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SECURITIES AND EXCHANGE COMMISSION
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In the Matter of WHEAT, FIRST SECURITIES, INC. and TERESSA L. CAWLEY |
OPINION OF THE COMMISSION
BROKER-DEALER PROCEEDING
MUNICIPAL SECURITIES DEALER PROCEEDING
CEASE-AND-DESIST PROCEEDING
Grounds for Remedial Action
Violations of MSRB's Fair Dealing Rule
Effecting or Inducing Securities Transactions in Contravention of MSRB Rules
Registered broker-dealer, acting as a municipal securities dealer, and firm's assistant vice-president, a registered municipal securities principal, engaged in deceptive, dishonest, and unfair practices while serving as financial advisors to a municipality by failing to disclose fees paid to a lobbyist in connection with bond refundings. Held, it is in the public interest to suspend assistant vice-president for three months from association with any broker, dealer, or municipal securities dealer; to issue cease-and-desist orders against firm and assistant vice-president; to order firm and assistant vice-president to pay civil penalties of $20,000 and $15,000, respectively; and to order firm to pay disgorgement.
APPEARANCES:
Michael K. Wolensky and Steven H. Lang, of Kutak Rock, for Wheat, First Securities f/k/a First Union Capital Markets Corp.
Thomas Tew and Daniel S. Newman, of Tew Cardenas Rebak Kellogg Lehman DeMaria & Tague, LLP, for Teressa L. Cawley.
Christian R. Bartholomew, John C. Mattimore, and Kerry A. Zinn, for the Division of Enforcement.
Appeal filed: January 21, 2000
Briefing completed: May 9, 2000
Oral argument: April 23, 2003
Wheat, First Securities, Inc., formerly known as First Union Capital Markets Corporation ("First Union"), 1 a registered broker-dealer that conducted a municipal securities business, 2 and Teressa Cawley, a registered municipal securities principal and former First Union assistant vice-president and manager of First Union's public finance operations in Miami, Florida, appeal from anadministrative law judge's decision. 3 The Division of Enforcement appeals, seeking modification of the sanctions imposed against First Union and Cawley.
The law judge determined that First Union and Cawley engaged in unfair, dishonest, and deceptive practices while First Union served as a financial advisor to Broward County, Florida, with respect to three advance bond refundings. The law judge found, as relevant here, that First Union and Cawley deceived the County when they failed to disclose to County representatives at the closing of the first refunding, and First Union failed to disclose at the closing of the third refunding, fees paid to a consultant. The law judge found that this conduct violated Municipal Securities Rulemaking Board ("MSRB") Rule G-17 4 and Section 15B(c)(1) of the Securities Exchange Act of 1934. 5
The law judge suspended Cawley for three months from association with any broker, dealer, or municipal securities dealer. The law judge ordered Cawley and First Union to cease and desist for three years from violating the provisions that they were found to have violated. The law judge imposed civil penalties of $15,000 on Cawley and $20,000 on First Union. The law judge required First Union to disgorge its revenues on the first and third transactions, which amounted to $92,740.31 and $21,753, respectively, plus prejudgment interest. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal.
In February 1992, First Union had a public finance operation in North Carolina and Georgia, but had no presence in South Florida. In an effort to enter the Florida market, First Union hired Cawley to build a public finance business in Miami. She became the registered municipal securities principal for First Union's Miami office. 6 The office consisted of Cawley; her secretary and administrative assistant, Ann-Jeannette Jean-Baptiste; a municipal analyst, Orlando R. Cruz, Jr.; and two other employees. Cawley managed the Miami office from March 1992 until her resignation in April 1994.
In April 1993, with the approval of senior management, Cawley sought to retain outside consultants to help First Union develop a public finance business. 7 Cawley had learned, as part of her investigation of the South Florida political scene, that the use of consultants was "fairly commonplace." Cawley also had learned that without the assistance of consultants it would take First Union substantially longer to make inroads in the market. As a result, Cawley sought to retain people who would "assist First Union in getting its name out in the business, . . . in meeting people, [and in] being introduced to the right decision makers."
That same month, Cawley contacted and retained Ronald L. Book. Cawley knew that Book was a preeminent South Florida lawyer and lobbyist, and that he had access to the Broward County commissioners and other public officials.
Cawley testified at the hearing that she met with Book in April 1993 and discussed the terms of his employment with First Union, including compensation. According to Cawley, Book told her that he received fees of $25,000 for similar work. Cawley informed Book that First Union could pay him only $2,000 per month, but she hoped to raise his compensation as soon as it became feasible.
In his investigative testimony, Book said that he did not recall discussing any dollar amount with Cawley. 8 A June 22, 1994, memorandum, 9 written by municipal analyst Cruz, stated that the parties informally had agreed that Book would receive a 20% contingency fee based on the business he secured for First Union, in addition to a $2,000 monthly retainer. 10
The law judge found that Cawley's testimony both with respect to Book's compensation and in general lacked credibility. The law judge stated that "[Cawley] 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 her testimony." The law judge noted that, when confronted with her contradictory investigative testimony, Cawley repeatedly insisted that her memory had improved over time, and that she now remembered "exactly the sequence of events." We see no basis to disagree with the law judge's credibility findings. 11
In the midst of Cawley's efforts to hire consultants, Broward County issued a "Request for Letters of Interest" ("RLI"), dated April 5, 1993, seeking proposals from firms interested in serving as its financial advisor for the issuance of refunding bonds. 12 Broward County sought a financing team to review its outstanding bond issues to determine potential refunding candidates. It proposed to refund those bonds that resulted in a net present value savings of three percent of the refunded principal. The RLI requested that all proposals include the particular firm's recommended approach for the refundings. The RLI identified fourteen outstanding bond issues that the County was considering refunding.
Cawley knew that the position of a financial advisor was not as lucrative as that of the senior managing underwriter on the refundings. However, Cawley understood that, in Broward County,First Union had to become a financial advisor before the County would consider First Union for the underwriter position.
The Broward County Commission Selection/Negotiation Committee for the financial advisor position consisted of five officials, all of whom had a political connection to Book. Book admitted at the hearing that he had a "long-time friendship" with Commissioner Scott Cowan, who was Chairman of the Committee, 13 and that he had relationships with the other Committee members.
On May 6, 1993, First Union submitted its proposal, signed by Cawley, recommending for refunding several of the specified bond issues. The proposal discussed each of the recommended issues in detail and the savings to be achieved by the County in refunding the bonds. On May 12, 1993, the Committee members reviewed all proposals and identified their top five choices, which included First Union. On May 21, 1993, the Committee notified First Union that it ranked first among the presenters.
On June 3, 1993, Cawley executed a Financial Advisory Agreement (the "Agreement") on First Union's behalf. The Broward County Commission approved and executed the Agreement on June 8, 1993. As part of the Agreement, First Union warranted that it had "not employed or retained any company or person, other than a bona fide employee working solely for [First Union], to solicit or secure this Agreement, and that [it had] not paid or agreed to pay any person, company, corporation, individual, or firm, other than a bona fide employee working solely for [First Union], any fee, commission, percentage, gift, or other consideration contingent upon or resulting from the award or making of this Agreement." For breach or violation of this warranty, the County had "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."
Cawley understood that this provision required First Union to disclose to the County the identity of any person who assisted First Union in securing the Agreement so that the County could disclosethis fact to the State of Florida. Cawley believed that the provision applied to a disclosure concerning a "finder" or intermediary under Florida law. 14 Cawley testified that she believed the warranty did not apply to First Union because Book was not a finder and had not assisted First Union in securing the Agreement. Cawley testified further that her belief was based, in part, on a May 1, 1993, opinion letter from outside counsel. 15
Book contradicted Cawley's assertions that he did not assist First Union in obtaining the Agreement. Book testified that he gave First Union and Cawley "very good direction at how to respond to the RLI." Book further testified that "[he] guided [First Union] in how to respond in pursuit of that business," and that this was "what [he] did to help First Union get the business." Cawley's supervisor testified, consistently with Book, that he understood from Cawley that Book assisted First Union in its efforts to obtain the Agreement with Broward County.
First Union acted as a financial advisor to the County on three bond refunding transactions:
$134,895,000 Water and Sewer Utility Revenue Refunding Bonds, Series 1993, which closed on September 2, 1993;
$92,440,000 General Obligation Refunding Bonds, Series 1993, which closed on October 5, 1993; and
$36,255,000 Tourist Development Tax Special Revenue.
Refunding Bonds, Series 1994, which closed on June 30, 1994.
First Union had recommended in its proposal the refunding of each of these bond issues. First Union received a total of $175,654 in fees for its services.
On June 3, 1993, the same day that Cawley, acting on behalf of First Union, executed the Agreement, Book filed with the County a Lobbyist Registration Statement. The Statement indicated that Book was registering to lobby on "general matters[,] including municipal bond finance." Although he did not disclose his employer's name, as requested in the Statement, Book admitted at the hearing that he had registered to lobby for First Union in Broward County.
First Union sent the consulting agreement to Book under cover letter dated June 22, 1993. Book admitted that he received it on or about that date, and then executed and returned the agreement to First Union. The agreement was dated May 1, 1993, the purported starting date of his employment. Book agreed to provide, among other things, "advice and counsel on matters relating to various municipal bond offerings." At the hearing, however, Book was unable to recall specific matters that he had performed for First Union. First Union agreed to pay Book $1,000 for May 1993 and $2,000 for each month thereafter, 16 although it could increase his compensation if he spent more time on First Union matters. The agreement provided for a six-month term, unless renewed by the parties, and in fact lasted about one year.
Cawley testified that she first discussed hiring Book with her superiors in a conference call in late April 1993. Cawley admitted at the hearing, however, that her 1993 calendar did not contain any notation about the April conference call. None of her superiors could recall a conference call having taken place.
Cawley also obtained from outside counsel an opinion letter, dated May 1, 1993, on the legality of underwriters hiring consultants, and a form agreement to execute with proposedconsultants. 17 Cawley testified that she modified the form contract, executed the contract as modified, and forwarded the contract to her supervisor, who approved it on or about May 1, 1993. Cawley claimed that Book executed the contract during the second or third week of May 1993, before he began performing services for First Union.
Cawley's testimony, however, is controverted by evidence demonstrating that the opinion letter and Book's formal consulting agreement were drafted and executed in June 1993, after First Union had obtained the financial advisor position with Broward County. The date of the opinion letter, May 1, 1993, fell on a Saturday. Outside counsel testified that he ordinarily did not work on Saturdays and did not recall writing the opinion letter on a Saturday. Moreover, outside counsel's time sheets reflect that he billed two hours to First Union on June 7, 1993, for researching and evaluating "finders issues," and another hour on June 14, 1993, for preparing the written opinion letter and standard agreement. 18 Cawley's 1993 calendar confirms that she placed a call to outside counsel on June 7, 1993, the date of the first billing entry, and another on June 15, 1993, the day after the second billing entry.
For May through September 1993, First Union paid Book $9,050. On October 15, 1993, Cawley amended the Book agreement and increased Book's compensation to $7,700 per month for October through December 1993. On October 18, 1993, the County paid First Union $92,740.31 relating to the first refunding. In December 1993, First Union paid Book $23,150 for the period October through December 1993.
On November 9, 1993, the County paid First Union $61,160.69 on the second refunding transaction. Book testified that he knew of only two "deals" between First Union and the County, referring to the first and third transactions. There is no evidence that Book was paid in connection with the second bond refunding.
On January 6, 1994, Cawley extended Book's agreement from January to March 1994, at a reduced rate of $2,000 pr month. Shortly after that, she raised Book's monthly retainer to $3,750 for February and March 1994. 19 On April 19, 1994, Cawley resigned from her position at First Union.
The following chart summarizes First Union's payments to Book from May 1993 through March 1994:
| Relevant Dates | Books' Invoices | First Union's Payments | |
| May 1993 | $1,000 | ||
| June-September 1993 at $2,000 per month | $8,000 | ||
| $9,050* | |||
| October 1993 | $7,700 | ||
| November 1993 | $7,750 | ||
| December 1993 | $7,700 | ||
| $23,150 | |||
| January 1994 | $2,000 | ||
| February 1994 | $3,750 | ||
| March 1994 | $3,750 | ||
| $9,500 | |||
| Total: | $41,700 | ||
| * Includes reimbursement of Book's costs. | |||
Cruz replaced Cawley and became responsible for the Broward County relationship. Cruz participated in finalizing the third refunding. On June 20, 1994, Cruz received a telephone call from Book, who stated that he "wanted to get paid for Broward." Cruz asked Book, "[W]hich deal?." Book replied, "the last deal," referring to the third transaction. Cruz asked Book about his fee arrangement with First Union. According to Cruz, Book told him that it was "[$]2,000 plus the 20 percent" of First Union's profits on the transaction. Cruz told Book he would look into the matter and contact him. Book testified that he did not recall this conversation with Cruz, but he would not deny that it took place.
After this conversation, Cruz called Cawley, who confirmed the 20% plus $2,000 arrangement. 20 Cruz also contacted his superior and told him that Cawley had confirmed Book's payment arrangement. Cruz was asked to investigate the matter and write a memorandum.
On June 22, 1994, Cruz wrote his superior a memorandum stating, in pertinent part:
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 $2,000 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 $2,000 (his monthly retainer). I believe that this was a good faith agreement and not a written agreement.
Cruz testified that he tried to be as accurate as possible in writing this memorandum. Cruz stated that "[t]here was no doubt in [his] mind" that everything he wrote was true. Cruz believed that Book was "influential" in First Union's receipt of the financial advisor position because "prior to Mr. Book [First Union] had no bond business in Broward County and after[wards] [it] did."
On or about June 30, 1994, Cruz received an invoice from Book for $4,350 for services "related to Broward financing and other matters." On July 29, 1994, the County paid First Union $21,753 on the third refunding transaction.
On August 9, 1994, with secretary Jean-Baptiste's assistance, Cruz prepared a second memorandum concerning First Union's arrangement with Book. The memorandum stated that Book's "invoices have never been paid through our legal department. Apparently, [Book] was never retained as legal counsel." 21 It stated further that "[First Union's] contractual relationship [with Book] establishes him as a consultant and lobbyist, an expertise for which he is well-known in South Florida." The memorandum recited the terms of the agreement and its amendments. It indicated that the increase in Book's compensation to $7,700 per month for October through December 1993 was "directly related to work with BrowardCounty." The memorandum stated that "Mr. Book's efforts were a great force behind [First Union's] award" of the Agreement. 22
On October 3, 1994, First Union paid Book's $4,350 invoice. 23
As part of the closing documents for each of the refundings, the County's bond counsel was required to file bond disclosure forms, known as "BF Forms," with the Florida Division of Bond Finance. Item 11 of the BF Forms required a listing of "[a]ny 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." 24 For the first two refundings, Item 11 of the BF Forms stated "[n]one." For the third refunding, two firms engaged by the underwriter were listed, but Book was not.
The County's bond counsel for the first two refundings stated that the standard procedure, followed in these transactions, was to send the completed BF Forms and other closing documents to all of the participants in the transaction for their corrections two weeks before the closing of a transaction. 25 The parties were given theopportunity to review the documents at the pre-closing, typically the day before the closing, and then again at the closing of the bond issue. Any party could request a change to a document at any time.
Cawley testified that she was familiar with the BF Forms. She saw the BF Form filed with the first refunding. Cawley was unsure whether she had seen the BF Form filed with the second refunding. Her 1993 calendar indicates that she attended the pre-closings and closings for the first two refundings.
Cawley took Item 11 at "face value" and understood it to mean, "Did the financial consultant pay anybody that doesn't work for them in connection with the deal[?]." Cawley asserted that she did not inform the County that Book should be named under Item 11 of the BF Forms for the first and second refundings because he had done nothing on those transactions.
Cruz and his supervisor represented First Union at the closing of the third refunding. Neither one notified County representatives that Book was involved in that transaction or that Book had made a recent request for payment. Cawley, who was no longer employed by First Union, represented the underwriter on the third refunding. Her 1994 calendar indicates that she attended the pre-closing and closing of that transaction.
MSRB Rule G-17 requires that a municipal securities dealer deal fairly with all persons, and prohibits deceptive, dishonest, and unfair practices. The MSRB has stated that the Rule imposes an obligation to disclose material information. Under this Rule, First Union, acting as a financial advisor, had a fiduciary duty to disclose all material facts concerning the refundings to Broward County, which was acting on behalf of its residents and taxpayers.26 This obligation included the information explicitly required by the Agreement and closing documents.
The materiality of the information is a prerequisite for liability under Rule G-17. 27 None of the parties disputes that First Union's payment arrangement with Book constituted material information to municipal market participants. The payments were material to the County's decision to select First Union as a financial advisor. The selection of a financial advisor was directly related to the County's sale, and the public's purchase, of the County's securities. Thus, the MSRB has stated that Rule G-17 requires, in connection with the purchase or sale of a municipal security, that a dealer must disclose, at or before the time the transaction occurs, all material facts concerning the transaction and not omit any material facts which would render other statements misleading. 28 First Union, through Cawley, breached its duty whenit failed to disclose to the County its payment arrangement with Book, who was not a First Union employee.
First Union's and Cawley's failure to disclose Book's fees was particularly egregious after they had misled the County as to Book's involvement when they entered into the Agreement. At the time that the Agreement was executed, First Union and Cawley knew that Book was not a bona fide employee working solely for First Union, that Book had been hired to assist them in obtaining the Agreement, and that they had promised to compensate him for his efforts. Notwithstanding this knowledge, First Union and Cawley falsely warranted to the County that they had not hired or paid any person other than a regular First Union employee to solicit the Agreement.
First Union's execution of the formal consulting agreement with Book in late June 1993 further evidenced First Union's and Cawley's concern that their arrangement with Book violated the Agreement's warranty provision. The consulting agreement recited that Book agreed to "employment" by First Union, and "[t]he Firm [Ronald Book, P.A.]" was "employed by First Union on a regular and ongoing part-time basis." The agreement also purported to pay Book a fixed amount that could be adjusted. First Union's and Cawley's concealment from the County of their intended contingent payments to Book was a continuation of their efforts to hide Book's involvement from the County. We conclude that First Union and Cawley, in her capacity as an associated person of First Union, willfully violated MSRB Rule G-17 in connection with the first bond refunding. 29 Because their conduct contravened an MSRB Rule, we also conclude that First Union willfully violated, and Cawley willfully aided,abetted, and caused 30 First Union's violations of, Exchange Act Section 15B(c)(1).
The law judge determined that First Union and Cawley did not deceive Broward County in connection with the second refunding because they did not pay Book for that transaction, and thus they did not violate MSRB Rule G-17 and Exchange Act Section 15B(c)(1). The Division has not contested these findings on appeal. As a result, we express no view as to the propriety of the law judge's determination that there was no violation with respect to the second bond transaction.
With respect to the third refunding, First Union again deceived the County by failing to inform the County that First Union intended to pay Book a fee in connection with that refunding. Cruz, who represented First Union at the closing, knew that Book was to be paid for that transaction. First Union willfully violated MSRB Rule G-17 and Exchange Act Section 15B(c)(1). 31
First Union and Cawley raise a number of arguments against applying MSRB Rule G-17 and Exchange Act Section 15B(c)(1) to their conduct.
1. First Union and Cawley argue that they were not "acting as" a municipal securities dealer, but "only" as a financial advisor. They assert that MSRB G-17, which applies to the "conduct of [a] municipal securities business," is not applicable to their conduct. However, Rule G-17 does not limit its coverage to those "acting as" municipal securities dealers. Rather, Rule G-17 requires only that the entity be a "municipal securities dealer" or an associated person of the dealer and that the complained-of actions arise "[i]n the conduct of its municipal securities business." 32
The MSRB has expressly stated that the provision of financial advisory services falls within the scope of a municipal securities business. 33 Consistent with this statement, other MSRB rules refer to financial advisory services as being part of a municipal securities business. MSRB Rule G-1(b)(2), for example, defines a bank's municipal securities dealer activities to include "financial advisory and consultant services for issuers in connection with the issuance of municipal securities." 34 MSRB Rule G-3(b)(i)(B) employs the same language to describe a municipal securities principal's activities. 35 First Union's position, moreover, is contradicted by its compliance manual, which classifies the bank's activities in rendering financial advice as "acting as a municipalsecurities broker-dealer." We conclude that the law judge correctly determined that MSRB Rule G-17 applied to First Union and Cawley.
2. First Union and Cawley argue that it violates due process to apply Rule G-17 to their conduct. Respondents assert that Rule G-17 has not been used before to regulate the financial advisor-issuer relationship, and they did not have adequate notice that their conduct contravened Rule G-17. 36 Due process requires only that the laws be sufficiently specific to "give the person of ordinary intelligence a reasonable opportunity to know what is prohibited." 37 We believe that a reasonably prudent municipal securities dealer would have had fair notice that it is a deceptive, dishonest, and unfair practice for a dealer acting as a financial advisor to fail to inform its client that the advisor retained and paid a lobbyist, particularly when such information was not disclosed at the time of the Agreement and was asked for at the closing of these transactions.
3. First Union and Cawley argue that it violates due process to apply Rule G-17 to their conduct, because the order instituting proceedings ("OIP") did not charge them with breach of their disclosure obligations under federal law. Administra-tive due process is satisfied where the party against whom the proceeding is brought understands the issues and is given an opportunity to meet the charges. 38 Administrative pleadings are "very liberally" construed, and courts grant agencies considerable latitude in interpreting charging documents. 39 The question on review is not solely the adequacy of the particular pleading, but the fairness of the entire proceeding. 40
Here, the OIP described the false warranty and alleged that First Union and Cawley omitted to disclose to the County the contingency fee paid to Book although the Florida statutes required First Union to file a statement disclosing such a fee. The OIP continued that, as a result of the affirmative misrepresentations and omissions made, First Union was able to serve as financial advisor to the County on the three bond refundings. The OIP further described the misconduct at issue as violations of Rule G-17 by not dealing fairly with all persons and by engaging in deceptive, dishonest, or unfair practices. First Union and Cawley addressed Rule G-17 both in their briefs before the law judge and on appeal. In these circumstances, we find that First Union and Cawley had sufficient notice of the allegations against them.
4. First Union and Cawley argue that it is both unfair and unduly burdensome to competition that MSRB Rule G-17 applies to financial advisors only if they are registered brokers, dealers, or municipal securities dealers, but not to financial advisors who are not so registered. However, Congress made the decision to regulate municipal securities dealers and their associated persons. The MSRB determined that its rules and regulations needed to apply to the full scope of municipal securities activities of these regulated persons. Subjecting municipal securities dealers' advisory activities to Rule G-17's prohibition of deceptive, dishonest, or unfair practices odes not impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.
5. First Union and Cawley assert that scienter is necessary to establish a Rule G-17 violation, and that the Division failed to show that they acted with an intent to deceive, manipulate, or defraud. Rule G-17 imposes on brokers, dealers, and municipal securities dealers an obligation to deal fairly and not engage in any deceptive, dishonest, or unfair practice. 41 We believe that Rule G-17 requires a showing of at least negligence to establish an unfair practice violation. 42 Even if scienter were required, thatelement is demonstrated by First Union's and Cawley's intentional misconduct in executing the false warranty and in concealing from the County material information to be disclosed with respect to the refundings.
6. First Union and Cawley argue that MSRB Rule G-23, which regulates certain activities of financial advisors, preempts Rule G-17 and establishes the only disclosure duties for financial advisors. Our order approving the adoption of Rule G-17 described it as an "omnibus fair practice rule" meant to "establish the general standard for conduct of a municipal securities business." 43 We stated that "[t]he other proposed fair practice rules would provide . . . an elaboration upon this general standard, by establishing guidelines for particular subject matters." 44
We have made it clear that MSRB Rule G-23 was not intended to preempt Rule G-17. Rule G-23 concerns one aspect of the financial advisor-issuer relationship. 45 Rule G-23 addresses primarily the conflict of interest that arises when a municipal securities dealer serves in the dual capacity of financial advisor and underwriter with respect to the same issue of municipal securities. 46 Rule G-23 prohibits a financial advisor from acting as an underwriter in an issue unless the advisor complies with certain provisions. 47 In this case, the Agreement expressly prohibited First Union in its capacity as the County's financial advisor from also serving as an underwriter on the refunding transactions. Rule G-23 is not applicable here.
1. First Union and Cawley argue that their conduct leading to the award of the financial advisor position was outside the statuteof limitations period, 48 and could not be considered in deciding, for example, whether they "effected" or "induced or attempted to induce" the bond refundings under Exchange Act Section 15B(c)(1). 49 The statute of limitations, even if applicable, does not operate as an evidentiary bar. We may consider conduct occurring outside the limitations period in evaluating Respondents' activities within the statutory period. 50
Cawley arranged to hire Book, who was not a regular, full-time First Union employee, to secure the Agreement and promised to pay him a contingent fee for his efforts. Once the Agreement wasobtained, First Union and Cawley continued to advise the County and participate in the refunding transactions while failing to disclose that Book had been hired to obtain the County's business and was going to receive compensation from First Union based on the transactions done under the Agreement. First Union and Cawley knew that First Union would not be paid for its services until after each of the transactions had closed. Their material omissions thus "effect[ed]," or "induce[d] or attempt[ed] to induce," the bond refundings in violation of Rule G-17. 51
2. First Union and Cawley argue alternatively that Exchange Act Section 15B(c)(1) does not apply because they did not "induce" the refundings. Citing Cawley's hearing testimony, they contend that Broward County had already identified the bonds that it intended to refund when the RLI was issued. They add that the County sought proposals only to decide which of the firms were capable of performing the financial analysis.
The record demonstrates that First Union played a substantial role in inducing the refundings. The County had identified fifteen bond issues as potential candidates for refunding. First Union's May 6, 1993, proposal identified a subset of these bond issues that it recommended for refunding. The County agreed with First Union's proposal and refunded the issues that First Union had recommended.
Moreover, the Agreement expressly stated that First Union would not be paid until each series of bonds was delivered. As a result, First Union and Cawley had a strong incentive to ensure that each refunding was consummated. The success of their efforts was shown by First Union's receipt of $175,654 in fees from the County.
First Union and Cawley raise various evidentiary and procedural objections, none of which has any merit.
A. First Union and Cawley object on hearsay grounds to the admission of the following evidence: (1) Cruz's testimony and memoranda reflecting Book's statement to Cruz concerning his contingency fee arrangement with First Union; (2) Cawley's statement to Cruz confirming this arrangement; and (3) Cruz's memoranda reciting the arrangement with Book. They argue that Cruz's testimony and memoranda were based on speculation and not on personal knowledge.
We have stated repeatedly that hearsay evidence is admissible in administrative proceedings. 52 Under the Commission's Rules of Practice, only irrelevant, immaterial, or unduly repetitious evidence must be excluded. 53 The record shows the probative and reliable nature of this evidence. 54 Book's statement to Cruz concerning his fee arrangement with First Union was confirmed by Cawley's admission to Cruz and by First Union's payment of Book's invoice on the third transaction. Cruz testified that he made every effort to be accurate in his memoranda. 55
B. First Union and Cawley challenge the exclusion of statements made by Broward County officials to the Division's investigator that the officials were not influenced by Book in awarding the financial advisor position to First Union. As an initial matter, these statements were not relevant since they had no bearing on the issue of whether First Union hired and paid Book. 56 In addition, as the law judge noted, the officials' statements were unreliable. They were not written, signed, or made under oath. There was no showing that any of the officials was unavailable to testify at the hearing. The commissioners who reviewed and voted on First Union's proposal were well-known to respondents and subject to subpoena. The respondents were given the option of calling these officials, but elected not to do so.
C. First Union and Cawley complain about the manner in which the law judge conducted the hearing. At a pre-hearing conference and at the inception of the hearing, the law judge stated that he would permit counsel to confer with their own witnesses following their examination by opposing counsel. Neither First Union nor Cawley objected to the practice until the last day of the hearing when the Division first attempted to invoke the procedure and confer with its investigator after he had been examined by First Union. The law judge denied First Union's objection. We believe that the law judge has wide latitude in regulating the conduct of the proceedings. The law judge did not abuse his discretion. 57
The law judge also acted within his discretion in allowing the Division to call Cawley's secretary, Jean-Baptiste, to rebut Cawley's testimony. The law judge sought to safeguard First Union's and Cawley's rights by giving them the opportunity to offer testimony in response. They declined to present such testimony.
D. First Union contends that before issuing his decision the law judge engaged in improper ex parte contacts when his law clerk called the Florida Division of Bond Finance and asked questions about the Florida administrative regulation. The Administrative Procedure Act, 5 U.S.C. § 557(d), prohibits ex parte communications relevant to the merits of a proceeding between an "interested person" and an agency decisionmaker. 58 By its terms, § 557(d) applies only to ex parte communications to or from an "interested person." 59 Our own ex parte rules likewise prohibit communications with "interested person[s] outside the agency." 60 First Union has not demonstrated that the Florida Division of Bond Finance employees were "interested persons" with respect to this proceeding. In any event, we have not relied on an analysis of the Florida regulation.
E. First Union and Cawley assert that the law judge admitted into evidence, and made findings concerning, alleged wrongdoing that was not set forth in the Division's order instituting proceedings. They complain that the law judge considered evidence of First Union's arrangement with Book on a North Miami Beach, Florida,transaction that was not the subject of any charge. They also complain that the law judge improperly permitted the Division to introduce evidence of First Union's retention of two other consultants. We have not considered this evidence in our de novo review of this case. 61
F. First Union and Cawley also find error in the law judge's ruling that the Florida administrative regulation was a "nullity," and in his "unsubstantiated statements" concerning Broward County government. We do not express a view on the merits of either one of these matters. Nor have we considered them in our resolution of this appeal. The law judge's initial decision is not a final decision. 62
First Union's and Cawley's failure to disclose to the County their payment arrangement with Book occurred within the five-year limitations period contained in 28 U.S.C. § 2462. 63 The statute of limitations does not bar the enforcement of penalties against First Union and Cawley based on that misconduct.
The Division asserts that the law judge erred when he found the County was not entitled to restitution because it would have had to retain another advisor, so an assessment of disgorgement necessarily constituted a penalty. However, disgorgement isdesigned to deprive a wrongdoer of its ill-gotten gains. 64 Courts have awarded disgorgement without proof of particular damage to any victim. 65 We now turn to the issue of what sanctions are appropriate for First Union's and Cawley's misconduct.
Exchange Act Sections 15(b)(6) and 15B(c)(4) authorize the Commission to censure, place limitations on, suspend, or bar a person associated with a broker, dealer, or municipal securities dealer when such sanction is in the public interest and the person has, among other things, willfully violated, or aided and abetted a violation of, the federal securities laws, the regulations promulgated under those laws, or MSRB rules. 66 In determining whether a suspension is in the public interest, we consider the egregiousness of a respondent's conduct, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongfulness of her conduct, and the likelihood that the respondent's occupation will present opportunities for future violations. 67
Cawley, while representing First Union's interests, engaged in deceptive, dishonest, and unfair conduct, thereby violating MSRBRule G-17 and aiding and abetting First Union's violations of Exchange Act Section 15B(c)(1), when she failed to disclose material information to the County in connection with the first bond closing. The law judge remarked on her lack of candor at the hearing. Cawley has not made any assurances against future violations. Nor has she acknowledged the wrongful nature of her conduct. We agree with the law judge that Cawley's continued activities in the municipal securities business call for external restraint. 68 We conclude that Cawley should be suspended for three months from association with a broker, dealer, or municipal securities dealer.
Exchange Act Section 21C(a) authorizes the Commission to impose a cease-and-desist order on any person who has violated or has caused violations of the federal securities laws. 69 In deciding whether to impose a cease-and-desist order, we consider such factors as "the seriousness of the violation, the isolated or recurrent nature of the violation, the respondent's state of mind, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his or her conduct, and the respondent's opportunity to commit future violations. We also consider whether the violation is recent, the degree of harm to investors or the market resulting from the violation, and the remedial function to be served by the cease-and-desist order in the context of any other sanctions being sought in the same proceedings." 70 Before imposing a cease-and-desist order, there must be some likelihood of future violations; however, the risk does not need to be very great. 71 "[I]n the ordinary case and absent evidence to the contrary, a finding of [a] past violation raises a sufficient risk of future violation." 72
As concluded above, Cawley caused First Union's violation of Exchange Act Section 15B(c)(1) when they engaged for roughly one year in a course of conduct that operated as a deceit. Their conduct misled the County about material information concerning First Union's retention of a lobbyist to secure the County's business. Neither First Union nor Cawley has made assurances against future violations. Both continue to work in the municipal securities business. We conclude that cease-and-desist orders are warranted against them for their violations of Exchange Act Section 15B(c)(1). 73
The law judge determined that cease-and-desist orders of a limited duration are a sufficient deterrence. The remedy of a cease-and-desist order "requires that a wrongdoer cease his unlawful conduct and desist from such conduct in the future." 74 Consistent with this remedial purpose, our practice has been to impose cease-and-desist orders of unlimited duration.
First Union and Cawley contend that Exchange Act Section 21C does not preclude the entry of a cease-and-desist order of limited duration. Section 21C grants us the authority to craft cease-and-desist orders that assure future compliance with the securities laws. 75 We believe that a cease-and-desist order requiring continued compliance with the requirements of the securities laws achieves this purpose.
First Union and Cawley contend, based on Exchange Act Section 21C's legislative history, 76 that Congress intended our cease-and-desist authority to be similar to that available to other agencies,most notably the bank regulatory agencies. 77 They argue that, because those agencies have placed time limits on cease-and-desist orders, Congress intended for the Commission to do the same. We have stated that the practices of these agencies "do not provide clear guidance," and that their experiences present "an uncertain guide." 78 We observed that the bank regulatory agencies' cease-and-desist authority is "somewhat different from ours. [A banking order] is intended to reverse business practices that may endanger a bank's soundness, whereas ours is intended to prevent resumption of unlawful actions." 79 Accordingly, we do not believe that we are required to limit the duration of cease-and-desist orders under Exchange Act Section 21C.
We see no reason why the order's obligation to obey the securities laws should end in three years. Because we find that a cease-and-desist order is necessary in the public interest, we will order that First Union and Cawley cease and desist from committing or causing any violations or future violations of Exchange Act Section 15B(c)(1), including failing to deal fairly with all persons and engaging in any deceptive, dishonest, or unfair practice under MSRB Rule G-17.
Exchange Act Section 21B authorizes the Commission to impose civil penalties for willful violations of the Exchange Act or the rules thereunder when such penalty is in the public interest. 80 The law judge decided that First Union's and Cawley's violations warranted second-tier penalties. The Division has not appealed the amount of the second-tier penalties imposed. In view of our findings that First Union and Cawley engaged in deceptive conduct and recklessly disregarded regulatory requirements, we impose a second-tier penalty of $20,000 on First Union and $15,000 on Cawley. 81
Exchange Act Section 21C(e) authorizes disgorgement in this proceeding. 82 Disgorgement requires a securities law violator to return proceeds causally related to the wrongdoing. 83 The Division has the initial burden of showing that its disgorgement figure reasonably approximates the amount of unjust enrichment. 84 Once the Division makes this showing, the burden then shifts to the respondent to demonstrate that the disgorgement figure is not a reasonable approximation. 85
The Division established that First Union received $92,740.31 and $21,753 in fees for the first and third refunding transactions, respectively. The Division also established that these payments were causally connected to First Union's wrongdoing. The Division's showing presumptively satisfied its burden of proof. First Union failed to show that the Division's disgorgement figure was an unreasonable approximation of the amount of its ill-gotten gains. First Union did not substantiate or even calculate any reduction to its revenues to arrive at a more realistic figure. 86 Accordingly, we will order First Union to disgorge $114,493.31, representing its revenues
from the first and third refunding transactions, plus prejudgment interest. 87
An appropriate order will issue. 88
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, ATKINS and CAMPOS).
Jonathan G. Katz
Secretary
In the Matter of WHEAT, FIRST SECURITIES, INC. and TERESSA L. CAWLEY |
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that Teressa L. Cawley be, and she hereby is, suspended for three months from association with any broker, dealer, or municipal securities dealer, effective at the opening of business on August 29, 2003; and it is further
ORDERED that Teressa L. Cawley and Wheat, First Securities,
Inc., f/k/a First Union Capital Markets Corporation, cease and desist from committing or causing any violations or future violations of Section 15B(c)(1) of the Securities Exchange Act of 1934, including failing to deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice under Rule G-17 of the Municipal Securities Rulemaking Board; and it is further
ORDERED that Teressa L. Cawley pay a civil money penalty of $15,000, and that Wheat, First Securities, Inc., f/k/a First Union Capital Markets Corporation, pay a civil money penalty of $20,000; and it is further
ORDERED that Wheat, First Securities, Inc., f/k/a First Union Capital Markets Corporation, disgorge $114,493.31, plus prejudgment interest, calculated in accordance with the Commission's Rule of Practice 600(b); and it is further
ORDERED that the Division of Enforcement submit to the Commission a proposed disgorgement plan in accordance with Rule ofPractice 610 within 60 days of payment of the amount of disgorgement.
Payment of the civil penalty shall be made within 21 days of the issuance of this order. The civil penalty shall be (a) made by United States postal money order, certified check, bank casher's check, or bank money order; (b) made payable to the Securities and Exchange Commission; (c) mailed or delivered by hand to the Comptroller, 6432 General Green Way, Alexandria, VA 22312; and (d) submitted under cover letter that identifies the particular respondent in these proceedings, as well as the Commission's administrative proceeding file number. A copy of this cover letter and money order or check shall be sent to Teresa J. Verges, Southeast Regional Office, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | First Union, based in Charlotte, North Carolina, was a principal subsidiary of First Union Corporation, a bank holding company. In January 1998, First Union Corporation acquired Wheat, First Securities, Inc. and merged First Union Capital Markets Corporation with Wheat, First Securities, Inc. In September 2001, First Union Corporation merged with Wachovia Corporation. The new Wachovia Corporation provides retail brokerage services under different names, including First Union Securities, Inc., the successor to Wheat First Securities, Inc. In May 2002, Wachovia Corporation's retail brokerage arm became Wachovia Securities. |
| 2 | Under Section 15B(a)(1) of the Securities Exchange Act of 1934, a broker or dealer may not engage in interstate trade in municipal securities unless the broker or dealer registers under that Section or under Exchange Act Section 15, 15 U.S.C. § 78o. See 15 U.S.C. § 78o-4(a)(1) (prohibiting "any municipal securities dealer (other than one registered as a broker or dealer under section 15 of this title) to make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security unless such municipal securities dealer is registered in accordance with this subsection."). |
| 3 | On August 27, 1998, the Commission brought this proceeding against First Union under Sections 15(b), 15B(c), 19(h), and 21C of the Securities Exchange Act of 1934. On December 23, 1998, the Commission charged Cawley under the same provisions. On January 25, 1999, the First Union and Cawley actions were consolidated. |
| 4 | The applicable version of MSRB Rule G-17 provided that, "[i]n the conduct of its municipal securities business, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice." See MSRB Manual (CCH)
¶ 3581 at 4871. In June 2000, the MSRB amended Rule G-17 by replacing the term "municipal securities business" with the term "municipal securities activities." The MSRB stated that the amendment effected only a technical change to the Rule. Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Municipal Securities Rulemaking Board Consisting of Technical Amendments to Rules A-3, G-15, G-17 and G-18, Exchange Act Rel. No. 42830 (May 25, 2000), 72 SEC Docket 1428, 1429. |
| 5 | Exchange Act Section 15B(c)(1) prohibits a broker, dealer, or municipal securities dealer from "effect[ing] any transaction in," or "induc[ing] or attempt[ing] to induce the purchase or sale of," a municipal security in contravention of any MSRB rule. 15 U.S.C. § 78o-4(c)(1). |
| 6 | See MSRB Rule G-3(b) (qualification requirements of municipal securities principals), MSRB Manual (CCH) ¶ 3511 at 3271-3. |
| 7 | Cawley's superiors testified that they understood from the outset that consultants were hired to assist First Union in obtaining business. They further testified that they did not think it was a problem for consultants to be paid based on the business that they generated. |
| 8 | At the hearing, Book contradicted his investigative testimony and stated that he "had a standard range of fees." Book elaborated that he "would have had a number, probably in the $25,000 to $50,000 a year range, to have [his] services available." After observing Book's demeanor at the hearing, the law judge found Book's investigative testimony to be more reliable than his hearing testimony. See Michael J. Fee, 50 S.E.C. 1124, 1125 (1992) (upholding administrative law judge's refusal to credit respondent's hearing testimony when it contradicted earlier, sworn investigative testimony), aff'd, 998 F.2d 1002 (3d Cir. 1993) (Table). The law judge observed that Book, who admitted to being Cawley's close personal friend and professional associate, sought to testify in Cawley's favor, but that his "almost total lack of recall" about the specifics of his payment arrangement with First Union and his lack of memory on other matters were "telling." |
| 9 | See discussion infra Section II.I. |
| 10 | The record is unclear whether the 20% arrangement was to be based on First Union's fees, as the law judge found, or on its "profits," as stated in Cruz's June 1994 memorandum. If the arrangement were to be based on "profits," the record is also unclear as to how those "profits" were to be calculated. However, the record supports the finding that the parties informally arranged for Book to receive payments in addition to his monthly retainer as compensation for securing BrowardCounty business. |
| 11 | Credibility determinations by the fact-finder are entitled to considerable weight, and can be overcome only when there is "substantial evidence" for doing so. See Anthony Tricarico, 51 S.E.C. 457, 460 (1993). The record in this case contains no such evidence. |
| 12 | In a typical advance refunding, the municipality issues a new offering of tax-exempt bonds to fund retirement of a pre-existing issue of bonds bearing higher interest rates. SEC v. Rauscher Pierce Refsnes, Inc., 17 F. Supp. 2d 985, 991 n.8 (D. Ariz. 1998). The proceeds of the new bond offering are invested in U.S. Treasury securities and used to pay off the old bonds as they mature. Id. |
| 13 | Cawley admitted at the hearing that she knew in April 1993 that Commissioner Cowan was the Chairman of Broward County's Selection/Negotiation Committee. Cawley denied knowing at the time that she hired Book that he was Commissioner Cowan's close friend. Cawley admitted, however, that she did learn "at some point" of their relationship. |
| 14 | See Fla. Stat. ch. 218.386(1)(a) (defining "finder" to mean "a person who is not regularly employed by, or not a partner or officer of, an underwriter, bank, banker, or financial consultant or adviser and who enters into an understanding with either the issuer or the managing underwriter, or both, for any paid or promised compensation or valuable consideration directly or indirectly, expressly or impliedly, to act solely as an intermediary between such issuer and managing underwriter for the purpose of influencing any transaction in the purchase of such bonds"). |
| 15 | See discussion infra Section II.G. |
| 16 | Cawley testified that First Union paid Book only $1,000 for May 1993 because he did not begin performing services until the middle of the month. However, Book did not recall receiving half-month payments. |
| 17 | The one-page opinion letter recited that First Union sought advice concerning "agreements between various parties and [First Union] for the primary purpose of providing services to First Union, relating to the purchase of municipal bonds and other certificates of indebtedness ("Bonds") from various governmental issuers ("Issuer")."
It is undisputed that outside counsel was unaware of, and gave Cawley no advice regarding, the Agreement or its warranty provision. Outside counsel had no knowledge of First Union's retention of Book. |
| 18 | On cross-examination by Cawley's counsel, outside counsel testified that he believed the date on the opinion letter was more accurate than the dates entered on his time sheets because he was a late-biller, and because he would not have back-dated the letter. On re-direct examination, however, outside counsel could not explain why, if he had done the work on or about May 1, 1993, he would have made two separate billing entries in June 1993. Outside counsel acknowledged that someone else could have backdated the letter. |
| 19 | The law judge found that some of these fees were for work unrelated to Book's efforts in Broward County. |
| 20 | Cawley admitted that Cruz called and asked her if First Union owed Book money, but claimed that he did not mention Broward County. Cawley also admitted that she spoke to Book the next day, but she denied discussing Cruz's call. |
| 21 | At the hearing, a First Union Corporation vice president and assistant general counsel confirmed that payments to Book were made through a First Union "business development" account. |
| 22 | Cruz testified that, because he did not sign this memorandum, he was unsure whether it had been sent to his superior. |
| 23 | In a letter to Commission staff during its investigation of this case, the same First Union Corporation vice president and assistant general counsel who testified before the law judge admitted that Book assisted First Union in obtaining its award of the Agreement. She also admitted that First Union paid Book's $4,350 invoice based on his representation that he was to receive a percentage of First Union's profits on the third refunding. |
| 24 | This language was identical to that contained in Fla. Stat. ch. 218.38(1)(c)1 (requiring municipality to file with the Florida Division of Bond Finance on forms prescribed by the Division information regarding "[a]ny fee, bonus, or gratuity paid by any underwriter or financial consultant, in connection with the bond issue, to any person not regularly employed or engaged by such underwriter or consultant") ("the Florida reporting statute"). |
| 25 | Bond counsel further testified that, in completing the BFForms, he did not rely on any rules promulgated by the Florida Division of Bond Finance. Rather, he was guided by the plain language of the BF Forms. Bond counsel was unaware of any relationship between First Union and Book. |
| 26 | See, e.g., Order Approving Proposed Rule Change of MSRB Relating to Activities of Financial Advisors, Exchange Act Rel. No. 30258 (Jan. 16, 1992) ("The MSRB . . . believes that the existence of the conflict of interest [faced by a dealer acting as both financial advisor and placement agent on the same issue] is contrary to the fiduciary obligations of municipal securities professionals acting as financial advisors to issuers . . . . "); Notice of Filing of Fair Practice Rules, [1977-1987 Transfer Binder], MSRB Manual (CCH) ¶ 10,030 at 10,377 (Sept. 20, 1977) (stating, in the context of MSRB Rule G-23, that a municipal securities professional serving as financial advisor "acts in a fiduciary capacity as agent" for the state or local governmental unit); In re O'Brien Partners, Inc., Securities Act Rel. No. 7594 (Oct. 27, 1998) (violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act for failure to make full disclosure in breach of fiduciary duty owed as municipal financial advisor). |
| 27 | SEC v. Cochran, 214 F.3d 1261, 1264 n.2 (10th Cir. 2000). |
| 28 | See, e.g., MSRB Interpretation of February 10, 1984, MSRB Manual (CCH) ¶ 3571.24 at 4534.
First Union and Cawley raise numerous claims under Florida law, including the claim that a Florida administrative regulation allegedly implementing the reporting statute relieved them of any duty to report Book's fees on the BF Forms. They do not claim that they were aware of or relied on the regulation at the time of the events at issue. Their asserted compliancewith state law reporting requirements does not abrogate their disclosure obligations under federal law. |
| 29 | See MSRB Rule G-2 (the term "municipal securities dealer" as used in the MSRB's rules refers to and includes its respective associated persons), MSRB Manual (CCH) ¶ 3251 at 3202. Cawley asserts that the Division failed to produce evidence of harm to investors or the marketplace. No such proof is required to establish an MSRB Rule G-17 violation. |
| 30 | The principal elements required to establish Cawley's liability for aiding and abetting are: (1) First Union violated Exchange Act Section 15B(c)(1); (2) Cawley provided "substantial assistance" to First Union; and (3) Cawley rendered such assistance knowingly or recklessly. See Sharon M. Graham, 53 S.E.C. 1072, 1080 (1998), aff'd, 222 F.3d 994, 1000 (D.C. Cir. 2000). Cawley's conduct satisfied these elements. |
| 31 | See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (a culpable intent is not required in order to find that a wrongdoer acted willfully.). Cawley participated in the third refunding transaction as the principal of the underwriter. The law judge found that Cawley had no obligation to disclose fees intended to be paid by her former employer. The Division has not appealed that determination. |
| 32 | Respondents argue that Exchange Act Section 15B(c)(1) also applies only to persons "acting as" a municipal securities dealer. This section, however, prohibits a municipal securities dealer from violating any MSRB rule. MSRB Rule G-17 applies to a municipal securities dealer acting as a financial advisor. |
| 33 | See Notice of Filing of Fair Practice Rules, [1977-1987 Transfer Binder] MSRB Manual (CCH) ¶ 10,030 at 10,373 (Sept. 20, 1977) (adopting commentator's suggestion to expand scope of proposed Rule G-17 to cover conduct in the municipal securities business, rather than conduct solely involving transactions in municipal securities; stating that such an expansion is appropriate since "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") (emphasis supplied).
We reject First Union's attempt to narrow the types of financial advisory services covered by MSRB Rule G-17. This Rule applies to all financial advisory services, and not merely to portfolio or escrow investment advice, as urged by First Union. |
| 34 | MSRB Rule G-1(b)(2), MSRB Manual (CCH) ¶ 3501 at 3251. |
| 35 | MSRB Rule G-3(b)(i)(B), MSRB Manual (CCH) ¶ 3511 at 3271-3. |
| 36 | For support, First Union and Cawley cite Upton v. SEC, 75 F.3d 92 (2d Cir. 1996), among other cases. There, the court held that respondent was denied due process because he did not have sufficient notice of a Commission interpretation. Id. at 98. Here, by contrast, we have evaluated First Union's and Cawley's conduct in light of well-established disclosure requirements. |
| 37 | Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). |
| 38 | See Jonathan Feins, Exchange Act Rel. No. 3-8721 (Sept. 29, 1999), 70 SEC Docket 2116, 2128 and cases cited therein. |
| 39 | Id. |
| 40 | Id. at 2128-29. |
| 41 | The MSRB recently noted that Rule G-17 encompasses two basic principles: an antifraud prohibition and a general duty to deal fairly even in the absence of fraud. The MSRB stated that Rule G-17 "was implemented to establish a minimum standard of fair conduct." Interpretative Notice Regarding Rule G-17, on Disclosure of Material Facts (Mar. 20, 2002). |
| 42 | SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001) (holding that negligence is the standard for liability underMSRB Rule G-17). See Aaron v. SEC, 446 U.S. 680, 696-97 (1980) (interpreting Section 17(a)(2) of the Securities Act of 1933, which prohibits any person from obtaining money or property "by means of any untrue statement of a material fact or any omission to state a material fact," and Securities Act Section 17(a)(3), which prohibits any person from "engag[ing] in any transaction, practice, or course of business which operates or would operate as a fraud or deceit," to contain no scienter requirement); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 200 (1963) (interpreting Section 206(2) of the Investment Advisers Act of 1940, which prohibits an investment adviser from engaging in any practice which "operates as a fraud or deceit upon any client or prospective client," to contain no scienter requirement). |
| 43 | In the Matter of Municipal Securities Rulemaking Board, Order Approving Proposed Rule Change, Exchange Act Rel. No. 15247 (Oct. 19, 1978), 15 SEC Docket 1323, 1324. |
| 44 | Id. For this reason, we reject Respondents' similar argument concerning MSRB Rule G-37 (requiring, among other things, that municipal securities dealers record and disclose political contributions) and Rule G-38 (requiring municipal securities dealers to disclose their use of consultants), both of which were approved in 1996 after the events underlying this matter took place. See Order Approving Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Consultants, Exchange Act Rel. No. 36727 (Jan. 17, 1996), 61 SEC Docket 254. |
| 45 | See Notice of Filing of Fair Practice Rules, [1977-1987 Transfer Binder], MSRB Manual (CCH) ¶ 10,030 at 10,377 (Sept. 20, 1977) (The MSRB, in considering the adoption of Rule G-23, stated that it addressed only "certain aspects of the conduct of a municipal securities professional acting as a financial advisor."). |
| 46 | Order Approving Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Activities of Financial Advisors, Exchange Act Rel. No. 41217 (March 26, 1999), 69 SEC Docket 1286, 1286. |
| 47 | See MSRB Rule G-23(d), MSRB Manual ¶ 3611 at 5052-53. |
| 48 | The Agreement was executed in June 1993. The Commission's order instituting proceedings was filed against First Union on August 27, 1998, and against Cawley on December 23, 1998. |
| 49 | A person "effects" securities transactions by participating in such transactions "at key points in the chain of distribution." Massachusetts Financial Services, Inc. v. SIPC, 411 F. Supp. 411, 415 (D. Mass.) (defining "effects" in the context of Exchange Act Section 3(a)(4), 15 U.S.C. § 78c(a)(4)), aff'd, 545 F.2d 754 (1st Cir. 1976). The Commission's staff has stated that such participation includes assisting an issuer to structure a prospective securities transaction and to identify potential purchasers of securities, soliciting securities transactions, and participating in the order-taking or order-routing process. MuniAuction, Inc., 2000 SEC No-Act LEXIS 659 (Mar. 13, 2000). See also Financial Surveys, Inc., 1973 SEC No-Act LEXIS 210 (July 30, 1973) (stating that the term "effect," as used in Exchange Act Section 3(a)(4),"should be construed broadly to encompass not only persons who are engaged directly in the offer or sale of securities, but also those persons who perform other than purely ministerial or clerical functions with respect to securities transactions.").
Additionally, Webster's Third New International Dictionary (1971) defines the term "effect" to mean "to cause to come into being" or "to bring about." Id. at p. 724. It defines the term "induce" similarly to mean "to bring on or about," "to effect or to cause," and "to influence or to persuade." Id. at p. 1154. |
| 50 | E.g. Russell Ponce, Exchange Act Rel. No. 43245 (Aug. 31, 2000), 73 SEC Docket 442, 466-67 & n.55 (evidence of conduct outside the limitations period is admissible to show motive, intent, or course of conduct), appeal pending, No. 00-71398 (9th Cir. Nov. 1, 2000). |
| 51 | First Union and Cawley cite United States v. Rudi, 927 F. Supp. 686 (S.D.N.Y. 1996), for the proposition that the MSRB rule violation must have a sufficient nexus to the sale of municipal securities to establish an Exchange Act Section 15B(c)(1) violation. In Rudi, the district judge concluded that the conduct underlying the MSRB rule violation was "too remote and peripheral," "no more than an afterthought," and "only accidentally a part" of the sale of municipal securities. Id. at 688. The district judge accordingly dismissed the Section 15B(c)(1) charge against the defendant. By contrast, First Union's and Cawley's non-disclosure of material information cannot be characterized as an "afterthought" or an "accidental" part of their deceptive course of dealing. Rather, these actions were an integral part of, and in furtherance of, their initial deception in concealing from the County the payments made to Book. |
| 52 | See, e.g., William H. Gerhauser, 53 S.E.C. 933, 945 (1998). |
| 53 | Rule of Practice 320, 17 C.F.R. § 201.320. |
| 54 | See Charles D. Tom, 50 S.E.C. 1142, 1145 (1992) (factors to consider in evaluating probative and reliability of hearsay include the possible bias of the declarant, the type of hearsay at issue, whether the statements are written, signed, and sworn, whether the statements are contradicted by direct testimony, whether the declarant is available to testify, and whether the hearsay is corroborated). |
| 55 | Even if the Federal Rules of Evidence applied, the law judge properly admitted the evidence as non-hearsay. See Fed. R. Evid. 801(d)(2)(B) (a statement in which the party manifests an adoption or belief in its truth is an admission by a party-opponent); Fed. R. Evid. 801(d)(2)(A) (a party's own statement in either an individual or representative capacity is an admission by a party-opponent); Fed. R. Evid. 801(d)(2)(D) (a statement by a party's agent concerning a matter within the scope of his agency made during the existence of the relationship is an admission by a party opponent). |
| 56 | For this same reason, we find no abuse of discretion in the exclusion of a letter written by the Division and sent to opposing counsel stating that two County officials had confirmed they had not been contacted by any First Union representative. |
| 57 | See Fairbank v. Hardin, 429 F.2d 264, 267 (9th Cir. 1970) (law judge has wide latitude as to all phases of the conduct of the hearing); see also Rule of Practice 111(d), 17 C.F.R. § 201.111(d) (stating, among other things, that the law judge has the authority to "regulat[e] the course of a proceeding and the conduct of the parties and their counsel").
First Union's reliance on Perry v. Leeke, 488 U.S. 272 (1989), is misplaced. There, the Supreme Court held that it was not a Sixth Amendment violation to deny a criminal defendant the right to confer with counsel while he is testifying. In so holding, the Supreme Court affirmed that the district court, in its discretion in regulating the conduct of the trial, may impose restrictions on an attorney's contact with witnessesduring trial. See id. at 281-84. |
| 58 | See 5 U.S.C. § 557(d)(1)(B) ("[N]o member of the body comprising the agency, administrative law judge, or other employee who is or may reasonably be expected to be involved in the decisional process of the proceeding, shall make or knowingly cause to be made to an interested person outside the agency an ex parte communication relevant to the merits of the proceeding."). |
| 59 | See, e.g., Pioneer Hotel, Inc. v. NLRB, 182 F.3d 939, 944 (D.C. Cir. 1999) ("[T]he only prohibited communications [under 5 U.S.C. § 557(d)] are those with interested person[s] outside the agency") (internal quotations omitted). |
| 60 | See 17 C.F.R. § 200.111(a)(2) ("No member of the Commission or decisional employee shall make or knowingly cause to be made to any interested person outside the agency an ex parte communication relevant to merits of the proceeding."). |
| 61 | See Jay Frederick Keeton, 50 S.E.C. 1128, 1136 & n.28 (1992) (noting that the Commission's de novo review of the record "further dissipates the possibility of abuse") (citing cases). |
| 62 | See Rule of Practice 360 (an initial decision does not become final when a petition for review is filed), 17 C.F.R. § 201.360; W. David East, Jr., Exchange Act Rel. No. 43569 (Nov. 16, 2000), 73 SEC Docket 2538 (order dismissing proceeding). |
| 63 | Section 2462 provides that, "[e]xcept as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued." See Johnson v. SEC, 87 F.3d 484, 492 (D.C. Cir. 1996) (holding that Section 2462's limitations period applied to certain Commission administrative proceedings). |
| 64 | See, e.g., SEC v. First City Fin. Corp., 890 F.2d 1215, 1230 (D.C. Cir. 1989); SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997). |
| 65 | See, e.g., SEC v. Bilzerian, 29 F.3d 689, 697 (D.C. Cir. 1994) ("Whether or not [defendant's] securities violations injured others is irrelevant to the question whether disgorgement is appropriate. The primary purpose of disgorgement is not to refund others for losses suffered but rather `to deprive the wrongdoer of his ill-gotten gain.'").
As discussed previously, the law judge found that there were no violations with respect to the second refunding. The Division has not appealed that finding. We decline to consider whether the false warranty outside the limitations period would support First Union's disgorgement of the fees that it received for the second refunding, in addition to those received in connection with the first and third refundings. |
| 66 | 15 U.S.C. §§ 78o(b)(6) and 78o-4(c)(4). |
| 67 | See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd, 450 U.S. 91 (1981). |
| 68 | The Division did not appeal the length of Cawley's suspension. |
| 69 | 15 U.S.C. § 78u-3. |
| 70 | KPMG Peat Marwick LLP, Exchange Act Rel. No. 43862 (Jan. 19, 2001), 74 SEC Docket 384, 436, reh'g denied, Exchange Act Rel. No. 44050 (Mar. 8, 2001), 74 SEC Docket 1351, petition denied, 289 F.3d 109 (D.C. Cir. 2002). These factors are considered by the Commission in determining the appropriate-ness of any sanctions to be imposed in the public interest. |
| 71 | KPMG Peat Marwick LLP, 74 SEC Docket at 1360-61. |
| 72 | Id. at 1360. |
| 73 | Exchange Act Section 21C authorizes the Commission to impose cease-and-desist orders for violations of the Exchange Act or "any rule or regulation thereunder." 15 U.S.C. § 78u-3. Because we find that the imposition of cease-and-desist orders against First Union and Cawley is justified based on the Exchange Act Section 15B(c)(1) violations, we do not address First Union's argument that an MSRB rule violation cannot be the basis for a cease-and-desist order under Exchange Act Section 21C. |
| 74 | See KPMG Peat Marwick LLP, 74 SEC Docket at 429. |
| 75 | See id. at 429-30 & n.120. |
| 76 | We were given cease-and-desist authority in the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 10-429, 104 Stat. 931 (1990). |
| 77 | See S. Rep. No. 101-337, at 19 (1990); H.R. Rep. No. 101-616, at 23 (1990), reprinted in 1990 U.S.C.C.A.N. 1379, 1391-92. |
| 78 | KPMG Peat Marwick LLP, 74 SEC Docket at 433 & 435. |
| 79 | Id. at 434. |
| 80 | 15 U.S.C. § 78u-2. Section 21B specifies a three-tier system for assessing the amount of the penalty. The first tier provides for a maximum of $5,000 for an individual and $50,000 for a firm. Id. The second tier provides for a maximum of $50,000 for an individual and $250,000 for a firm if the misconduct involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement. Id. The third tier provides for a maximum of $100,000 for an individual and $500,000 for a firm if the misconduct involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and resulted in, or created asignificant risk of, substantial loss to others or resulted in substantial pecuniary gain to the violator. Id.
The Commission increased the amounts for violations occurring after December 9, 1996, and again, for violations occurring after February 2, 2001. See 17 C.F.R. §§ 201.1001 (1996 adjustment) and 201.1002 (2001 adjustment). |
| 81 | Although we have found that Respondents' conduct justifies second-tier penalties, the penalty assessed against First Union is below the limit for a first-tier penalty which may be assessed for any violative act or omission. See 15 U.S.C. § 78u-2. |
| 82 | 15 U.S.C. § 78u-3(e) (authorizing disgorgement in cease-and-desist proceedings); see also Exchange Act Section 21B(e)
(authorizing disgorgement in monetary penalty proceedings), 15 U.S.C. § 78u-2(e). |
| 83 | First City Fin. Corp., 890 F.2d at 1231; SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995); First Jersey Sec., 101 F.3d 1450, 1475 (2d Cir. 1996). Even if the County were ineligible to receive disgorgement, we could still require disgorgement of First Union's ill-gotten gains. See, e.g., First City Fin. Corp., 890 F.2d at 1231. |
| 84 | First City Fin. Corp., 890 F.2d at 1232. |
| 85 | Id. |
| 86 | Contrary to First Union's suggestion, the fees paid to Book in breach of the warranty provision are not the proper measure of its disgorgement liability. These fees do not reflect the financial gain obtained by First Union as a result of its wrongful activities. |
| 87 | We note that the Division and Cawley evaded Rule 450's page limit requirements when they submitted briefs incorporating by reference certain pleadings filed before the law judge. This resulted in their submission of composite briefs that greatly exceeded the page limits set forth in Rule 450(c). The practice of incorporating pleadings submitted before the law judge (or self-regulatory organization) contravenes Rule 450(c). It also "unnecessarily confuses and diffuses the issues presented" on appeal. Fleming v. County of Kane, 855 F.2d 496, 498 (7th Cir. 1988) (per curiam) (parties should not adopt briefs previously filed in support of motions at the district court level); see also Varda, Inc. v. Ins. Co. of North America, 45 F.3d 634, 640-41 (2d Cir. 1995). Henceforth, we will not consider any briefs that exceed the page limitations in the absence of a duly filed motion. |
| 88 | We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion. |
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