U.S. Court Rules Against Dolphin & Bradbury

WASHINGTON — A federal appeals court has ruled against Dolphin & Bradbury and its top official, refusing to overturn the Securities and Exchange Commission’s finding that they were extremely reckless in failing to disclose key information about bonds an authority sold in 1998 to acquire an office building in Harrisburg, Pa.

“Substantial evidence supports the commission’s finding that [Robert J.] Bradbury’s non-disclosure created a danger of misleading buyers that was so obvious he must have known about it,” the three-judge panel for the U.S. Court of Appeals for the District of Columbia Circuit concluded in a 15-page ruling handed down Friday.

The panel also found that Bradbury, chairman, chief executive officer, and part-owner of the now-defunct firm, misstated the role of an underwriter in his bid to get the appeals court panel to overturn the SEC’s finding of recklessness.

SEC attorneys applauded the ruling. “We are very pleased that the court of appeals affirmed the commission’s decision,” said Denise Colliers, the lawyer who initially represented the SEC when it filed charges against Bradbury and the firm in 2004. “We are also pleased with the court’s reiteration of the underwriter’s obligations and of the vital role that the underwriter occupies in a securities offering.”

Rada Lynn Potts, who represented the SEC before the appeals court, declined to comment.

William Winning, a lawyer at Cozen O’Connor, which represents Bradbury, said: “Obviously we are disappointed. But any decision on [a further appeal] will have to await review of the opinion and consultation with the client.”

Sources said Bradbury has 45 days to ask the panel or the full appeals court to review the ruling, which was written by Judge Janice Rogers Brown. Alternatively, he has 90 days to ask the U. S. Supreme Court to take up the case.

The case revolves around $75.35 million of bonds the Dauphin County, Pa., General Authority issued in 1998 to acquire the Forum Place office building. The SEC enforcement staff charged Bradbury and the firm violated the Municipal Securities Rulemaking Board’s Rule G-17 on fair dealing, as well as the securities law that prohibits such violations, by failing to disclose in the bond documents that the building’s main tenant — the Pennsylvania Department of Transportation — planned to move out of the building a few years after the bonds were issued. PennDOT occupied 79% of the space in Forum Place and generated 60% of its lease revenues.

An administrative law judge in 2005 agreed with the SEC and ruled against Bradbury and the firm, finding they should have specifically disclosed that PennDOT planned to move. Bradbury appealed to the SEC. In 2006, the commission sided with the ALJ and found that Bradbury and the firm acted with scienter, or extreme recklessness, by failing to disclose PennDOT’s planned move.

Bradbury objected to the scienter charge and asked the appeals court panel to overturn it, contending he could not have intentionally engaged in wrongdoing because the bond documents disclosed that the tenant’s leases were short-term and that there was no guarantee they would be renewed before the bonds matured. He also pointed out that none of his advisers felt PennDOT’s planned move should be disclosed because its timing was uncertain and that he did tell one institutional investor, Putnam Investments, about the move.

But the panel disagreed, finding that Bradbury was wrong in not specifically disclosing the PennDOT move and that he tried “to hide his extreme recklessness by misstating the role of the underwriter.”

As for its finding on the disclosure, the panel agreed with the SEC that there is a “critical distinction between disclosing the risk a future event might occur and disclosing the actual knowledge the event will occur.”

“Bradbury in effect asks us to apply the scienter standard in a way that would protect ‘someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away,’” the panel wrote.

PennDOT’s planned move “had enormous significance because it dramatically affected the tax-exempt status of the bonds and put the bonds’ repayment at risk,” it added.

The panel was particularly troubled that the financial projections used to market the bonds were “flawed” because they assumed the PennDOT lease would continue through 2008. It rejected Bradbury’s contention that he did not disclose the PennDOT move because he did not have the details. “Bradbury’s lack of perfect knowledge did not relieve him of his duty to disclose those material facts he did know,” the panel said.

“Bradbury’s attempts to paint his state of mind in a favorable light by simultaneously understating and overstating his role as an underwriter. On the one hand, Bradbury understates — and nearly abdicates — his independent responsibilities, arguing he escapes liability because nobody told him to disclose the PennDOT information,” the panel said. “On the other hand, he overstates his role in the process by arrogating, [or unjustly assuming,] the role of an investor in evaluating material facts and weighing expected risks. We reject both of these attempts to mischaracterize an underwriter’s role.”

The panel notes the SEC said in a 1988 document that the underwriter “occupies a vital position” in a securities offering because investors rely on its reputation, integrity, independence, and expertise. The commission said underwriters have a “heightened obligation” to ensure adequate disclosure.

The panel also scoffed at Bradbury’s claims that, if investors had asked about PennDOT, he would have mentioned the planned move, and that because Putnam knew about the move and still bought bonds, the information was not important. “Each investor must have the opportunity to make decisions based on a singular, and perhaps idiosyncratic, preference for balancing risk and return, taking into account its unique investment portfolio,” the panel said. “Bradbury’s role was to facilitate each investor’s individualized balancing of risk and return — not to strike the balance on his own without revealing a critically important fact.”

Paul Maco, a partner at Vinson & Elkins and former SEC muni office director, said after reading the ruling, “There is a lot in this decision for people to read.” Maco noted that the panel said at the end of the ruling, “Were we writing on a blank slate, this would be a very close case, because the scienter threshold is high. ... [But] Congress has directed us to uphold the commission’s factual findings if supported by substantial evidence. ...When viewed through that deferential lens, we conclude a ‘reasonable mind might accept’ the evidence as ‘adequate’ to support the commission’s scienter finding.”

The ruling “emphasizes that disclosure is quite often a factually intense analysis as opposed to a bright line,” Maco said.

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