The Securities and Exchange Commission has filed securities fraud charges against Steven Strauss, a former managing director of New York City-based Sakura Global Capital Inc., in connection with two municipal bond deals underwritten by the former Oklahoma office of Stifel, Nicholas & Co. in 1992.
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The civil charges were filed Friday in U.S. District Court in New Haven, where Strauss lives, and announced yesterday. They allege that Strauss defrauded both the issuers and purchasers of the securities by covering up payments that Sakura made to Stifel in connection with forward purchase agreements Sakura provided to the issuers. The SEC also charges that the payments jeopardized the tax-exempt status of the bond issues by violating the arbitrage rules of the tax code.
The SEC complaint marks the second time the government has gone after Strauss in connection with the bond issues. It alleges that Sakura provided an undisclosed $6.593 million payment to Stifel, through Strauss, in a $600 million deal done for the Oklahoma Turnpike Authority in 1992, for which Sakura provided a forward purchase agreement.
The forward agreement stated that Sakura did not intend to take any action that could jeopardize the tax-exempt status of the bonds. However, the complaint alleges that at the time Strauss signed the forward on behalf of Sakura, he knew Sakura was planning to pay the $6.593 million brokerage fee to Stifel - and Strauss knew or was reckless in not knowing that such a fee would jeopardize the tax-exempt status of the bonds by violating yield restrictions.
In four 1992 bond deals totaling $265 million for the Sisters of St. Mary's Health Care Obligated Group - in which Sakura also provided a forward purchase agreement - the SEC charged that Strauss got Sakura to make a $100,000 payment to Stifel even though he certified that Sakura would not make any payments in connection with the forward, other than up- front payments to the issuers.
The SEC charged that Strauss defrauded the Sisters of St. Mary's by falsely representing that Sakura would not pay a brokerage fee to Stifel in connection with the forward agreement, and that he deprived investors of material information needed to assess the tax-exempt status of the bonds.
The SEC's civil action is not the first time Strauss has faced charges of wrongdoing arising from his payments to Stifel.
In 1996, Strauss agreed to testify against Robert Cochran, the executive vice president in charge of Stifel's Oklahoma public finance office, and plead guilty to one count of wire fraud arising from the $100,000 payment in connection with the Sisters of St. Mary issue. He was sentenced to two years' probation.
However, after Cochran's conviction was overturned on the grounds that failure to disclose the fees did not constitute fraud, a federal judge agreed to dismiss the charges against Strauss as well, and ordered all references to the conviction expunged from his record.
Municipal market participants have repeatedly drawn parallels between the Oklahoma Turnpike Authority and Sisters of St. Mary's cases, and the more recent yield-burning cases the SEC and Internal Revenue Service are investigating to determine whether they constituted an arbitrage abuse.
In a typical yield-burning case, a municipal issuer overpays when reinvesting bond proceeds in Treasury securities. Those inflated prices drive down the yields on the taxable investments to bring them in line with federal limits on the arbitrage profits a municipal issuer is entitled to.
In the filing, SEC officials contend that the undisclosed payments to Stifel were material to determining whether the bonds were in compliance with the tax code and should have been disclosed. SEC officials have said they will consider similar "failure to disclose" charges in other yield- burning cases concerning markups on Treasuries.
