A case involving bond attorney Ira Weiss, a closely watched legal drama that came to a close nearly two decades ago, continues to be one 'of significance' for bond lawyers and remains a topic capable of evoking strong opinions.
"The case illustrated the intersection of securities law and tax law," said Andrew Kintzinger, counsel at Hunton Andrews Kurth LLP, adding that the Weiss case "remains of significance to the bond lawyer community."
Back in 2004, the Securities and Exchange Commission initiated an administrative proceeding against Weiss and another respondent in connection with a Pennsylvania school district's $9.6 million note offering in 2000. The SEC alleged that Weiss, "knowingly or recklessly" issued an unqualified legal opinion "to the effect that interest on the notes would be exempt from federal income taxation."
While an administrative law judge later dismissed all charges against Weiss, the SEC's Division of Enforcement appealed the ALJ's decision to the commission, which reversed it.
The commission held that Weiss, in acting as bond counsel for the school district, had "violated antifraud provisions by negligently rendering [an] unqualified opinion that interest on notes issued by [the] school district would be exempt from federal income taxation, and representing that the proceeds would be used for school renovation and construction projects," according to the commission's Dec. 2, 2005 opinion.
Weiss subsequently petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review of the SEC's Dec. 2, 2005 order. In a Nov. 28, 2006 ruling, a three-judge panel of the DC Circuit
"I actually think that this was a difficult case for the SEC enforcement division to bring, a close call, on the facts," said Kintzinger, who noted that the ALJ found no violations by Weiss.
"On a very easy review standard – does substantial evidence support the commission's findings – the DC Circuit Court of Appeals upheld findings of securities law violations by Mr. Weiss," the Hunton attorney said. "With recent U.S. Supreme Court rulings limiting the ability of the commission to proceed with an administrative law judge hearing, one wonders what the outcome of the case would be today."
For example, in Securities and Exchange Commission, Petitioner v. George R. Jarkesy, Jr., et al., decided in June 2024, the Supreme Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.
The Weiss case "remains important, both from a tax and securities law point of view, and from an SEC procedural point of view," Kintzinger said.
Mary Reichert served as special tax counsel to Ira Weiss in an order instituting proceedings brought by the SEC, according to a biography posted on the website of law firm Bryan Cave Leighton Paisner LLP.
While Reichert declined to be interviewed for this article, her bio noted that although the ALJ dismissed all charges against Weiss, the SEC's enforcement division filed an appeal with the commission, which reversed the ALJ's decision and issued a cease and desist order against Weiss.
"This strategy of the enforcement division filing an appeal after losing at the administrative level has been criticized by practitioners and the securities industry for giving the commission which initially decided to bring the enforcement action, a 'second bite,'" the bio said.
In a recent interview, Mark Zehner, who at the time of the 2006 appeals court panel's decision was a Philadelphia-based regional municipal securities counsel in the SEC's enforcement division, recalled his reaction after learning that Weiss planned to litigate the case.
"When I first got a phone call saying there's going to be litigation over this, I said 'Great!,'" said Zehner, who
For Zehner, the case presented an opportunity to get much-needed guidance that both regulators and private practitioners could rely on.
"So many cases out of the SEC get settled, and that's fine, it makes prudential sense, but you can't really rely on them," he said. "To get something like this, where both sides can rely on where the boundaries are, was very healthy I think. Very helpful."
Zehner referenced a portion of the appeals court opinion that described the school district's nonarbitrage certificate – a document also sometimes referred to as a tax certificate – as "wholly conclusory."
Though investing bond proceeds in higher yielding investments would normally cause the bonds to become arbitrage bonds, "Treasury Department regulations contain an exception," the opinion said.
"Up to $10 million of bonds may remain tax-exempt and the issuer may retain any profits earned during a three-year 'temporary period' after the issue date if the issuer 'reasonably expects' to satisfy three tests: the expenditure test, the time test, and the due diligence test," the opinion said.
Treasury regulations require nonarbitrage certificates to include the facts and estimates that constitute the basis for an issuer's expectations with regard to meeting the three tests, the opinion said.
"Yet the school district's certificate – which Weiss drafted – is wholly conclusory, stating only that the issuer 'reasonably expects' to satisfy each of the three tests," the opinion said. "No relevant facts or estimates are recited."
The certificate referred to "the Project," but lacked any description of what the project included, the appeals court opinion said, adding that another document, which contained a list of 33 projects, suffered from "the same flaw."
"And Weiss certainly could not base an unqualified tax opinion on the nods of Board members at the only meeting he attended," the opinion said.
While the DC Circuit was "quite right" in finding that the information contained in the tax certificate was insufficient to support an unqualified opinion, "that [was], I think, a surprise to a lot of the tax lawyers," Zehner said.
For decades, tax law had been "determined by a small group of tax lawyers" at major firms, he said, adding that when those lawyers agreed on an interpretation concerning an ambiguous point in the tax code "every major firm started buying into that analysis." Weiss wasn't part of that group, Zehner said.
Asked about the Weiss case's legacy, Zehner said the "only real legacy here is that the SEC is now on the beat." People likely were surprised when the SEC in the Weiss action effectively said "hold on, you're selling this stuff as if it's tax-exempt, and it's not," the former SEC enforcement attorney said.
"And that means there's a very specific financial detriment to the buyers because they accepted lower interest rates thinking it was tax-exempt," Zehner said. "So therefore, this is a material item to your average investor, which shifts it from solely an IRS [issue] … to a securities law issue."
During the interview, Zehner referenced comments he provided to The Bond Buyer nearly 20 years ago in the wake of the appeals court panel's decision.
"For the vast majority of bond lawyers that have been doing the right things, the Ira Weiss decision doesn't change how they are practicing law," Zehner said according to an article The Bond Buyer published on Nov. 28, 2006. "But for those who have been aggressive and operating on the edges of what constitutes an unqualified opinion, this should make them much more cautious."
While many years have passed the appeals court panel's ruling, the case has continued to garner attention. The SEC's enforcement action against Weiss was discussed in a chapter written by Robert A. Fippinger that was included in the most recent
"It's good that the legal principles in that case still echo, they should," Zehner said in the recent interview. "But on the other hand – and it comes back to what I said in the old Bond Buyer article – the vast majority of bond lawyers … sort of knew that internally. They didn't need a DC Circuit decision to tell them that."
Efforts to obtain comment from Weiss were unsuccessful.
