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UNITED STATES OF AMERICA
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| In the Matter of DOUGHERTY SUMMIT SECURITIES LLC, |
ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE-AND- DESIST PROCEEDINGS PURSUANT TO SECTIONS 15(b), 15B(c), 19(h) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS, AND ORDERING RESPONDENTS TO CEASE AND DESIST |
I.
The Securities and Exchange Commission (Commission) deems it appropriate and in the public interest that administrative proceedings be instituted against Dougherty Summit Securities LLC (Dougherty Summit Securities), successor to Dougherty Dawkins, Inc., Thomas Strand (Strand), Ralph McGinley (McGinley), and Daniel Eitrheim (Eitrheim) pursuant to Sections 15(b), 15B(c), 19(h) and 21C of the Securities Exchange Act of 1934 (Exchange Act).
In anticipation of the institution of these administrative proceedings, Dougherty Summit Securities, Strand, McGinley, and Eitrheim have submitted Offers of Settlement (Offers) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained in this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b), 15B(c), 19(h) and 21C of the Securities Exchange Act of 1934, Making Findings, Imposing Remedial Sanctions, and Ordering Respondents to Cease and Desist (Order), except as to the Commission’s jurisdiction over respondents and the matters set forth in this Order, which is admitted, respondents consent to the entry of this Order.
II.
Accordingly, IT IS HEREBY ORDERED THAT public administrative proceedings pursuant to Sections 15(b), 15B(c), 19(h) and 21C of the Exchange Act be, and hereby are, instituted.
III.
On the basis of this Order and the Offers submitted by respondents, the Commission finds that:
RESPONDENTS
A. Dougherty Summit Securities, a broker-dealer registered with the Commission and located in Minneapolis, Minnesota, is the surviving entity of a merger between Dougherty Dawkins LLC and Dougherty Summit Securities LLC. Dougherty Dawkins LLC succeeded to the business of Dougherty Dawkins, Inc. (Dougherty Dawkins) in a prior reorganization. Dougherty Dawkins’ registration with the Commission was cancelled in February 1998 after the merger. Dougherty Dawkins specialized in the underwriting, trading and marketing of municipal securities.
B. Strand, age 53, resides in North Oaks, Minnesota, and at all relevant times was associated with Dougherty Dawkins. Between 1989 and 1993, Strand was President of Dougherty Dawkins and from 1994 to 1996 was Vice-Chairman of the firm.
C. McGinley, age 53, resides in North Oaks, Minnesota, and at all relevant times was associated with Dougherty Dawkins. Between 1989 and 1995, McGinley was the Executive Vice-President in charge of the Public Finance Division of Dougherty Dawkins.
D. Eitrheim, age 43, resides in Bloomington, Minnesota, and at all relevant times was associated with Dougherty Dawkins. In 1992, Eitrheim became a Senior Vice-President of the Public Finance Division of Dougherty Dawkins.
OTHER ENTITY INVOLVED
E. Presbyterian Retirement Village of Rapid City, Inc. is a non-profit South Dakota corporation. It was formed in 1979 to develop and operate a retirement center in Rapid City, South Dakota, known as the Westhills Village Retirement Community (Westhills). It was the recipient of the proceeds and the ultimate obligor of the bond issues that are the subjects of this Order.
FACTUAL BACKGROUND
F. In 1983, Dougherty Dawkins underwrote an $11.12 million municipal bond issue on behalf of Westhills (Series 1983 Bonds). The proceeds were used for the construction of Westhills Retirement Community. In January 1987, Westhills issued $10.5 million of refunding bonds (Series 1986 Bonds), also underwritten by Dougherty Dawkins, to refinance the Series 1983 Bonds using a technique known as a “crossover refunding.”
G. Westhills invested the proceeds of the Series 1986 Bonds in an escrow account. The escrow account served as collateral for the Series 1986 Bonds, which were rated "AAA.” The offering documents for the Series 1986 Bonds contemplated that the issue would be remarketed in August 1993 and provided that the Series 1986 Bonds would become unsecured and nonrated after the funds in the escrow account were released to retire the Series 1983 Bonds on October 1, 1993.
H. Under the terms of the original issue, the Series 1986 Bonds were to be automatically tendered to the trustee at par on or before August 15, 1993, and, in a process known as remarketing, the remarketing agent was to re-sell the bonds to the public at par on August 15, 1993. Bondholders who desired to retain the Series 1986 Bonds beyond the remarketing date were required to notify the trustee in writing of their intention to retain the bonds.
I. In January 1987, the entire Series 1986 Bond issue was sold to another registered broker-dealer, which immediately resold interests in the bonds to its retail customers.
DISCUSSIONS ON REFINANCING THE SERIES 1986 BONDS
J. In or about September 1992, Eitrheim suggested to Westhills that Westhills consider refinancing the Series 1986 Bonds, in view of falling interest rates. In or about December 1992, Westhills asked McGinley for information on the costs of refinancing the bonds.
K. In or about February and April 1993, McGinley made presentations to the board of directors for Westhills on the costs and benefits of refinancing the Series 1986 Bonds, as well as the costs and benefits of remarketing them.
L. In or about May 1993, bond counsel for the Series 1986 Bonds advised that, for tax reasons, the Series 1986 Bonds had to be remarketed before they could be refinanced. Failure to proceed with the remarketing at par would jeopardize the tax exempt status of the Series 1986 Bonds.
M. In or about May 1993, Dougherty Dawkins submitted to Westhills, in response to a request for proposals to several firms, an investment banking proposal prepared by Eitrheim and reviewed by McGinley, which recommended that Westhills first remarket the bonds and then wait for 30 to 90 days before effecting a refinancing.
N. In or about May 1993, the board of directors of Westhills hired Dougherty Dawkins to serve as its investment banker on an ongoing basis for future bond issues and remarketings.
O. In or about July 1993, the board of directors of Westhills made a preliminary determination that it would refinance the Series 1986 Bonds after they had been remarketed by Dougherty Dawkins on August 15, 1993, should then current market conditions remain favorable.
P. On or about July 15, 1993, Dougherty Dawkins prepared a Remarketing Memorandum which established February 15, 1994 as the first callable date for the Series 1986 Bonds, at a call price of 108.
TRADES IN THE SERIES 1986 BONDS
Q. In or about July 1993, Eitrheim called a representative of the broker-dealer described in Paragraph III.I above to remind him that the date for the remarketing of the Series 1986 Bonds was near. Eitrheim informed the representative that Dougherty Dawkins offered to buy the bonds in a secondary transaction at 102 to the extent that bondholders did not wish to tender their bonds to the trustee at par during the remarketing. Eitrheim did not inform the representative about the probability that the Series 1986 Bonds would be refinanced. The representative asked Eitrheim to put the offer in writing and to send him a copy of the notice to be sent to bondholders concerning the remarketing.
R. Eitrheim confirmed Dougherty Dawkins' offer to purchase the Series 1986 Bonds at 102 from the bondholders by letter dated July 14, 1993. On or about July 16, 1993, Eitrheim sent the representative a copy of the proposed notice to bondholders. The draft notice stated that the remarketed bonds would no longer be secured by escrow funds and would be unrated. However, the notice made no mention of the probability that the remarketed bonds would be refinanced should then current market conditions remain favorable.
S. In or about August 1993, holders of approximately $3.7 million of the Series 1986 Bonds sold their bonds to Dougherty Dawkins at 102, and holders of $6.3 million of the bonds tendered their bonds to the trustee at par. Dougherty Dawkins did not inform the bondholders of the probability that the Series 1986 Bonds would be refinanced. The holders of an additional $500,000 of the bonds chose to retain their bonds.
T. In August 1993, the trustee transferred the $6.3 million in tendered bonds to Dougherty Dawkins, as remarketing agent, to resell to the public at par. Dougherty Dawkins sold these bonds to eight of its officers, including Strand, McGinley and Eitrheim, for their personal accounts at par and on margin. Westhills paid Dougherty Dawkins a fee of $52,100 for performing the remarketing.
U. Dougherty Dawkins resold the bonds it purchased at 102 to its own customers in September 1993, at an average price of 109. Dougherty Dawkins did not inform its customers of the probability that the Series 1986 Bonds would be refinanced.
V. In December 1993, a new series of bonds was issued on behalf of Westhills to replace the remarketed Series 1986 Bonds, as planned. The proceeds of the new bonds were used to retire the Series 1986 Bonds on February 15, 1994 at 108.
W. Dougherty Dawkins' officers sold $1.2 million of the Series 1986 Bonds they purchased at par in the remarketing to Dougherty Dawkins at an average price of 108, which were resold by Dougherty Dawkins to its customers at 109. The officers held the remaining bonds until February 1994 when they were redeemed by the issuer at 108. Strand, McGinley, and Eitrheim redeemed approximately $1,150,000, $650,000 and $350,000 of the Series 1986 Bonds and profited by approximately $92,000, $52,000, and $28,000 respectively.
X. Dougherty Dawkins, Strand, McGinley, and Eitrheim failed to disclose their transactions in the Series 1986 Bonds and the resulting profits to Westhills.
VIOLATIONS
Y. Rule G-17 promulgated by the Municipal Securities Rulemaking Board (MSRB) requires broker-dealers to deal fairly and honestly with all persons in connection with their municipal securities business. Broker-dealers and their associated persons have a responsibility under the Rule not to exploit their superior access to information to gain financially at the expense of their customers or issuers of municipal securities. Respondents, by engaging in the above transactions in the Series 1986 Bonds without disclosing the probability of a refinancing of the Series 1986 Bonds to the bondholders who sold their bonds to Dougherty Dawkins at 102, to the bondholders who tendered their bonds to the trustee at par, and to the bondholders who purchased from Dougherty Dawkins at 109, as described in Paragraphs III.F through III.X above, failed to deal fairly and honestly with the bondholders. Similarly, by failing to disclose their transactions and profits in the Series 1986 Bonds to Westhills, Respondents failed to deal fairly with Westhills. Accordingly, Dougherty Dawkins, Strand, McGinley, and Eitrheim willfully violated Rule G-17.
Z. Dougherty Dawkins willfully violated Section 15B(c)(1) of the Exchange Act by violating MSRB Rule G-17, as described in Paragraph III.Y above.
IV.
Accordingly, IT IS ORDERED that Dougherty Summit Securities cease and desist from committing or causing any violations, and any future violations, of Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17.
IT IS FURTHER ORDERED that Dougherty Summit Securities shall refund, within sixty (60) days of the entry of this Order, its $52,100 remarketing fee to Westhills, and within twenty (20) days of this payment Dougherty Summit Securities shall submit to the Commission’s staff an affidavit that it has complied with its undertaking to refund the $52,100 remarketing fee.
IT IS FURTHER ORDERED that Dougherty Summit Securities shall pay a civil money penalty in the amount of $400,000 to the United States Treasury. Payment of this $400,000 penalty shall be made on the following terms: $200,000 shall be paid within ninety (90) days of the entry of the Commission’s Order, and the remaining $200,000 shall be paid within one hundred and eighty (180) days of the entry of the Commission’s Order. Provided, however, that if any payment is not made on the date it is due, the entire unpaid balance becomes immediately due and payable. Such payments shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the United States Securities and Exchange Commission; (C) hand delivered to Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter which identifies Dougherty Summit Securities as a Respondent in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Godfried B. Mensah, Securities and Exchange Commission, Midwest Regional Office, 500 W. Madison Street, Suite 1400, Chicago, Illinois, 60661-2511.
IT IS FURTHER ORDERED that Strand, McGinley, and Eitrheim cease and desist from committing or causing any violations, and any future violations, of MSRB Rule G-17.
IT IS FURTHER ORDERED, that Strand, McGinley, and Eitrheim shall each pay a civil money penalty in the amount of $35,000 to the United States Treasury within sixty (60) days of the entry of this Order. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier’s check or bank money order; (B) made payable to the United States Securities and Exchange Commission; (C) hand delivered to Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter which identifies Strand, McGinley, and Eitrheim as respondents in these proceedings and the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Godfried B. Mensah, Securities and Exchange Commission, Midwest Regional Office, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
By the Commission.
Jonathan G. Katz
Secretary
| 1 | Dougherty Summit Securities LLC merged with Dougherty Dawkins LLC in September 1997. Dougherty Dawkins LLC was the successor to Dougherty Dawkins, Inc., the broker-dealer whose conduct is discussed herein. |
http://www.sec.gov/litigation/admin/34-41584.htm
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