STATE OF KANSAS CHARGED WITH SECURITIES FRAUD BY SEC

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced securities fraud charges against the state of Kansas stemming from a nationwide review of bond offering documents to determine whether municipalities were properly disclosing material pension liabilities and other risks to investors.  According to the SEC’s cease-and-desist order instituted against Kansas, the state’s offering documents failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.

Shortly after its nationwide review of municipal bond disclosures began, the SEC brought its first-ever enforcement action against a state when it sanctioned New Jersey for failing to disclose to investors that it was underfunding the state’s two largest pension plans.  Around the same time, the SEC began questioning the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.  As the SEC began its inquiry, Kansas began adopting new policies and procedures to improve disclosures about its pension liabilities.  Kansas has now fully implemented those remedial actions, and has agreed to settle the SEC’s charges for its prior incomplete disclosures.

The SEC also charged Illinois last year for its misleading pension disclosures, and the state similarly implemented a number of remedial actions.

“We’re pleased that our actions have resulted in improved disclosure of pension liabilities in states that were not making investors aware of a significant repayment risk,” said Andrew Ceresney, director of the SEC Enforcement Division.  “Investors must be given adequate information to evaluate the impact of pension fund liability on a state’s overall financial condition.”

According to the SEC’s order against Kansas, the series of bond offerings were issued through the Kansas Development Finance Authority (KDFA) on behalf of the state and its agencies.  According to one study at the time, the Kansas Public Employees Retirement System (KPERS) was the second-most underfunded statewide public pension system in the nation.  In the offering documents for the bonds, however, Kansas did not disclose the existence of the significant unfunded liability in KPERS.  Nor did the documents describe the effect of such an unfunded liability on the risk of non-appropriation of debt service payments by the Kansas state legislature.  The SEC’s investigation found that the failure to disclose this material information resulted from insufficient procedures and poor communications between the KDFA and the Kansas Department of Administration, which provided the KDFA with the information to include in the offering materials.

“Kansas failed to adequately disclose its multi-billion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “In determining the settlement, the Commission considered Kansas’s significant remedial actions to mitigate these issues as well as the cooperation of state officials with SEC staff during the investigation.”

According to the SEC’s order, Kansas has since adopted new policies and procedures to help ensure that appropriate disclosures about pension liabilities are being made in its offering documents.  Kansas designated responsible parties in state agencies critical to the disclosure process, mandated closer communication and cooperation among those agencies, established a disclosure committee, and now requires annual training of key personnel.  Without admitting or denying the findings, Kansas consented to the SEC’s order to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Robert Hannan and Eric Werner in the Fort Worth Regional Office with assistance from members of the Municipal Securities and Public Pensions Unit including Joseph Chimienti, Creighton Papier, Jonathan Wilcox, and Mark Zehner (deputy chief).

SEC CHARGES MUNICIPAL ISSUER WITH MISLEADING INVESTORS IN BOND OFFERING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission charged a municipal issuer in the state of Washington’s Wenatchee Valley region with misleading investors in a bond offering that financed the construction of a regional events center and ice hockey arena.  The SEC also charged the underwriter and outside developer of the project and three individuals involved in the offering.

The Greater Wenatchee Regional Events Center Public Facilities District agreed to settle the SEC’s charges by paying a $20,000 penalty and undertaking remedial actions.  It is the first time that the SEC has assessed a financial penalty against a municipal issuer.

The issuer is a municipal corporation formed by nine Washington cities and counties in 2006 to fund the Town Toyota Center, located in the city of Wenatchee.  An SEC investigation found inaccuracies in the primary disclosure document accompanying the issuer’s offering of bond anticipation notes in 2008.  The document, called the “official statement,” stated there had been no independent reviews of the financial projections for the events center.  However, an independent consultant twice examined the projections and raised questions about the center’s economic viability.  The official statement failed to disclose that financial projections had been revised upward based in part upon optimistic assurances by civic leaders that the community would support the project.  The document also omitted key information about the possibility that the City of Wenatchee’s remaining debt capacity of $19.3 million would limit its ability to support any future long-term bonds.

“Financial penalties against municipal issuers are appropriate for sanctioning and deterring misconduct when, as here, they can be paid from operating funds without directly impacting taxpayers,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement. “This municipal issuer is paying an appropriate price for withholding negative information from its primary offering document and giving investors a false picture of the future performance of the project.”

The Greater Wenatchee Regional Events Center Public Facilities District issued $41.77 million in bond anticipation notes in 2008, and defaulted on its principal payments in December 2011.

The SEC’s settled administrative proceedings also name the developer Global Entertainment and its then-president and CEO Richard Kozuback, the underwriter Piper Jaffray & Co. and its lead investment banker Jane Towery, and Allison Williams, a senior staff member for the Greater Wenatchee Regional Events Center Public Facilities District who certified the accuracy of the official statement.

“An underwriter’s due diligence obligation is critical, particularly when financing a startup revenue project.  Piper Jaffray & Co. failed to develop a reasonable basis for believing the accuracy of key representations made in the official statement,” said Mark Zehner, deputy chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.

In settling the SEC’s charges, Piper Jaffray & Co. and Towery agreed to be censured and pay penalties of $300,000 and $25,000 respectively.  Global Entertainment and Kozuback each agreed to pay penalties of $10,000.  Williams consented to a cease-and-desist order and the issuer agreed to remedial actions, including training for personnel involved in the offering and disclosure process.  The issuer also agreed to adopt written policies for disclosures in municipal offerings and continuing disclosure obligations, and to designate an individual responsible for ensuring compliance with those obligations.  The respondents neither admit nor deny the SEC’s findings.

The SEC’s order requires Piper Jaffray & Co. to retain an independent consultant to conduct a review of the firm’s municipal underwriting due diligence policies and procedures as well as its supervisory policies and procedures relating to municipal underwriting due diligence.  Towery agreed to limit her activities as an associated person of a broker-dealer or municipal advisor for one year by refraining from any contact with any existing or prospective municipal issuer client for the purpose of conducting, maintaining, or developing business or for the purpose of making decisions on behalf of a broker-dealer in connection with any due diligence activities.

The SEC’s investigation was conducted by Monique C. Winkler in the San Francisco Regional Office, who is a member of the Municipal Securities and Public Pensions Unit.  The case was supervised by Cary Robnett, an assistant director in the San Francisco office.

SEC CHARGES FATHER AND SON IN SCHEME INVOLVING THE TERMINALLY ILL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission charged a father and son in Lexington, S.C., with operating a fraudulent investment program designed to illegally profit from the deaths of terminally ill individuals.

The SEC alleges that Benjamin S. Staples and his son Benjamin O. Staples deceived brokerage firms and bond issuers and made at least $6.5 million in profits by lying about the ownership interest in bonds they purchased in joint brokerage accounts opened with people facing imminent death who were concerned about affording the high costs of a funeral.  The Stapleses recruited the terminally ill individuals into their program by offering to pay their funeral expenses if they agreed to open the joint accounts and sign documents that relinquished their ownership rights to the accounts or any assets in them.

According to the SEC’s complaint filed in federal court in Columbia, S.C., once a joint account was opened and they had sole control, the Stapleses purchased discounted corporate bonds containing a “survivor’s option” that allowed them to redeem the bonds for the full principal amount prior to maturity if a joint owner of the bond dies.  Following the death of one of their terminally ill participants, the Stapleses redeemed the bonds early by citing the survivor’s option to the brokerage firm and misrepresenting that the deceased individual had ownership rights to the bond.  Their illicit profit was the difference between the discounted price of the bonds they purchased and the full principal amount they obtained when redeeming the bonds early.

“The Stapleses exploited the tragic circumstances surrounding a terminally ill diagnosis and turned the misfortune of others into a profit-making enterprise for themselves,” said Kenneth Israel, Director of the SEC’s Salt Lake Regional Office that investigated the case.  “The Stapleses deceived brokerage firms and bond issuers by casting themselves as survivors of a joint ownership situation when the deceased had no legal ties to the bonds at all.”

According to the SEC’s complaint, the Stapleses operated what they called the Estate Assistance Program from early 2008 to mid-2012.  They recruited at least 44 individuals into the program and purchased approximately $26.5 million in bonds from at least 35 issuers.  The Stapleses required the terminally ill individuals to sign three documents: an application to open a joint brokerage account with them, an estate assistance agreement, and a participant letter.  The latter two documents required the terminally ill participant to relinquish any ownership interest in the assets in the joint account, including the bonds that the Stapleses later purchased.

The SEC alleges that after a terminally ill participant died, the Stapleses wrote a letter to the brokerage firm where the joint account was held and asked that the bonds be redeemed under the survivor’s option.  In their redemption request letters, the Stapleses falsely represented that the deceased participant was an “owner” of the bonds.  The Stapleses did not inform the brokerage firms or bond issuers that the deceased program participants had signed the estate assistance agreements and participant letters relinquishing all ownership interest in the bonds.

The SEC’s complaint charges Ben S. Staples and Ben O. Staples with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  The SEC is seeking disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions.  The SEC’s complaint names a different son of Ben S. Staples – Brian Staples also of Lexington, S.C. – as a relief defendant for the purposes of recovering $400,000 in illicit profits that were transferred into his possession.  Brian Staples had no active role in the scheme.

The SEC’s investigation was conducted by Tanya Beard, Justin Sutherland, and Matthew Himes of the Salt Lake Regional Office.  The SEC’s litigation will be led by Thomas Melton.