SEC v. Glt Dain Rauscher

254 F.3d 852 (9th Cir. 2001)

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Nature of the Case

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Facts

In 1993 and 1994, D, a broker-dealer, was the senior underwriter for nine taxable municipal note offerings, and financial advisor for a tenth offering. Ough, vice president in the public finance department of D's municipal securities division, acted as lead investment banker on these undertakings. The taxable municipal notes were a new type of security. The issuers, all of whom were 'municipalities,' used the note proceeds for interest arbitrage. They used the proceeds solely for investment purposes, rather than for infrastructure improvement, debt reduction or other projects. If they were able to invest at higher rates than the interest charged on the notes, the cities would make a profit on the transaction spreads. All of the issuers invested the note proceeds in investment pools managed by Orange County Treasurer Robert Citron. In underwriting the offering of the taxable municipal notes, the underwriter followed the procedure for underwriting the offering of municipal bonds. That procedure requires the underwriter to obtain and review an official statement and send it to potential bidders or purchasers. Ough helped prepare and draft the offering documents. Others were also involved in drafting those documents, including bond counsel, underwriting counsel and public officials. Ough was responsible for reviewing the final offering statements prior to issuance of the notes. All of the offering statements explained that the issuance proceeds would be invested directly or through investment agreements 'to the greatest extent possible' by the city Treasurer or the school district's Treasurer-Tax Collector. None of the offering statements used the term interest arbitrage. No offering statement disclosed the fact that the net proceeds would be invested in the Orange County investment pools. Ough never discussed the pools' investment strategy with Citron, the manager of the Orange County investment pools, and he did not make inquiries about the specific portfolio of investments and securities held by the pools. Ough said that reviewing such portfolios was not his expertise. Citron's strategy was to invest in securities that were highly sensitive to interest rate changes. As long as interest rates declined or held steady, returns on investments in the pools were high. Rate increases in 1994 caused significant losses in the value of the Orange County portfolio and ultimately led to the Orange County bankruptcy. All of the notes issued in the ten offerings were repaid in full and on time. P filed the complaint, in this case, seeking a permanent injunction and civil penalties against Ough (D) for violating § 17(a) and §10(b). The court granted Ough’s (D) motion for summary judgment. P appealed.