SEC Fines RBC for Misusing Bond Proceeds

WASHINGTON - In the first enforcement action of its kind, the Securities and Exchange Commission fined RBC Capital Markets Corp. $125,000 for using bond proceeds to reimburse itself for treating city officials from Mesquite, Tex. - along with their spouses, children, and grandchildren - to lavish meals, car services, and entertainment in trips to New York City to meet with rating agencies in 2004 and 2005.

The SEC did not name the issuer in a nine-page enforcement document released Tuesday, but Greg Sowell, communications director for Mesquite, confirmed that the Dallas suburb was the city referenced in the SEC's release.

"Yes, elected city officials and city administrators attended various credit agency meetings during these times as part of continued work to improve our community's credit rating score," Sowell said in response to an open records request from The Bond Buyer. "Past history shows such involvement is beneficial in improving a credit score, which is why the city of Mesquite felt it important to be present."

Eric Werner, branch chief of the SEC's Ft. Worth regional office, said the commission did not identify the city in question because it was not subject to any sanctions.

"In general, we don't want to disparage them or unnecessarily taint the city," he said.

In recouping as "issuance costs" the expense of the two trips - which totaled more than $75,000 - RBC violated federal securities laws as well as the Municipal Securities Rulemaking Board's rules G-17 on fair dealing, G-20 on gifts, and G-27 on supervisory procedures, the SEC charged.

"We want to let broker-dealers [engaging in such practices to] know that we are concerned and looking into it," Werner said, adding that he does not know the extent to which such activities may be going on throughout the country. He said this is the first SEC enforcement action involving a broker-dealer using bond proceeds to recoup money it spent on entertaining city officials meeting with the rating agencies.

Without admitting or denying the SEC's findings, RBC consented to the fine, a censure, and agreed to cease-and-desist from further violations of the securities laws and MSRB rules.

"We have cooperated fully with the authorities throughout the investigation and are pleased that we were able to come to a resolution," said Kevin Foster, head of communications for the Americas and Caribbean division of RBC.

Since the 2005 trip, "RBC has taken significant steps" to improve the way it organizes and oversees rating trips taken by its clients and now requires clients to arrange and pay for expenses incurred on rating trips involving entertainment, transportation, and meals, the SEC said in the enforcement document.

The SEC said it learned of the violations during a routine examination of RBC and its municipal bond underwriting and financial advisory activities in August and September of 2004.

According to the SEC, city officials decided in early 2004 that they wanted to meet face to face with two rating agencies in support of their annual municipal bond offerings. On the city's behalf, RBC scheduled the meetings to take place on Monday, March 22, and the city selected five officials to attend them. But most of the city officials arrived in New York the previous Wednesday. The SEC only referred to the titles of the city officials and did not specifically identify them, but bond offering documents indicate they were: Mayor Mike Anderson; deputy mayor pro tempore Shirley Roberts; city manager Ted Barron; director of finance Donald Simons; and a council member. In addition, Anderson was joined by his spouse and two daughters, Roberts was joined by her daughter and grandson, while the unnamed councilman was joined by his spouse. Altogether there were 11 people.

During the 2004 trip, city officials and their family members stayed at the Westin New York at Times Square at a cost of $8,958, and spent $7,552 at several upscale city restaurants, including Tavern on the Green, Rocco's on 22nd Street, and Le Cirque. They also spent an additional $7,250 on Broadway plays and a New York Knicks basketball game, while a car service dispatched them around the city at a cost of $8,883, though only $1,000 of that amount was attributable to use by the city officials on the day they met with the rating agencies.

On their return to Texas, city officials sent reimbursement requests to RBC for out-of-pocket expenses incurred during the trip, including hotel and restaurant expenses not previously paid for by RBC. RBC reimbursed them for a total of $33,452.

When the city closed on a bond offering in mid April, RBC sought and obtained reimbursement for all of the expenses out of the proceeds of the bond offerings, referring to the expenses as a cost of issuance. In total, the expenses incurred during the trip accounted for about 8% of the issuance cost, according to the SEC.

The following March, the city asked RBC to arrange another round of meetings with the rating agencies, as well as to arrange for accommodations, restaurants, and entertainment for its officials. Though RBC warned the city in a letter written two weeks prior to the trip that family of city officials should pay their own expenses, the firm either advanced or reimbursed 14 city officials and family members for $42,213. Those expenses accounted for 11% of the issuance costs of a 2005 bond offering.

The SEC notes that the city's travel policy states that city employees should reimburse Mesquite for any incremental costs related to having their family members attend business trips, among other things. In a statement, Barron, the city manager, conceded that Mesquite was "lax in enforcing our travel policies and I have made a personal commitment to ensure these policies are being stringently enforced."

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