Cawley and First Union informally retained Book, who was not otherwise employed by First Union, as a lobbyist to secure agreements with Broward County and other municipalities. Under the informal agreement, he was to be paid a fee, contingent on his securing this business, which would include a monthly retainer and 20 percent of the fees paid to First Union on the business he secured. I find that as fact.
I further find as fact that Cawley and First Union attributed their securing the FA Agreement to Book's efforts, that First Union began paying him his monthly retainer when and because they had entered into the FA Agreement, and that First Union paid him approximately 20% of First Union's fees from the first and third refunding transactions, pursuant to this informal arrangement. I conclude that, having entered into this arrangement with Book, when Cawley and First Union accepted the warranty contained in the FA Agreement they knew it to be false because they knew that Book was not a regular employee of First Union, that they had retained him primarily to solicit Broward County business (including the FA Agreement), and that they had agreed to pay him fees based upon First Union's being awarded the FA Agreement and receiving fees under it. Thereason that Book's written agreement provided for only $1,000 for the month of May 1993 was that First Union was informally notified that it had been awarded the FA Agreement in the middle of May, signifying the success of Book's efforts and initiating his $2,000 per month retainer rate.
I find, however, that the execution of the FA Agreement by Cawley and First Union that included the false warranty occurred on June 8, 1993, more than five years before the Division brought this action against First Union on August 27, 1998, and more than five years before it entered into an agreement with Cawley tolling the statute of limitations as of September 2, 1998.
I further find that Cawley and First Union purposely deceived Bond Counsel for Broward County at the pre-closing and closing on the first refunding transaction by deliberately omitting to mention that fees were to be paid Book on that transaction. This resulted in Bond Counsel's omitting Book's name as a person to whom a fee was to be paid when he completed Item 11 of the BF forms, contrary to his usual procedure of reporting all recipients of fees, including those receiving fees from financial advisors. In that this action was brought against First Union on August 27, 1998, within five years after the closing on that transaction on September 2, 1993, and the statute of limitations was tolled against Cawley as of September 2, 1998, the last day of the five-year period following the closing, I find that the actions against both respondents are timely as to that act of deception.
Because Cawley and First Union did not intend to pay, and did not pay, Book a fee on the second refunding transaction, I find that they did not deceive Bond Counsel in omitting mention of Book in Item 11 of the BF Form.
On the third refunding transaction, I find that First Union, through its representatives Orlando Cruz and Phil Roberts, again purposely deceived Broward County by failing to inform its officials of Book's role in the transaction and of his request to receive 20 percent of First Union's fee. Cruz's conversation with Book and his confirming conversation with Cawley had taken place only 10 days before the closing, and Cruz's first memorandum about Book's role in the transaction and his request for a percentage of First Union's fee was written shortly thereafter.
However, although Cawley participated in the third refunding transaction as a principal of the underwriter, she no longer represented First Union, nor sat on the same side of the table with Broward County in any capacity. Consequently, I find that she had no fiduciary obligation to report fees intended to be paid by her ex-employer First Union to a lobbyist on the transaction, notwithstanding any actual knowledge she might have had of them and, consequently, cannot be considered as having deceived Broward County atthat closing.
That is not to say that there was no evidence adduced to the contrary of what has been found above. There was testimony to the effect that there was no informal arrangement with Book to pay him fees based on business he secured in Broward County and that Cruz was an incompetent, unknowledgeable, low-level employee, who had merely speculated, erroneously, on there being such an arrangement. There was ample evidence, however, that Cruz was and remains a valued employee of First Union or affiliate and that he was knowledgeable about the three similar lobbyist-consultant arrangements entered into by First Union at the time, including Book's, even though Cawley was Book's exclusive contact at First Union before her resignation. Moreover, Cruz's August 9, 1994 memorandum (Ex. DX 80) describing Book as a "great force" behind First Union's award of a contract in Broward County takes on added weight because of the role ascribed to the office secretary, AJ, in drafting the document. According to Cruz, AJ possessed a legal background, was fully knowledgeable about the manner in which Book was paid, and, in the interest of accuracy, actually wrote the document after consultation with Cruz, who signed and sent it up. Tr. 227-229. AJ appeared as the last witness at hearing. Of all the witnesses with first-hand knowledge of the basic facts of the case, she was by far the most credible. It would be difficult to imagine her drafting a document that was not truthful and accurate.
Cruz and Cawley also gave testimony that was at odds with the facts found above, much of which is cited in Respondents' briefs. None of that testimony was credible. On almost each such item of testimony that Cruz gave, he was forced to admit that it was a newly-offered version of events that conflicted with his prior testimony given at an investigative deposition two years before and that his prior testimony was correct. See, e.g., Tr. 75-77, 81-87, 90, 94, 101-03, 108-09, 114, 122-24, 138-40, 149-51, 190-91, 197-201, 221-24, 275-76. At one point, having already contradicted his prior testimony on many matters, Cruz asked to see his prior testimony before answering the question. Tr. 141.
Cawley's testimony was even less credible. She contradicted herself and was contradicted by unimpeachable documentary and testimonial evidence on numerous occasions and, on a number of matters on which she testified, she could not supply any expected details that would substantiate the testimony. See, e.g., Tr. 503-07, 534, 570-78, 597-98, 600, 623, 635-641, 645-48, 683, 713, 715, 718-19, 730-33, 743, 757-62, 833-37, 844, 850, 853-54, 860-62, 865-72, 883-91, 896-98, 901-06, 926-27, 930, 953, 989-90, 999.
Similarly, Book, who admits to being a close personal and professional friend of Cawley, to representing her now under an informal arrangement, and to meeting privately with her attorney prior to hearing (while refusing to meet with the Division's attorney) (see, Tr. 1295-96, 1381-82), attempted to testify in Cawley's favor, including making unsolicited speeches (see, e.g., 1375-76). Although he prided himself on being the best prepared lobbyist at the State legislature (Tr. 1314-15), he claimed to have an almost total lack of recall when asked of the specifics of his arrangement with First Union. But on certain matters, his professed lack of memory was telling. He could not remember whether he had discussed a fee based on a percentage of First Union's profits with Cawley (Tr. 1376-77), and he could not remember having the critical conversation with Cruz about being paid a 20 percent fee in connection with the June 30, 1994 refunding transaction, but does not deny that it happened (Tr. 1418). If, however, he had not had an arrangement to be paid a percentage of First Union's fees from Broward business, how could he not have been certain that he had not had both the conversation with Cawley providing for such fees and the conversation with Cruz demanding such a fee on the last refunding transaction? All of Cruz's, Cawley's, and Book's testimony contrary to the facts found above was carefully examined, considered, and rejected as not credible.
My findings are based on the preponderance of testimonial and documentary evidence admitted into the record and my observation of the witnesses testifying at the evidentiary hearing.
As found above, First Union and Cawley retained Ronald Book, a lobbyist-consultant, to lobby Broward County and other municipalities on their behalf for municipal bond investment business under an informal agreement to pay Book a monthly retainer and percentage of fees derived from that business. When they subsequently entered into an agreement with Broward to act as the County's financial advisor on prospective bond refundings, they falsely warranted, as part of the agreement, that they had not retained any person other than an employee working solely for First Union to solicit the agreement, nor agreed to pay any such non-sole-employee a consideration based on the agreement. Upon being awarded the FA Agreement, however, they began paying Book a monthly retainer and, when First Union received fees on the first and third refunding transactions under the FA Agreement, First Union paid him a percentage of those fees pursuant to the informal agreement.
At the outset, First Union raises a philosophical objection to finding a violation ofExchange Act in this proceeding where the Division did not call Broward County officials to testify that they "had been lobbied or deceived when they selected First Union as financial advisor in May 1993." First Union Br. 3. According to First Union, "not a single person said he or she was lobbied or deceived, before or after the execution of the financial advisory contract." Id. Consequently, First Union offers, this "might be the only case in which the Division has decided that a sophisticated municipality was a 'victim,' and then elected not to call the 'victim' to testify at the trial of the alleged perpetrators, apparently aware that the 'victim' would not support the Division's theory." Id. at 3-4.
First Union, apparently, is confused about whom the alleged victims might be. Clearly, they are not the lobbied or corrupted officials, but the people these officials represent. It is the taxpayers and residents of Broward County who are the victims of a system in which municipal contracts are surreptitiously awarded on the basis of influence, rather than merit, and fees paid by the County are inflated by lobbyists' commissions. Public officials who collude with lobbyists in such a scheme are perpetrators, not victims, and it can hardly be expected that they would be eager to testify about their transgressions. Having to rely upon the cooperation of the lobbied officials to protect the system would be akin to having the foxes guard the chicken coop.
Neither their testimony nor their agreement is needed, however, to successfully prosecute an action to protect their constituents. The required warranty and the "finders" statute do not require proving that lobbyists actually influenced the awarding of a contract, which would be almost impossible to prove, but only that there had been a failure to disclose that they had been hired to do so or that they had been paid on the basis of the award. Presumably, if the prospective fees were disclosed to the public, the contract offer would be withdrawn.
The SEC has the authority to bring its own independent action to safeguard the process, rather than leave enforcement of the disclosure requirements to the same county officials that may have been corrupted, provided that the Exchange Act and the MSRB rules promulgated thereunder encompass the specific violation. That there is a need for SEC intervention in the municipal bond business being conducted in South Florida is apparent. From the evidence adduced at hearing, the use of outside lobbyists to influence municipal business is extensive, contrary to the intent of the statutes, and deserves corrective action. Whether this is the proper proceeding, within the statutory and regulatory framework, to begin to correct the situation, is what is discussed below.
In this case, I find that Respondents executed an agreement that contained a warranty that they knew to be false, and that Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17 cover this act of deception. I find, however, that the 5-year statute oflimitations has run on this initial deception. But I also find that Respondents had a fiduciary obligation, when acting as Broward County's financial advisor, to notify the County's Bond Counsel at the pre-closings and closings of the bond refunding transactions under the agreement of any fees they intended to pay to lobbyists on the transactions. Because First Union intended to pay Ronald Book on the first and third refunding transactions, it was required to disclose these fees to Bond Counsel for inclusion in Item 11 of the BF Forms when the transactions closed. The evidence shows that First Union and Cawley purposely failed to disclose to Broward County's Bond Counsel on the first refunding transaction their fee arrangement with Book, in continuing to hide Book's involvement in the transaction. Consequently, I find their non-disclosure on the first refunding transaction to be a deceptive act that violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17. In that it occurred within five years before this action was commenced against First Union and within five years before the statute of limitations was tolled against Cawley, I find that this act of non-disclosure is actionable against both respondents.
On the second refunding transaction, First Union and Cawley did not intend to, and did not, pay Book any percentage of First Union's fee. Consequently, there was nothing to disclose, and no violation of the Exchange Act or MSRB rules occurred.
On the third refunding transaction, First Union's representatives again purposely deceived the County by not disclosing the 20 percent fee that Book had only recently demanded and which they subsequently paid. I find that this again was a deceptive act that violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17. This action also fell within the five-year period before the commencement of this action against First Union and is not barred by the statute of limitations. However, I do not find Cawley's coincidental participation in the third refunding transaction as a principal of the underwriter which, unlike a financial advisor, places her on the other side of the table from Broward County, to have required her to disclose Book's expected fees from First Union, notwithstanding her personal knowledge of them. Consequently, I do not find any violation of the Exchange Act or MSRB rules by her on that transaction.
Section 15B(b) of the Exchange Act, 15 U.S.C. § 78o-4(b), enacted on June 4, 1975, required the Commission to establish the Municipal Securities Rulemaking Board to propose and adopt rules "with respect to transactions in municipal securities effected by brokers, dealers, and municipal securities dealers" that are designed, in part, "to prevent fraudulent and manipulative acts and practices . . . and, in general, to protect investors and the public interest."
Pursuant to this mandate, the MSRB was established and proposed rules which the Commission adopted, including Rule G-17 which provides, in full, as follows:
In the conduct of its municipal securities business, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.
MSRB Manual § 3581 at 4871. The terms "broker," "dealer," and "municipal securities dealer" are defined, in turn, to include "their respective associated persons." Rule D-11, MSRB Manual § 3246. As a registered broker-dealer and municipal securities dealer, as well as an associated person of First Union, Cawley was bound by Rule G-17, as was First Union.
On the facts found above, First Union and Cawley were in violation of Rule G-17. Their actions in falsely warranting that they had not retained any person other than a bona fide employee working solely for First Union to solicit the FA Agreement and had not agreed to pay any such non-bona fide employee a fee resulting from the Agreement were deceptive, dishonest, and unfair in light of their having retained Book to solicit the agreement and agreed to pay him a percentage of First Union's fees. Similarly, especially in the context of the false warranty, their intentional failure later to inform Broward County representatives at the closing of the first refunding transaction, and First Union's failure to disclose at the third refunding transaction, that First Union intended to pay Book a percentage of its fees from the transactions, so as to have him listed in Item 11 of the BF Forms that requested such information, were acts of omission that were deceptive, dishonest, and unfair. These acts of concealment were premised on their continuing pretense that they did not intend to pay Book a percentage of First Union's fees from the refunding transactions.
The MSRB has consistently stated that a failure to disclose material information violates Rule G-17. See, e.g., MSRB Manual ¶ 3581 at 4878. For instance, the MSRB has interpreted G-17 "to require municipal securities dealers that assist in the preparation of refunding documents as underwriters or financial advisers to alert issuers of the materiality of information relating to the callability of escrowed-to-maturity securities." MSRB Manual, § 3581 at 4860-61.
Respondents, however, contend that First Union was acting in the capacity of a financial advisor, rather than a municipal securities dealer, and that, consequently, Rule G-17, which applies only to those in "the conduct of [a] municipal securities business," does not cover this situation. First Union Br. 26-30; Cawley Br. 45-49. They read into the rule the requirement that the alleged violator be "acting as" a municipal securities dealer to be covered. First Union cites Section 3(a)(30) of the Exchange Act, 15 U.S.C. § 78c(a)(30),for the definition of a "municipal securities dealer" as being one "engaged in the business of buying and selling municipal securities for his own account, through a broker or otherwise." Br. 29. Only the underwriters in each transaction, not the financial advisor to the County, were acting in the capacity of a municipal securities dealer.
Furthermore, according to Respondents, it would be unfair to apply Rule G-17 to them here in that it had never been applied before to financial advisors in their relationship with issuers, except in the context of directing financial advisors to advise issuers to deal fairly with investors. First Union Br. 27; Cawley Br. 46-47. They cite Upton v. SEC, 75 F.3d 92, 98 (2d Cir. 1996), for the proposition that the Commission may not sanction alleged violators pursuant to a change in its enforcement policy that was not reasonably communicated to the public, and Checkosky v. SEC, 139 F.3d 221, 225-226 (D.C. Cir. 1998), for the similar proposition that the government cannot deprive citizens of the opportunity to practice their profession without revealing the standard they have been found to be violating. First Union Br. 26; Cawley 48.
Along this vein, they continue that the Division has failed to prove that Respondents acted with scienter, which they claim is a necessary prerequisite to being found in violation of Rule G-17. First Union Br. 44; Cawley 43, 67. Citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976) for the proposition that scienter refers to a mental state involving an "intent to deceive, manipulate, or defraud," they contend that the Division has failed to prove intentional misconduct on the part of Respondents. Cawley Br. 43; First Union Br. 44.
Respondents' contentions miss the mark. There is no language in Rule G-17 that restricts its coverage to those "acting as" municipal securities dealers. It is sufficient that the entity be a broker, dealer or municipal securities dealer, and that its actions be "[i]n the conduct of its municipal securities business." Rule G-17. The MSRB rules recognize that acting as a financial advisor is one of the functions typically performed by a municipal securities dealer. Rule G-1 includes, as municipal securities activities of a bank (such as First Union), "financial advisory and consultant services for issuers in connection with the issuance of municipal securities." Rule G-1(b)(2). The same language is used in Rule G-3(b)(B) to describe the activities of a municipal securities principal, Cawley's position at First Union's South Florida office (Tr. 985). Rule G-23 is devoted to brokers, dealers, and municipal securities dealers who act as financial advisors to issuers, in further recognition that financial advisory services to issuers are part of the conduct of a municipal securities business. Similarly, First Union's own Compliance Manual classifies its activity of rendering financial advisory services as "acting as a municipal securities broker-dealer," and requires its employees to register as Municipal Securities Representatives if they supervise financial advisory services, putting itself and its employees on notice that financial advisory services are considered part of conducting a municipal securitiesbusiness. Ex. DX 27 at P-7, P-9. That same Compliance Manual references MSRB Rule G-17 and points out that First Union "is required to deal fairly with all its customers and may not engage in any deceptive, dishonest or unfair practice." Id.
Moreover, even if there were some merit to Respondents' position that municipal securities dealers rendering financial advisory services should not ordinarily be considered as conducting a municipal securities business, which there is not, that proposition would not apply to First Union on the particular facts of this case. As Cawley agreed in her testimony, acting as financial advisor to Broward County was not as lucrative as being senior managing underwriter and, in building a municipal securities business in Broward County, you had to work your way up by, first, becoming a financial advisor, then, moving to the underwriting pool and, finally, becoming a senior managing underwriter. Tr. 720. Even if we were to consider only the latter stages, that of being an underwriter, as acting as a municipal securities dealer, in accepting the role here of financial advisor to Broward, First Union and Cawley were furthering, and hence conducting, their municipal securities business because they were using that position as a first step in becoming an underwriter to the County.
Nor was it unfair to charge Respondents with violating Rule G-17, even if that were the first time the rule was used to regulate the relationship between a financial advisor and the issuer. The situation here is unlike those in Upton, supra and Checkosky, supra, relied upon by Respondents for their every-dog-gets-its-first-bite defense, which involved complex accounting conventions in which the methodologies utilized by the respondents were not in themselves fraudulent, but were only made so by the rules (or a changed interpretation of the rules), in the context in which they were utilized. In Upton, it was a changed interpretation of a rule.
Upton involved a complex formula for the calculation of broker-dealers' customer reserves to be held in separate bank accounts, concerning which companies had been permitted to evade the requirements by paying down loans secured by customer securities that they replaced with unsecured loans at higher interest just before the required weekly Rule 15c3-3(e) computation, a procedure they reversed shortly after the computation. Upton was a supervisory employee of a firm in which another employee had been notified by a New York Stock Exchange examiner that the practice was questionable, but did not stop that practice until the SEC staff had notified Upton personally that the practice violated the spirit of Rule 15c3-3(e). Thereupon, Upton immediately ceased the practice. Several months later, the N.Y.S.E. circulated an Interpretation Memo in which it advised its members, for the first time, that the paydown practice might violate Rule 15c3-3(e). After finding that the paydown practice did violate the rule, the Commission censured Upton for failing reasonably to supervise his subordinate with a view toward's preventing the violation.
The Court of Appeals, however, after finding that Upton's firm had "complied with the literal terms of the Rule at all times (75 F.3d at 94), reversed, on the ground that, "[b]ecause there was substantial uncertainty in the Commission's interpretation of Rule 15c3-3(e), Upton was not on reasonable notice that [his firm's] conduct might violate the Rule" (id. at 98).
In contrast to Upton, the instant case does not involve a long-established practice that is not inherently wrongful, except as interpreted by the Commission within the context of a particular situation, nor a literal compliance with the rule as written. Here, there was no uncertainty as to whether First Union and Cawley's actions in executing a false warranty and concealing information required to be disclosed in the documentation were wrongful. Those actions were inherently and knowingly wrong without being made so by a rule or regulatory interpretation, and are wrong in every context. Respondents cannot seriously contend that, if they had retained Book to secure the FA Agreement on a commission basis, they would not have known that their acts of concealment were wrongful. It is not the wrongfulness of their actions on which they are claiming to have been misled, as in Upton, but on the reach of Rule G-17 to embrace these wrongful actions, in that they were performed while acting as a financial advisor and not as a municipal securities dealer.
And also here, unlike Upton, the literal language the rule does not aid them. Rule G-17 only required that the acts take place within the conduct of a municipal securities business, and other MSRB rules (G-1, G-3, and G-23) specifically included financial advisory services within the scope of a municipal securities business, as did First Union's own Compliance Manual. Once that condition, of conducting a municipal securities business, was satisfied, Rule G-17 required that a "municipal securities dealer . . . deal fairly with all persons," necessarily including the issuer, Broward County, for whom First Union acted as financial advisor. Consequently, Respondents cannot claim they were not on reasonable notice that their wrongful acts would be covered or that they should not be covered because of the literal words of the rules. It is they who would vary the literal words by adding an "acting as a municipal securities dealer" condition to Rule G-17 and ignoring the other pertinent MSRB rules.
Nor is it even necessary, in the context of an act of deliberate deceit by a fiduciary that is inherently and transparently wrongful, to demonstrate that the wrongdoer knew the specifics of the rule or statute that was violated. In this regard, see, the Matter of Wonsover, 69 SEC Docket 169, 1999 WL 100935 (Mar. 1, 1999), and the cases cited therein at n. 36, where the Commission interpreted the word "willful" in Section 15(b)(4) of the Exchange Act as not requiring knowledge that the wrongful act was unlawful. Here, it is apparent that Respondents knew or should have known that the act was wrongful, whether or not they knew that it violated a specific rule or statute, which is clearfrom the nature of the act itself. Moreover, First Union's entering into the bogus, pre-dated, written agreement with Book is confirmation that they viewed their actual, informal agreement with him as being in violation of their warranty in the FA Agreement, making their execution of the warranty wrongful, as was their subsequent concealment from Broward representatives of the intended payments to Book when they closed the refunding transactions. Having been shown to have intentionally deceived the County in deliberately falsely warranting, and then intentionally concealing, their intended payments to Book, even the strictest construction of scienter has been satisfied. Certainly, the test of Ernst & Ernst v. Hochfelder, supra, requiring a showing of an intent to deceive, manipulate, or defraud, has been fully satisfied.
Checkosky, supra, is also inapposite. Like Upton, supra, it involved an accounting practice that was not inherently wrongful except as proscribed by rule, in this case rules of the Financial Accounting Standards Board determining whether start-up costs should be capitalized or expensed under generally accepted accounting principals (GAAP). The company had improperly deferred $37 in start-up costs and the two respondents, independent auditors, improperly reported that the company's statements conformed to GAAP. The Commission suspended them from practicing before it for two years for violating its rules. The Court of Appeals reversed on the ground that the Commission had failed to provide a clear mental standard that it applied to the respondents for disciplining their alleged improper professional behavior, after having gravitated in its discussion from a reliance on "recklessness," to "negligence," to "negligent actions . . . under certain [undefined] circumstances." 139 F.3d at 224-27.
Unlike Checkosky, there is no ambiguity in this proceeding on Respondents' culpability or state of mind, based on the findings made, above. They were aware that falsely warranting and concealing required information from the County were acts of deception and, hence, wrongful, whether or not covered by a specific statute or rule, and they intentionally committed those wrongful acts.
First Union also contends that Rule G-17 does not apply to municipal securities dealers acting in the capacity of financial advisors because Rule G-23 sets the exclusive ethical standards and disclosure requirements for dealers acting in that capacity. First Union Br. 30-32. In support of that proposition, First Union cites Rule G-23(a), as follows:
(a) Purpose. The purpose and intent of this rule is to establish ethical standards and disclosure requirements for brokers, dealers, and municipal securities dealers who act as financial advisors to issuers of municipal securities.
Id. at 31.
Its argument follows that, because Rule G-23 does not require disclosure of the engagement of a lobbyist to secure a financial advisory agreement in exchange for a contingent fee, or of disclosure of a "breach of contract, there is no established disclosure standard under MSRB Rules" that applies here. Id. at 31-32.
It is not irrational to read the language of Rule G-23(a) in isolation and conclude, as does First Union, that the rule contains the exclusive standards and disclosure requirements for municipal securities dealers acting as financial advisors. We cannot ignore, however, the structure of the MSRB rules, their administrative history and their purposes in determining the reach, respectively, of Rules G-17 and G-23.
Although Rule G-23 was adopted in final form after the adoption of Rule G-17, both were proposed by the MSRB at the same time as part of a group of proposed rules. See, Notice of Filing of Fair Practice Rules, 1977-78 CCH Transfer Binder ¶ 10,030 (Sept. 20, 1977). In explaining proposed Rule G-17, the Board made it clear that it covered financial advisory services. The Board stated, as follows:
The Board has adopted the suggestion of one commentator to expand the scope of the proposed rule to cover conduct in the municipal securities business, rather than conduct solely involving transactions in municipal securities. The Board believes this to be an appropriate expansion, given the fact that the activities of a municipal securities professional relate not only to transactions actually effected, but to a variety of other matters, including financial and investment advice.
Id. at 10,373.
In contrast, when the Board explained proposed rule G-23, it stated as follows:
Proposed Rule G-23 addresses certain activities of the conduct of a municipal securities professional acting as a financial advisor or consultant to a state or local governmental unit.
Id. at 10,377; emphasis added.
In adopting the MSRB rules, in which it did not at first include proposed Rule G-23, the Commission endorsed this concept of Rule G-17's establishing the general standard of conduct for municipal securities professionals, applicable to all, and the other rules' addressing only specific aspects of the municipal securities business. The Commissionstated that Rule G-17 was an "omnibus fair practice rule" meant to "establish the general standard for conduct of a municipal securities professional," while "[t]he other proposed rules would provide, in essence, an elaboration upon this general standard, by establishing guidelines for particular subject matters." In the matter of Municipal Securities Rulemaking Board, Order Approving Proposed Rule Change, Exchange Act Rel. No. 15247 (Oct. 19, 1978).
Nor is it even reasonable to suppose that, having established general rules of ethical behavior to govern the conduct of the municipal securities business, which the MSRB recognized as including financial advisory services, either the Board or the Commission would have intended to exempt municipal securities professionals acting as FAs from those general ethical standards. What purpose could have been served by carving out an exemption from the general ethical standards for some municipal securities professionals because of the particular function they are currently performing within their municipal securities business?
First Union attempts to further its position with a misleading paraphrase of the MSRB's explanation of proposed Rule G-23 in its proposed rule submission. First Union offers that the MSRB told the SEC that it was "neither necessary nor appropriate to have a rule requiring financial advisors to disclose to issuers all material information in the selection process." First Union Br. 27. In fact, the MSRB referred only to limiting disclosures relating to the experience and qualifications of financial advisors, not disclosures relating to their dealings with the issuers. 1977-1978 CCH Transfer Binder ¶ 10,030 at 10,380.
Rule G-23 does not address the acts of deception that Respondents committed against Broward County because its focus was primarily upon a narrow aspect of the municipal securities business, that of a financial advisor who intends to assume the role of underwriter, in whole or in part, on the securities being issued. That it does not also cover the disclosure and fair dealing requirements of a municipal securities professional acting as a financial advisor with regard to the circumstances of its entering into the relationship with the issuer is not surprising considering its narrow focus. But that relationship, in all of its aspects, remains, nonetheless, still subject to the general and universally applicable (to municipal securities professionals) requirements of disclosure and fair dealing imposed by Rule G-17. In this case, it required disclosure of First Union's actual relationship with Book when Respondents were confronted with the warranty and closing documents. Having entered into the false warranty and concealed First Union's relationship with Book at the closings, respondents violated MSRB Rule G-17.
Section 15B(c)(1) of the Exchange Act provides:
(1) No broker, dealer, or municipal securities dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule of the [Municipal Securities Rulemaking] Board.
15 U.S.C. § 78o-4(c)(1). Having determined that Respondents violated MSRB Rule G-17, the Division further contends that it has violated this section of the Exchange Act.
Respondents respond, however, that Section 15B(c)(1) is not applicable. To begin with, they read into this statute the same "acting as" or "acting in the capacity of" language that they attempted to add to Rule G-17, supra. First Union Br. 48; Cawley Br. 39. But this language is no more present in the statute than it was in the rule. Without repeating the discussion, above, the MSRB has determined that the conduct of a municipal securities business includes acting as financial advisor to issuers, to which their rules should apply. It would be improper not to defer to a reasonable determination by that entity, which had been established to provide its expertise in devising rules to apply the statute. Their reasonable interpretation of the statute, as reflected in their proposed rules, that were also reviewed and adopted by the Commission in applying its own expertise, must be accorded some deference in interpreting the statute that they were appointed apply. Respondents have offered no persuasive reason why, contrary to the interpretation of the MSRB and Commission, as reflected in the MSRB rules, we should read into the statute words of restriction that would immunize any part of a municipal securities business from the ethical standards adopted to govern practitioners of that business
Respondents further contend that Section 15B(c)(1) does not apply because it requires that the municipal securities dealer "induce or attempt to induce the purchase or sale" of a municipal security, and First Union did nothing to induce the transactions under the FA Agreement. First Union Br. 49; Cawley Br. 41. In that, they contend that the Broward County staff had already identified the refundings it intended to do before First Union submitted its proposal based on the County's refunding criteria. Id. And, even if First Union could be considered as having induced the refunding transactions, First Union further contends that there was a "disconnect" between the alleged violation of Rule G-17, the alleged false warranting, and its role in the inducement of the transaction, which should not be subject to the prohibitions of Section 15B(c)(1). First Union Br.50.
In centering on the "induce or attempt to induce" language in the statute, Respondents ignore the prior phrase "effect any transaction in," which broadens the coverage of the statute. Even if First Union had not induced or attempted to induce the transactions, it would be covered by the statute if it had "effected" the transactions. Asfinancial advisor under the FA Agreement, it assisted the County in effecting the transactions and must also be considered as effecting them, bringing it within the ambit of the statute.
Furthermore, despite Cawley's testimony to the contrary, the facts establish that First Union played a substantial role in inducing the refunding transactions under the FA Agreement. First Union's "Proposal to Provide Financial Advisory" services in response to the Request for Letters of Interest issued by Broward County set forth its "Recommended approach for Broward County" and stated that First Union "currently recommend[ed]" refunding five separate bond issues, all of which could, in First Union's view, be advance refunded under applicable federal tax laws. Ex. DX 6 at 6357. First Union's proposal then discussed each of the five issues in detail and the savings to be achieved by Broward in refunding the bonds. Id. at 6357-6362. Each of the refunding transactions eventually consummated under the FA Agreement had been recommended by First Union in its proposal to provide the financial advisory services. Tr. 792-3; compare Ex. DX 6 at FUMC 6357, 6361 with Ex. DX 114. First Union's recommendations regarding the refunding transactions were its main function under the agreement, for which it eventually received $175,000 in fees, and it cannot seriously contend that it did not have a major role in the selection of the transactions.
Moreover, under the FA Agreement First Union was paid only on the basis of the transactions consummated. Consequently, it was in its interests to induce as many refunding transactions as possible, which presumably it did in its proposal, within the guidelines formulated by the County. Merely by having the County select its proposal to become the financial advisor, it induced the transactions it recommended. In that it hired Book to solicit the FA Agreement, its employment relationship with him, which was the subject of its wrongful acts of non-disclosure, was material to the inducement of the transactions. He, in effect, was soliciting the transactions by soliciting the agreement and the County's retention of First Union as financial advisor. The acts of non-disclosure fall squarely within the ambit of Section 15B(c)(1).
Finally with regard to the statutory coverage, perhaps out of an overabundance of caution, the Division points out that Cawley's actions satisfied the three elements of aiding and abetting liability, to wit: (1) a violation Section 15B(c)(1) by a primary party; (2) a "general awareness" by the aider and abettor of his role in the violation; and (3) "substantial assistance" knowingly rendered by the aider and abettor. See, Division Opening Br. at 67-68, and cases cited therein.
While those are assuredly the rules governing aiding and abetting liability and there can be no doubt that Cawley easily meets the test on the facts found above, one wonders why it is necessary to rely on aider and abettor liability in that she was, along with FirstUnion, a primary party in the violations. As she testified at hearing, she was the designated municipal securities principal under the Exchange Act for First Union's South Florida office (Tr. 895), and was the principal actor on behalf of First Union in all of the violations found against her, above. Under MSRB Rule D-11, she was an "associated person" of First Union and, as such, would also be considered a "municipal securities dealer" subject to the MSRB rules. Under any reasonable interpretation, she should also be considered a primary party under Section 15B of the Exchange Act. I find her to be in violation of the statute and rule as a primary party. If, on review, she is determined not to be a primary party, I find her in violation as an aider and abettor.
Even if Respondents violated the statute and rule by entering into the false warranty, they contend that enforcement of penalties against them is barred by the statute of limitations. They cite Section 2462 of Title 28 of the U.S. Code, which states as follows:
Except as otherwise provided by Act of Congress, an action, suit, or proceeding for the enforcement of any civil fine, penalty, forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.
28 U.S.C. § 2462.
Johnson v. SEC, 87 F.3d 484 (D.C. Cir 1996) and In the matter of Chema, AP No. 3-8505, 1998 SEC LEXIS 2592 (1998), make it clear that 28 U.S.C. § 2462 applies to SEC proceedings seeking to assert penalties against respondents, as in the instant proceeding. The statute begins to run when the "offense is completed." Carroll v. United States, 326 F.2d 72, 86 (9th Cir. 1963). Here, the FA Agreement containing the anti-lobbyist warranty was executed by First Union on June 8, 1993. The action against First Union was not brought until August 27, 1998, more than five years later. Similarly, the statute of limitations was tolled by agreement against Cawley on September 2, 1998, also more than five years after the FA Agreement had been executed. If the execution of the FA Agreement had completed the act of deception, the statute has run.
The Division contends, however, that the statute did not begin to run when the agreement was executed because the warranty was "forward looking," and that Respondents continued to violate MSRB Rule G-17 by continuing this course of unfairconduct in paying Book with fees generated under the FA agreement without disclosing this fact to Broward. Div. R. Br. 21. With regard to the continuing non-disclosure, the Division relies, in particular, on Respondents' failure to apprise Broward of the arrangement with Book at the time of the transactions under the agreement so as to include that information as requested in the BF Forms executed in connection with each transaction. Id.
The language of the warranty does not support this position. The warranty states, in pertinent part, as follows:
ADVISOR [First Union] warrants that it has not employed or retained any company or person, other than a bona fide employee working solely for ADVISOR, to solicit or secure this Agreement and that they have not paid or agreed to pay any person, company, corporation, individual or firm, other than a bona fide employee working solely for ADVISOR, any fee, commission, percentage, gift, or other consideration contingent upon or resulting from the award or making of this Agreement.
Ex. DX 9, Article 9.3.
Whichever other provisions of the FA Agreement may have been forward looking, this provision is not. It required First Union to warrant that "it has not employed" and "that they [sic] have not paid or agreed to pay." Nothing in this warranty can be construed as imposing a continuing obligation of either informing the County of Book's continuing employment or refraining from continuing his employment. When First Union executed the agreement, it completed the act of deception and began the running of the statute of limitations. When the Division brought this action against First Union and reached agreement to toll the statute against Cawley, the statute of limitations had already run against each of them on the execution of the false warranty, and no future act of omission revived it based on the warranty that had been executed
On September 2, 1993, and June 30, 1994, respectively, however, the first and third refunding transactions under the FA Agreement closed, and Book thereafter received payments based on First Union's fees from those transactions, as found above. As part of the closing documents, Broward's bond counsel was required to complete bond disclosure forms (BF Forms) containing information supplied by the parties to the transactions, including the financial advisor. Item 11 of that form requested a listing of "Any fee, bonus, or gratuity paid in connection with the bond issue, by any underwriter or financial consultant to any person not regularly employed or engaged by such underwriter or consultant." Exs. DX 109, 111, 114. The BF Forms stated that they were to be filed as required by Section 218.38(1)(c)1 of the Florida Statutes. Id. Subsection e of Section218(1)(c)1 contained language identical to Item 11 of the BF Form. On the first two refunding transactions, Item 11was left blank. Exs. DX 109, 111. On the third refunding transaction, two firms engaged by the underwriter were listed, but Book was not. Ex. DX 114. As further found above, Respondents did not intend to, and did not, pay Book any fees arising from the second refunding transaction.
Cawley, who represented First Union in the first refunding transaction, took item 11 of the BF forms at face value and understood it to ask whether the Financial Advisor for the refunding transactions had paid anyone in connection with the transaction who didn't work for it. Tr. 801-02. She testified that the sole reason she did not have Book listed as receiving payment on the closing of the first refunding transaction, or even mention Book to First Union's attorney for the closing, was that Book had done nothing on the deal. Tr. 802-03. Kenneth M. Myers, Bond Counsel for Broward County on the first refunding transaction under the FA Agreement, testified that he was not aware of any relationship between First Union and Book on that transaction and that if he had known of one that fit the literal terms of item 11, he would have reported it to the state on the form as requested in Item 11 and in compliance with the language of Section 218.38 of the Florida Statutes on which Item 11 was based. Tr. 1170-73.
Orlando Cruz, who had succeeded to Cawley's position when she left First Union, and his supervisor in Orlando, Phil Roberts, represented First Union at the closing of the third refunding transaction. Neither of them notified the Broward County officials that Book was involved in the transaction or that he had recently requested to be paid out of First Union's fees from the transaction. Tr. 219. Cawley, who had left First Union two months earlier, represented Smith Mitchell, the underwriter on that transaction. She signed the Bond Purchase Agreement on behalf of Smith Mitchell and all other documents for that transaction unless she happened to be unavailable when they needed to be signed. Tr.994-97.
It would appear that First Union and Cawley again deceived Broward County by not reporting to its representatives the fees being paid to Book on the first and third refunding transactions, according to the literal words of Item 11 of the BF Forms and the Florida statute on which it was based. First Union was Broward's financial advisor under the FA Agreement and owed it a fiduciary obligation to disclose material matters, including the explicit information required in the closing documents. Its act of omitting mention of Book was especially egregious in the context of its having initially misled Broward as to Book's role when it executed the FA Agreement containing the false warranty. Cawley was First Union's representative on the first refunding transaction and, similarly, owed Broward that fiduciary obligation of disclosure. On the third refunding transaction, however, she represented the underwriter, rather than First Union, and owed no obligation to disclose matters pertaining to First Union relationship with the County.
These acts of non-disclosure were not acts of deception arising out of the execution of the false warranty, which was an act of deception that was completed when the FA Agreement was executed, but are independent acts of omission based on First Union's fiduciary obligations at the closing of the transactions. Consequently, they do not revive actions based on the false warranty that were already barred, but are further acts of deception that are actionable in their own right. In that the statute of limitations had not run on actions arising from the closings on the first and third refunding transactions against either respondent, the Division is not barred from pursuing this action against First Union for its acts of omission on the first and third refunding transactions, and against Cawley for its act of omission on the first refunding transaction.
In response, Respondents assert, first, that Book was "regularly . . . engaged" by First Union and, hence, was not required to be reported in Item 11, according to its language or the language of Section 218.38 of the Florida statutes. See, e.g., First Union Br.45-46. Respondents rely for this on the written agreement (Ex. DX 3) drafted by Haas, under which they allegedly retained Book. Id. Secondly, they assert that a Florida administrative rule relieved them of any responsibility for disclosing fees paid to Book because he was not a "finder" under Florida statutes, and First Union was not an "underwriter," either of which was a necessary prerequisite to having his fees reported in Item 11 of the BF Forms. Id. at 46-48.
There is no basis for Respondents' reliance upon the written agreement with Book. As determined above, that was a bogus agreement that was drafted and executed after the fact, for the purpose of disguising First Union's actual, informal agreement under which he had already been retained. Under that informal agreement, he was specially employed to solicit business from municipal governments, including Broward, and was to be paid a monthly retainer, plus a fee of 20% of First Union's fees on any transaction consummated from the business he solicited. At the time the bogus written agreement was executed, First Union had already been awarded the FA Agreement, which Book had been "instrumental in securing." See, Ex. DX 70. The evidence, discussed at length above, was clear that Book had not substantially performed any of the tasks supposedly assigned him under the written agreement, and that the provision contained therein for increasing the monthly retainer, allegedly based on increased time he spent on First Union business, was a sham, meant to disguise his receipt of a percentage of First Union's fees.
Based on the actual, informal agreement, Book was not a regular employee of First Union, but a special employee, employed only to bring in municipal securities business and paid on the basis of that business, exactly the arrangement that the Florida statute and Item 11 of the BF Form were intended to disclose. Moreover, as the Division points out, the alleged written agreement (Ex. DX 3) does not purport to retain Book, the individual, but rather, Ronald Book, P.A., the "firm" and, consequently, is meaningless for characterizingBook's (the individual's) employment capacity with First Union. Div. R. Br. 25. Accordingly, the literal language of Item 11 of the BF Forms and the Florida statute required that First Union disclose Book's fees on the transactions.
Although Item 11 of the BF Forms and Section 218.38 of the Florida Statutes, cited above, required that fees paid by either the underwriter or financial consultant be reported,
Respondents rely upon an administrative rule issued by the Florida Division of Bond Finance, which they contend narrowed the coverage and exempted fees paid by financial advisors, such as First Union, to their consultants, from the reporting requirement. First Union Br. 46-48; Cawley Br. 64-67. They cite Rule 19A-1.002(2), Fla. Admin. Code Ann. R. 19A-1.002 (1998), which purports to define the terms used in statutory Section 218.38, and states, "'Fee, Bonus, or Gratuity' shall mean any Finder's Fee, as defined herein, and any fees paid by the underwriter." In that First Union was not the underwriter, but the financial advisor, any fee paid by it to Book would not be covered unless it was considered a Finder's Fee. The next subsection of the rule, Rule 19A-1002(3), defines "Finder's Fee" as compensation paid to a "finder," as defined in Section 218.386(1)(a), Florida Statutes, by an underwriter, commercial bank, investment banker, or financial consultant or advisor. Section 218.386(1)(a), in turn, restricts the definition of a "finder" to one "who enters into an understanding with either the issuer or the managing underwriter, or both . . . to act solely as an intermediary between such issuer and managing underwriter."
In sum, if we refer only to the reporting statute, Section 218.38, any fees paid by the underwriter or financial advisor in connection with a bond issue to anyone not regularly employed by it would have to be reported. If we adopt the pattern of the administrative rule, fees paid by an underwriter would still be covered, but fees paid by a financial advisor would not be covered unless the recipient had entered into an understanding with the issuer or the managing underwriter to act solely as an intermediary between such issuer and managing underwriter. What scenario could possibly be imagined to fit the latter category, where a recipient of fees from the financial advisor had entered into such an agreement with the issuer or underwriter, is not further illuminated by the administrative rule. In that Book had not entered into an agreement with either the issuer, Broward County, or the underwriter, Respondents contend that, under the administrative rule, his fees from First Union were not subject to disclosure and Respondents committed no wrongdoing by not reporting them to Broward's representatives.
In relying on the administrative rule, Respondents point out that Section 218.37(3) of the Florida Statutes authorizes the Division of Bond Finance to issue rules implementing Section 218.38. Cawley Br. 64-65; First Union 46. They also cite Florida cases that establish that an administrative rule is operative and binding until it is modified or superceded by subsequent legislation or regulation, or the statute from which it was initiated is repealed or expired. Cawley Br. 66; First Union Br. 48. In that regard, FirstUnion notes that the Division of Bond Finance had to provide the Administrative Procedures Committee a listing of each rule which exceeds its rulemaking authority, and did not report Rule 19A-1.002. Id. at 47, n.54.
Respondents are correct that the Division of Bond Finance was authorized to issue rules to implement Section 218.38. But it was not given authority to issue rules to interpret it, or more important, to nullify, repeal, contradict, or modify it, or any portion of it, as it appears to have done in this instance. And, where an administrative rule is contrary to the clear terms of a statute, it is a nullity unentitled to any weight. For example, in Demarest v. Manspeaker, 111 S.C. 599 (1991), the Supreme Court reversed a decision where the lower courts had denied witness fees to a state prisoner based on a longstanding administrative construction of the relevant statute, ruling that an "administrative interpretation of a statute contrary to language as plain as we find here is not entitled to deference." Id. at 603. The Court went on to explain that when the terms of a statute are found to be "unambiguous, judicial inquiry is complete except in rare and exceptional circumstances." Id. at 604 (citations omitted).
The Florida courts have been equally consistent in rejecting administrative constructions or rules that conflict with a statute. See, e.g., City of Safety Harbor v. Communications Workers of America, 715 So. 2d 265 (Fla. 1998) "[a]n agency's construction of a statute is not entitled to deference where the agency has erroneously interpreted a provision of law." As the Florida appellate court has correctly recognized:
[A]n administrative agency has no power to declare a statute void or otherwise unenforceable and there is no obligation to defer to an agency interpretation that results in a statute being voided by administrative fiat.
Secretary of State v. Milligan, 704 So.2d 152, 157 (Fla. 1997) (overturning administrative construction of statute).
While the cases cited by Respondents do support the position that a rule remains operative and binding until modified or superceded, none of them permits a rule to negate a portion of a statute as Rule 19A-1.002 appears to do to Section 218.38. The closest case for that proposition is Florida Livestock Bd. v. Gladden, 76 So.2d 291 (Fla. 1954), in which a hog owner was permitted to recover compensation for the destruction of his diseased hogs that he had fed uncooked garbage until two days before August 15, 1953, the date fixed by the State Live Stock Sanitary Board to comply with its rules on cooking garbage. The effective date of the authorizing statute had been August 4, 1953. In permitting the effective date to be extended by the rule the court stated, "It would not have been possible for [the hog owner] to cook garbage to comply with said regulations
as to the manner and time of cooking, temperature, etc., before he was apprized of theprovisions of said regulations, and it appears that he was not required to comply with these regulations before the effective date thereof." Id. at 292. In conclusion, the court stated: "This Court has on numerous occasions recognized that equitable estoppel will be invoked against the State when justified by the facts. Id. at 293.
In the instant proceeding, the statute was clear and complete on its face and required the reporting of Book's fees on the BF Forms. Using identical language, Item 11 of the BF Forms required the same disclosure. And, in accordance with both, the bond counsel for the County would have reported Book's fees had he been told of them by Respondents. Tr. 1170-73. No rules were necessary to interpret or apply the statute, as in Florida Livestock v. Glidden, supra, and, in fact, bond counsel applied it as written and incorporated verbatim in the BF Forms, not as narrowed by the administrative rule. As the rule issued was in conflict with the statute, it is a nullity.
It was, perhaps, because the Bond Division did not list Administrative Rule 19A-1.002 with the Administrative Procedures Committee that it was allowed to stand. The Rule serves no useful purpose in implementing the statute, the extent of the Bond Division's mandate, in that the statute is clear on its face. It requires a listing of all fees paid by the underwriter or financial advisor in connection with the bond issue to persons not regularly employed by them, not merely fees paid for the purposes specified in the rule. Had the Bond Division recognized that the rule, if applied, would diminish the coverage of the statute, it might have withdrawn it of its own volition, much less submitted it to the Administrative Procedures Committee. But having been untested by that Committee or the courts, the rule's continued existence is no endorsement of its validity.
That is not to say that, if Respondents had actually relied upon the administrative rule in not reporting Book's fees to the County's representatives, it might not have justified its failure to disclose. But we are not asked to decide that issue here, because that did not happen. The record is clear that the only reason that Respondents did not report Book's fees was that they were continuing the deception that Book had not been retained to solicit business from Broward and that he was not going to receive compensation based on First Union's fees from the transactions under the FA Agreement. These acts of omission were actionable under MSRB Rule G-17 and Section 15B(c)(1), and occurred within the time specified in the statute of limitations.
The Division also contends that, under prevailing authority, the statute of limitations does not apply to this proceeding, so as to bar action on the execution of the false warranty, because it seeks an order of disgorgement in addition to civil penalties. I do not agree, and explore this issue in the next Part, in discussing disgorgement.
Having determined that First Union and Cawley violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17 with regard to the first refunding transaction under the FA Agreement, and First Union also did so with the third refunding transaction, we must now consider possible penalties and other remedial action.
Section 21B of the Exchange Act, 15 U.S.C. § 78u-2, provides for three tiers of monetary penalties in an administrative action where the respondents have willfully violated the securities statutes, regulations thereunder, or the MSRB rules, and the penalty is in the public interest. The first tier covers basic violations and sets minimal penalties, the maximum being $5,000 for a natural person and $50,000 for any other person. 15 U.S.C. § 78u-2(b)(1). The second tier covers violations that also involve "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement." 15 U.S.C. 78u-2(b)(2). The maximum penalties for the second tier are $50,000 for a natural person and $250,000 for any other person. Id. The severest penalties are imposed under the third tier, covering violations that not only involve the characteristics required for second tier violations, but which also resulted in substantial losses or created significant risks to other persons, or resulted in substantial pecuniary gain to the violator. 15 U.S.C.§ 78u-2(b)(3). Here, the Division asks for second tier penalties against First Union in the amount of $175,000, and against Cawley in the amount of $35,000. Div. Open. Br. 71.
Clearly, the violations of MSRB Rule G-17 by First Union and Cawley fit the characteristics required for second tier violations. The deliberate non-disclosure of Book's fee arrangement to Broward County's representatives by First Union and Cawley on the first refunding transaction, and by First Union on the third refunding transaction were deceitful and manipulative acts that continued their initial overt acts of deceit and manipulation of Broward County officials of entering into the false anti-lobbyist warranty in the FA Agreement and attempting to disguise their lobbying arrangement with a disingenuous, after-the-fact employment agreement. Moreover, the deceit and manipulation continued throughout the evidentiary hearing on the part of Cawley, whose testimony was replete with falsehoods, self-contradictions, and inaccuracies (see, e.g., Tr. 503-07, 534, 570-78, 597-98, 600, 623, 635-641, 645-48, 683, 713, 715, 718-19, 730-33, 743, 757-62, 833-37, 844, 850, 853-54, 860-62, 865-72, 883-91, 896-98, 901-06, 926-27, 930, 953, 989-90, 999) and, to only a lesser extent, on the part of First Union's (i.e., its successor's or affiliate's) current employees, whose testimony was also deficient in credibility (see, e.g., Tr. 75-77, 81-87, 90, 94, 101-03, 108-09, 114, 122-24, 138-40, 149-51, 190-91, 197-201, 221-24, 275-76, 402-03, 407-10).
On the other hand, the violation did not reach the level of typical violations of the securities laws, in which investors are directly defrauded of money. While the deceitful acts of First Union and Cawley permitted them to secure and retain profitable business from Broward County that otherwise might have gone, more fairly, to others, one would not necessarily conclude that either Broward County or any of First Union's competitors had suffered an actual and direct loss on the transactions by virtue of the deceit. There is no evidence to suggest that Broward County would have paid any less on the refunding transactions to First Union or a competitor had First Union not retained an outside lobbyist, or that any particular competitor suffered monetary loss by not being able to compete fairly and openly for the business. The direct harm to them on these particular transactions, if any, may have been minimal.
Moreover, from all accounts, Cawley was a competent, knowledgeable and energetic manager who could have established a successful municipal bond business for First Union by merit, on a level playing field. But in attempting to penetrate the municipal securities bond market, and do it in a hurry, she chose to manipulate the system. Beginning a municipal bond business in southern Florida would have been difficult without hiring lobbyists, in a system characterized as "unique" because of its reliance on lobbyists. See, e.g. Tr. 95-96. The newspaper articles documenting the influence of lobbyists in securing business and enacting legislation, even on behalf of municipalities, are proof enough of this difficulty. See, Exs. DX 1, 1A-1G. As Cawley understood it, it was fairly commonplace to hire consultants in Florida, and chances of succeeding in building a business without them were not good. Tr. 1047. And disclosing their hiring, as required under the standard warranty and Florida statutes, which were intended to illuminate the process of awarding public contracts, might have prevented First Union from securing business, either as underwriter or financial advisor.
The primary fault for creating and perpetuating this system under which it is influence rather than merit that lands the contracts however, lies with the public officials and public-officials-turned-lobbyists. The result is not merely that competence is downgraded; there is also the added costs of the lobbyists' compensation. While the successful recipient of the government contract pays the direct cost of the lobbyist's commission, it is the public that ultimately bears the costs by paying inflated awards that include these lobbying fees. Moreover, the electoral system is undermined by the lobbyists' funneling of a portion of their fees to the political campaigns of incumbent officials who accord them influence. Obviously, those officials who are beholden to the lobbyists are unlikely to be the most meritorious of candidates. This is the type of lobbying arrangement that the warranty and disclosure requirements of the Florida statutes are designed to prevent.
Cawley and First Union, although willing participants, were but recent entrants intoa well-established system in obvious need of reform. But they exploited the system to the hilt, hiring a bevy of lobbyists to solicit municipal securities business in various municipalities in South Florida, and concealing that practice when required to disclose. Holding them accountable under the ethics rules of the MSRB and the penalty provisions of the Exchange Act for their violations is a necessary first step in reforming the system and deterring them from future violations. Taking all this into consideration, together with the facts that this is a first time violation by Cawley and that she has not been directly enriched by her behavior, I determine that a second tier penalty for Cawley in the amount of $15,000 is appropriate.
Taking also into consideration that this is also a first time violation by First Union that was perpetrated by a short term employee who had left its employ even before the violation was discovered, and that First Union is also being ordered to disgorge its ill-gotten gains on the actionable violations, below, I determine that the addition of a second tier penalty for First Union in the amount of $20,000 is appropriate to reflect the degree of its turpitude and deter it from future wrongdoing.
Sections 21B(e) and 21C(e) of the Exchange Act, 15 U.S.C. § § 78u-2(e) and 78u-3(e), provide for the entry of disgorgement, plus prejudgment interest. Disgorgement is designed primarily to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws. SEC v. First City Financial Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989); SEC v. Tome, 833 F. 2d 1086, 1096 (2d Cir. 1987). It also provides a fund for the return of ill-gotten gains to those illegally deprived of their assets. See, Rules 610-614 of the Commission's Rules of Practice (adopted July 1995), which now provide a uniform method by which disgorgement funds may be distributed to injured investors.
The Division asks that First Union be ordered to disgorge the $175,653 it earned under the FA Agreement, plus prejudgment interest thereon in the amount of $97,652. Div. Open. Br. 70. This apparently assumes that all profits earned under the FA Agreement from all three refunding transactions are tainted and subject to disgorgement. But we have already determined that the statute of limitations has run on the execution of the false warranty and that only the acts of withholding information concerning Book from Broward County on the first and third refunding transactions were within the statutory period and actionable. Consequently, only the $92,740.31 received by First Union on the first refunding transaction, and the $21,753 received by it on the third refunding transaction, rather than the total fees received by First Union under all the refunding transactions, should be subject to disgorgement.
As the Division points out (R. Br. 29), it would be proper to consider actions takenby respondents outside the limitations period in determining their states of mind and intent in evaluating their activities within the statutory period. See, In the matter of Barbato, 69 SEC Docket 169, 1999 WL 58922 (Feb. 10, 1999); In the matter of Wonsover, 69 SEC Docket 608, 1999 WL 100935 (Mar. 1, 1999). However, we would be overreaching to consider a violation within the statutory period, involving only the first and third refunding transactions, as reviving the statute as to other refunding transactions covered by the FA Agreement, when they are not within the confines of the actionable violation. Once the bar has fallen on matters arising from the execution of the false warranty in the FA Agreement, they are not actionable unless specifically embraced by a further violation within the statutory period. Respondents have committed no violations with regard to the second refunding transaction within the statutory period and that refunding transaction should not be considered in determining the amount ordered to be disgorged.
But the Division also contends that the statute of limitations is no bar to the imposition of the remedial sanctions of disgorgement and cease-and-desist orders so as to permit ordering the disgorgement of fees paid to First Union on all of the refunding transactions attributable to the FA Agreement containing the false warranty. It relies upon Johnson v. SEC, supra, and In the matter of Roche, 64 SEC Docket 1973 (June 17, 1997) for the proposition that the statute of limitations does not apply to orders of disgorgement. Div. R. Br. 30.
The Division, however, reads those cases too broadly when it suggests that they exempt all orders of disgorgement from the statute of limitations, including the one requested here. In Johnson, the SEC had imposed sanctions of censure and a six-month suspension on Johnson for failing to adequately supervise an employee who had stolen money from a client. Because over five years had passed since the unlawful acts, the Court of Appeals held that the five-year statute of limitations of 28 U.S.C. § 2462 barred the action. In explaining its decision, the court distinguished between penalties, which are covered by § 2462, and remedial sanctions, which are not. It relied upon two early Supreme Court cases, Huntington v. Attrill, 146 U.S. 657 (1892) and Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412 (1915), on which to base its definition of "penal," to determine if a law should be so characterized so as to fall within the embrace of the statute.
In Huntington, the Court had defined a penal law as one that redresses a wrong to the public, rather than a wrong to the individual. 146 U.S. at 667-68. Or, as it put another way, the question of whether a law is penal depends on whether its purpose "is to punish an offense against the public justice of the State, or to afford a private remedy to a person injured by the wrong." 146 U.S. 673-74.
Meeker, supra, involved a suit against a railroad seeking a refund of alleged overcharges under a federal commerce statute. In holding that the predecessor of § 2462did not apply to bar the action, the Court stated: "The words 'penalty or forfeiture' in this section refer to something imposed in a punitive way for an infraction of a public law, and do not include a liability imposed solely for the purpose of redressing a private injury, even though the wrongful act be a public offense, and punishable as such. Here, the liability sought to be enforced was not punitive, but strictly remedial." 236 U.S. at 423.
In Johnson, the Court of Appeals applied these Supreme Court pronouncements to the SEC sanctions before it, to hold that the proposed censure and six months suspension fell on the side of punishment because they were "certainly not 'remedial' in the sense that term is used in Meeker and its progeny, for they are not directed toward correcting or undoing the effects of Johnson's allegedly faulty supervision." 87 F.3d at 491. "Unlike restitution or disgorgement," the court added, "the sanctions here do not attempt to restore the stolen funds to their rightful owner." Id. at 491-92. The court concluded by embracing what it understood to be the "ordinary, contemporary, common meaning" of the word "penalty," to which the statute of limitations applies, "as a sanction imposed by the government for unlawful or proscribed conduct which goes beyond remedying the damage caused to the harmed party." Id. at 492. Concerning a contrasting type of sanction, however, the court had stated, "[W]here the effect of the SEC's action is to restore the status quo ante, such as through a proceeding for restitution or disgorgement of ill-gotten profits, § 2462 will not apply." Id. at 491.
In Barbato, supra, and Roche, supra, the Commission was faced with exactly the latter situation. There, salesmen of broker-dealers who had defrauded investors were ordered by administrative law judges to disgorge their ill-gotten gains. In reviewing each decision, the Commission recalculated downward the amounts of the disgorgement orders to include only the amounts by which each investor was actually defrauded, and affirmed the orders of disgorgement only as to those amounts. It determined that the orders of disgorgement were not subject to the statute of limitations according to the test in Johnson, supra, because they merely restored the status quo ante.
The situation before us is quite different. Unquestionably, First Union's profits from the transactions under the FA Agreement were ill-gotten gains because First Union would not have been awarded the agreement had it disclosed its retention of lobbyist Book. But Broward County cannot be considered as having been defrauded of those profits, because it would have paid them to an alternate financial advisor if First Union had been disqualified, and there is no indication that First Union did not perform its functions under the agreement as well as would have any alternate financial advisor. Consequently, Broward County cannot be eligible for restitution out of the disgorgement proceeds, and they must be considered solely as penal, rather than remedial.
While Broward has the right to recover all fees paid to a lobbyist in violation of thefalse warranty under the terms of the FA Agreement through a breach of contract action in state court, that right is independent of this proceeding and can be pursued separately by Broward if its officials so desire. Here, disgorgement would go well "beyond compensation to the wronged party," as did the sanctions in Johnson, supra (see, 87 F.3d at 491), and would similarly be subject to 28 U.S.C. § 2462, the federal statute of limitations on penalties, which had run on all but the first and third refunding transactions.
Accordingly, only First Union's fees from the first and third refunding transactions are within the statutory period and remain subject to disgorgement. But even as to those fees, First Union raises a suggestion of impropriety in the Division's asking for disgorgement of the entire amount of its fees on each refunding transaction as "illegally obtained profits," rather than recognizing them as being in part "legally earned revenue." First Union Br. 24. First Union raises this point merely in the context of asserting the requested disgorgement to be punitive, rather than remedial, so as to be subject to the statute of limitations, a position with which I agree, as discussed above.
Lest its assertion be carried farther, however, so as to challenge the Division's calculation of the amount requested for disgorgement because it included First Union's entire fee, not just its profits, it is clear that the Division's request is proper insofar as it pertains to the fees for the first and third refunding transactions. Although the amount requested is First Union's revenues, and its profits would be lesser, by the sum of its expenses, any risk of uncertainty in calculating disgorgement should fall on the wrongdoer whose illegal conduct created that uncertainty. SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995); SEC v. First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989). First Union has failed to substantiate, or even calculate, any reductions that should be made to its revenues from the refunding transactions to arrive at a more realistic profit figure. And, if we were to accept at face value the testimony of Cawley as to only minimal efforts having been made by First Union to service the FA Agreement (see, e.g., Tr. 496-504, 735-36, 783-89), the fees First Union received were almost entirely profit.
Accordingly, I grant orders of disbursement against First Union in the amounts of $92,740.31 and $21,753, plus prejudgment interest thereon according to law, calculated from October 18, 1993 and July 29, 1994, respectively, the dates First Union received fees from Broward County in those amounts from the first and third refunding transactions.
Section 21C of the Exchange Act, 15 U.S.C. § 78u-3, also authorizes the Commission, where it has found that a person "is violating, has violated, or is about to violate any provision of the security laws or any rule or regulation thereunder," to issue an order requiring that person "to cease and desist from committing or causing such violationand any future violation of the same provision, rule, or regulation." As determined above, Respondents have violated Section 15B of the Exchange Act and MSRB Rule G-17 promulgated thereunder, and are already subject to cease-and-desist orders. 2/ The Division requests that both First Union and Cawley be ordered to cease and desist from any future violations, primarily because "[b]oth remain active in the municipal securities business and neither has shown any indication that they recognize that their actions with respect to Broward were, at best, unfair." Opening Br. 70. The Division suggests no limitations with regard to the cease-and-desist orders. It also requests that Cawley be subjected, at a minimum, to a six month suspension from association with any broker, dealer, or municipal securities dealer. Id. at 68.
Taking into account on the one hand that the main impetus for the deceitful conduct came from Cawley, who is no longer with First Union, and that First Union will be paying substantial sanctions in the form of a civil penalty and disgorgement, and on the other hand that its current managerial employees are not averse to using deceitful practices, as demonstrated at hearing, a cease-and-desist order of limited duration would appear to be appropriate to deter it from repeating its violative actions. Accordingly, I order that it cease and desist from further violations of Section 15B of the Exchange Act and MSRB Rule G-17, said order to remain in effect for a period of three years from the date of entry of the Commission's final order in this proceeding.
Cawley continued her deceitful conduct in testifying at hearing. Her continued activities in the municipal securities business and her carelessness with the truth call for some external restraint. A cease-and-desist order is clearly merited. Taking into account her youthfulness (30 years of age when the violation occurred, and 36 at hearing) and the detrimental effect that the publication of this decision may have on her budding career in the municipal securities business, I order that Cawley cease and desist from further violations of Section 15B of the Exchange Act or MSRB Rule G-17, but also limit the period within which said cease-and-desist order is to remain in effect to three years from the date of the Commission's final decision in this proceeding. Taking into account thesame considerations, I further order her suspended from association with any broker, dealer, or municipal securities dealer for a period of three months from the date of final decision.
In addition to questioning the competency of Orlando Cruz's testimony, discussed above, Respondents also challenge the introduction into evidence of his memoranda concerning Book's arrangement with First Union (Exs. DX 70, 80), as inadmissible hearsay. First Union Br. 37-40; Cawley Br. 61-63. They are in error. Cruz's memoranda were written by an employee of First Union concerning a matter within the scope of his employment, and are admissions by a party-opponent. Admissions by a party-opponent have historically been excepted or excluded from hearsay, as they continue to be under Rule 801(d)(2) of the Federal Rules of Evidence. Similarly, Cawley's out-of-court statement to Cruz confirming the arrangement between First Union and Book, having been made by Cawley, an adverse party, is also admissible by the Division as an admission by a party-opponent. Cruz's testimony that Cawley made the statement was given at hearing and is not subject to challenge as hearsay. As admissions by a party-opponent, Cruz's memoranda and Cawley's statement to Cruz are fully admissible and can be used to prove the truth of their contents.
Furthermore, although Book's statement to Cruz concerning his percentage arrangement with First Union would be hearsay if it stood by itself, it has also become an admission by a party-opponent because of its adoption by First Union and Cawley. Rule 801(d)(2)(B) of the Federal Rules of Evidence includes as an admission by a party-opponent "a statement of which the party has manifested an adoption or belief in its truth." According to Cruz, Cawley directly confirmed the truth of Book's claim, making Book's statement part of her admission. And First Union manifested both an adoption and belief in its truth by the memorandum of its employee Cruz, acting within the scope of his employment, who agreed with Book's claim, and by paying Book the exact amount of his requested 20 percent of the fees from the third refunding transaction under the FA Agreement, pursuant to his claimed arrangement and Cruz's memoranda. Consequently, Book's statement to Cruz is fully admissible against both Respondents and can be used to prove its contents. The evidentiary basis for admitting these statements and memoranda as admissions by a party-opponent was made known to the parties and discussed at length on a number of occasions at the evidentiary hearing. See, e.g., Tr.196-197, 1037-38
That is not to say that these statements and memoranda are judicial admissions and binding on the parties against whom they were admitted. They are not. A judicial admission, such as is made in a pleading, in answer to a request for admission, or in a stipulation between the parties, is ordinarily conclusive unless a party is relieved of the admission by the presiding judge for due cause shown. An admission by a party-opponent, on the other hand, is simply an evidentiary admission that can be introduced into evidence by the opposing party to prove the truth of its contents and, once admitted, given whatever weight the trier of fact finds proper. It is excluded from the hearsay rule for the same reason that it would be admitted into evidence even if it were considered hearsay: by virtue of the declaration's being made or adopted by a party, when used against that party it assumes the mantle of reliability that is the threshold measure of admissibility and becomes the burden of that party to explain away.
In this case, Cruz's memoranda and Cawley's confirmation of the Book arrangement were given considerable weight because they were consistent with other reliable evidence, including payments made to Book which appeared to reflect the professed arrangement. In that respect, however, Cawley and First Union contend that the total payments made to Book do not amount to 20 percent of the fees received by First Union under the FA Agreement, plus his monthly retainers. First Union points out that his payments amounted to only 13 percent of revenues, plus his monthly retainers. Br. 43, n. 48. And Cawley points out that the $17,100 (actually $17,150) that Book received in addition to his monthly retainers for October, November and December of 1993, only amounted to 11 percent of the first two refunding transactions under the FA Agreement. Br. 60, n.82.
But these figures assume that the second refunding transaction, which closed on October 5, 1993, on which First Union received a fee of $61,160.69, was made known to Book so that he would have received or could have demanded his commission, as he did of Cruz with regard to the third refunding transaction. In fact, it appears that he was not informed of that refunding transaction and knew nothing of it even at the time of the evidentiary hearing in this proceeding. On two separate occasions, Book testified that he knew of only two "deals" that First Union transacted with Broward, apparently referring only to the first and third refunding transactions. Tr. 1357-58, 1392. As detailed above, the $17,150 that he received in early 1994 amounted to 18.5% of the first refunding transaction, for which Book dated the first invoice for the day after First Union was paid its fee. And on the third refunding transaction, he received the entire 20 percent from First Union that he had demanded from Cruz. What minor adjustment Cawley made to reduce the Book's commission from 20 percent to 18.5 percent of the first refunding transaction fee is not disclosed by the record, but the commission was substantially what was promised in their informal agreement, found to be extant, above.
Respondents further contend that the Division's proof is deficient in that it has failed to prove that Book actually influenced the awarding of the FA Agreement to First Union, and that, therefore, it has failed to carry its burden of proving the breach of warranty. Cawley complains that "[t]he Division did not attempt to call any Broward Commissioners or staff members from the financial advisory selection committee as witnesses." Cawley Br. 50. First Union similarly complains that "not one of [the Division's] witnesses was a Broward County official; not a single person said that he or she was lobbied or deceived, before or after the execution of the financial advisory contract." First Union Br. 3.
What is material, however, is not whether Book actually influenced the award, but whether Respondents retained him to do so or agreed to pay him for doing so. These they clearly did, in violation of the warranty that they had not. Moreover, in view of First Union's having paid Book approximately the agreed percentage on the first and third refunding transactions, it would be naive to believe that his close relationships with the members of the selecting committee did not actually influence the award. At least First Union and Cawley, by paying him, apparently believed that they had.
What we have before us is the classic case of what the warranty and the Florida statutes on which it is based were designed to prevent: an award based not on merit and fair competition, but on representation by an outside lobbyist. The lobbyist funnels money to officeholders in the form of campaign contributions. The officeholders, in turn, reward the lobbyist by approving contracts with his clients, who pay him a fee for the business. To show a violation of the warranty and the Florida statutes, designed to thwart this type of arrangement, it is not necessary to prove that the awarding of a covered contract was surreptitiously influenced by the lobbyist, an almost impossible task, but only that the contractor had failed to disclose that he had retained an outside lobbyist, or had paid or promised him a fee based on the awarded contract.
Respondents raise certain other procedural objections which relate in some manner to the testimony of Nick Monaco, an SEC investigator, called as an adverse witness by First Union. The entire purpose for calling Monaco was to elicit testimony that none of the Broward public officials he had interviewed had admitted to being influenced by Book in awarding the FA Agreement to First Union. First Union challenges my ruling that no questioning along those lines would be permitted because the unsworn, out-of-court, statements made to Monaco were inadmissible hearsay. First Union Br. 54-55. There is no merit to First Union's position.
The Broward officials reviewing and deciding First Union's application were well known to all of the parties and were subject to subpoena. While it might be expected that they would not admit to wrongdoing in unsworn testimony given to an investigator, whatever the case, testimony given under oath in a courtroom and subject to critical cross-examination is yet another matter. It would have been error to allow any party to introduce into evidence, through the backdoor, statements of the public officials, in the form of second hand testimony by an investigator, instead of calling the officials as witnesses and eliciting their testimony, first hand, under oath, and subject to cross-examination. See, discussion at Tr.1607. The option of calling them was offered to all of the parties, and none of them chose it. Id.
First Union also contends that it was error to permit the Division's attorney to confer with its agent Monaco after Monaco was questioned on direct by Respondents, before the Division's cross-examination. Br. 56-58. At a prehearing conference held on February 24, 1999 (Transcript at 52-53), and early in the evidentiary hearing (Tr. 183-84, 267-270), I indicated my intention of allowing counsel to confer with their party-witnesses after they had been examined by adverse parties and before counsel began conducting their friendly examination. The purpose was clearly stated, to wit, to prevent the possibility of losing important evidence that would explain away seemingly critical admissions given under the adverse examination, because the witness's counsel might be uninformed and could not ask the right questions. See, Tr. 267. I did, however, restrict counsel from discussing other witnesses' testimony from which the party-witness might have been excluded. Tr. 269. On the other side, of course, is the possibility that the party-witness would be coached for his further examination by his own counsel. But changing one's testimony after conferring with counsel is something that the trier of fact can evaluate in making his factual findings; absent testimony, which may be critical to the case, is something that he cannot.
In any event, these were ground rules set at the inception of the hearing, to be applied to all the parties. Only the Division objected. Tr. 183-84, 267-270. First Union's counsel understood the ruling and did not object. Tr. 270. Nor did Cawley's counsel. It was only after that procedure had been put into effect for the course of the hearing, that First Union objected, on the last day of hearing, when the Division sought to confer with its agent Monaco. Tr.1570. First Union's objection was too late. At that juncture, it would have been improper to deny the Division the same right to confer with its party-witness as had already been extended to its adversary parties during the entire course of the hearing. The procedure adopted was within the discretion of the trial judge, but once adopted, was required to be applied uniformly to all parties.
Nor is there any merit to First Union's claim (First Union Br. 57), that the Supreme Court, in Perry v. Leeke, 488 U.S. 272 (1989), has found the practice of conferring with one's counsel before his examination by that counsel, but after examination by adverse counsel, to be improper. In that case, the Court affirmed that it was within the discretion of the trial judge to determine whether conferring with counsel was permissible. The Court merely held that it would not be a constitutional violation of the Sixth Amendment's right-to-counsel provision for the trial judge to deny a criminal defendant the right to confer, a ruling that was within the scope of the trial judge's discretion.
Here, in addition to the practice's being within the judge's discretion and having been accepted by First Union when first adopted, First Union could not have been harmed by Monaco's conferring with the Division's counsel. Monaco had no first-hand knowledge of any of the probative facts in the case and was called as a witness only in an attempt to bring in second-hand testimony of witnesses whom First Union was reluctant to call directly. This attempt was ruled improper and disallowed, as discussed above. There was no probative evidence solicited from Monaco on direct-, cross-, or re-direct examination, because Monaco had none to offer. Whatever coaching he may have been given by the Division's counsel had no effect on the proceeding or on my findings in this decision.
Respondents also contend that it was improper to permit the Division to call AJ, Cawley and First Union's secretary, as a rebuttal witness after the Division had rested its case-in-chief and First Union had called Monaco as Respondents' sole witness. First Union Br. 58-59; Cawley Br. 69-73. Whether the Division should have been required to call AJ in its case-in-chief, rather than in its rebuttal case, again, is a matter within the scope of a trial judge's discretion. The critical factors to consider are the anticipated nature of the testimony, i.e., whether it is expected to be rebuttal of prior testimony or new matter, and the opening party's (in this case, the Division's) right to have the final word, in the form of evidentiary offerings, on the matters already placed in issue. See, my discussion at Tr. 1582-83. Here, I exercised my discretion to allow the testimony in the Division's rebuttal case because it appeared that AJ was being called primarily to rebut testimony given by Cawley concerning her claimed lack of responsibility for certain First Union actions, a determination that was fully vindicated by AJ's testimony. She was questioned solely in rebuttal of matters testified to by Cawley. And, in allowing the Division to call Cawley as a rebuttal witness, I took pains to safeguard Respondents' rights by permitting them to offer testimony in response, if AJ's testimony were to offer surprises or go beyond matters covered in the original testimony that it purported to rebut. Tr. 1582-83.
Furthermore, Respondents have not been harmed by permitting the calling of AJ after the presentation of their sole witness, Monaco, because AJ's testimony was unrelatedto his testimony and, as discussed above, Monaco's testimony had no probative value. While it was clearly within my discretion to determine whether AJ's anticipated testimony should be characterized as testimony-in-chief or rebuttal testimony, what Respondents sought at hearing and continue to seek here goes beyond that discretion. They sought a ruling that would have prevented the Division from calling AJ because it had already rested its case-in-chief and Respondents had presented their sole witness, Monaco. But the Division had given Respondents ample notice before it rested its case that it intended to call AJ in rebuttal (Tr. 1000, 1187, 1189, 1239-40, 1469), and it was incumbent upon Respondents to object then and solicit a ruling on whether the testimony had to be presented as part of the Division's case-in-chief or could be deferred to its rebuttal case. Only in the event that the Division had received a ruling that the testimony would only be permitted as part of its case-in-chief and persisted, nonetheless, in waiting to present it in its rebuttal case would it be proper to preclude its presentation.
Finally, there is some irony in Respondents' complaints about the Division's presenting AJ so late in the hearing. Early in the hearing, Cawley claimed that the last time she had spoken to AJ was "a couple of years ago" and had "lost track" of her. Tr. 534. Then, she testified that she had spoken to her recently but had thrown her telephone number away. Tr. 953, 999. It was only after that testimony that the Division was finally supplied with her location. See, Tr. 1000.
Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.351(b), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on May 11, 1999.
Based on the findings and conclusions set forth above,
It is ordered that, First Union cease and desist from further violations of Section 15B of the Exchange Act and MSRB Rule G-17 for a period of three years from the date of entry of the Commission's final order in this proceeding.
It is ordered that, Teressa Cawley cease and desist from further violations of Section 15B of the Exchange Act and MSRB Rule G-17 for a period of three years fromthe date of entry of the Commission's final order in this proceeding. In addition, Teressa Cawley is suspended from association with any broker, dealer, or municipal securities dealer for a period of three months from the date of the final decision.
It is ordered that, pursuant to Section 21B(e) and 21C(e) of the Exchange Act that First Union shall pay disgorgement in the amounts of $92,740.31 and $21,753, plus prejudgment interest, calculated from October 18, 1993 and July 29, 1994, respectively.
It is ordered that, pursuant to Section 21B of the Exchange Act, First Union shall pay civil money penalties in the amount of $20,000.
It is ordered that, pursuant to Section 21B of the Exchange Act, Teressa Cawley shall pay civil money penalties in the amount of $15,000.
This order shall become effective in accordance with and subject to the provisions of rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the initial decision upon such party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party.
Herbert Grossman
Administrative Law Judge
1 / Two other fees paid by First Union to Book merit only brief discussion to make the record complete. Each was submitted as an "additional retainer," in the amounts of $1750 each, for the months of February and March, 1994, and paid on March 31, 1994. Exs. DX 93, 94. Together with invoices Book submitted in those same amounts for the months of April and May, 1994 (Ex. RX 7 (also DX 54)), which remained unpaid after Cawley left First Union, they were to be Book's share of fees paid lobbyists on a $13 million City of North Miami Beach deal. Tr. 142-45; Exs. DX 47, 60, 159. Sharing the lobbyist fees on that transaction with Book was the firm of JGR, which received three fees in the amounts of $2,346 each for the months of January, February and March, 1994. Exs. DX 88, 96, 97A.
Although I find those fees paid to Book to be unrelated to the Broward FA Agreement, if they were added to the $17,150 he received from the first refunding transaction, they would bring the percentage he received of First Union's fee on that transaction from 18.5%, to 22.2%, still approximately the 20% of First Union's fees informally agreed to be paid him by Cawley and First Union.
2 / There is no basis for First Union's assertion that Section 21C(a) of the Exchange Act does not include a violation of the MSRB rules as a basis for a cease-and-desist order. Section 15B(b)(1), of the Exchange Act, 15 U.S.C. § 78o-4(b)(1), provided for the establishment of the MSRB, and Section 15B(b)(2) of the Act, 15 U.S.C. § 78o-4(b)(2), required the MSRB to adopt rules to effect the purposes of the Act. Section 21 of the Exchange Act, 15 U.S.C.§ 78u-3, applies cease-and-desist orders to violations of the Act or "any rule or regulation thereunder," so as to include MSRB rule violations. Moreover, Cawley is also being ordered to cease and desist from further violations of Section 15B of the Exchange Act, of which she has also been found in violation here.
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