WASHINGTON - Former Rauscher Pierce Refsnes Inc. banker Kenneth D. Ough does not have to pay a fine as part of a settlement of fraud charges reached with the Securities and Exchange Commission this week in the last of the Orange County, Calif.-related municipal bond enforcement cases.
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The SEC merely imposed a cease-and-desist order on Ough, barring him from any future securities law violations.
The commission charged Ough was negligent in failing to ensure that the official statements for 10 taxable note issues sold by issuers in the county in 1993 and 1994 would be invested in Orange County's investment pools and that the investments were risky. The issues totaled more than $560 million. Ough was the banker on the issues for Rauscher, the underwriter for all but one of the issues, for which it served as financial advisor.
The SEC found that Ough violated the securities laws' antifraud provisions as well as the Municipal Securities Rulemaking Board's Rule G-17 on fair dealing in failing to meet his disclosure obligations.
Ough, who currently lives in Post Falls, Idaho, and works for the San Francisco-based firm of Sutter Securities Inc., neither admitted nor denied the charges, but agreed to the order.
"I believe both parties are equally relieved to have this lengthy proceeding behind them," he said in a written statement. "I am very pleased that no fine was imposed and that the commission found that the failure to disclose information was not intentional."
Karen Matteson, an SEC attorney in Los Angeles, said the settlement should send an important message to municipal market participants. "The message is that if you are offering and selling municipal securities and you act negligently, the commission will seek appropriate relief to protect the investing public," she said. "Even if it wasn't intentional behavior, the result is the same -- that investors were misled."
Market participants said yesterday that the settlement is not surprising, given that the case is more than four years old, that Rauscher Pierce -- now RBC Dain Rauscher Inc. -- was fined $500,000 in a settlement of the same charges in August, and that U.S. District Court Judge Gary Taylor has shown little interest in proceeding with the case after he tried to throw out the SEC's charges against Ough in 1999 and his decision was then overturned by an appeals court panel.
That ruling was a major victory for the SEC, Matteson and Paul Maco, the former director of the SEC's Office of Municipal Securities, Maco said yesterday.
"What is most important is that you now have a Ninth Circuit Court of Appeals decision on what the standard is for broker-dealer conduct in a municipal securities offering," said Maco.
"The court of appeals decision sets forth the position we took regarding the duties of municipal securities broker-dealers, as well as what constitutes negligent behavior," Matteson said. "We were very pleased with that. That was a very important decision."
The appeals court panel rejected Taylor's ruling that the SEC had failed to show Ough departed from the disclosure standards that existed at the time. Ough's conduct should not be judged only by industry practice, but rather by a wider standard of "reasonable prudence," in which industry practice is only one factor, the panel ruled.
The panel's ruling was a disappointment for the dealer community. The Bond Market Association had filed a friend-of-the-court brief warning that if the appeals court panel did not uphold Taylor's ruling dismissing the charges against Ough, dealers would be "at risk of arbitrary prosecution" by the SEC. TBMA claimed Ough followed the same muni disclosure practices used by the rest of the dealer community.
The case is the last of a handful of cases that the SEC brought against broker-dealers and issuers over bond issues in connection with Orange County's investment pools, which were highly leveraged and very sensitive to interest-rate changes. The county was forced to file for bankruptcy protection in December 1994 because of huge investment losses. At that time, the pools held $7.6 billion in participant deposits, which the Treasurer had leveraged into a portfolio with an investment value of more than $20.6 billion.
The SEC filed the charges against Ough, Rauscher and former Rauscher banker Virginia Horler in August 1998. Ough took the lead in the case and proceed to fight the SEC charges. Rauscher settled and the commission dropped charges against Horler, who had retired. Ough's lawyers had vowed he would continue to fight the SEC charges and was seeking vindication. But earlier this month The Bond Buyer disclosed the parties had reached a tentative settlement. Rauscher was obligated to pay Ough's legal expenses, unless Ough lost, in which case Ough would be responsible for all of his legal fees and expenses. That may have given Ough some incentive to settle.
The issuers of the note issues were: the city of Anaheim, the Irvine Unified School District, the North Orange County Community College District, and the Orange County Board of Education.
