Initial Decision: Public Finance Consultants, Inc., Robert D. Fowler, Dolphin and Bradbury, Incorporated, and Robert J. Bradbury, Release No. 244; File No. 3-11229

The Securities and Exchange Commission (SEC or Commission) issued its Order Instituting Proceedings (OIP) on April 26, 2004, pursuant to Section 8A of the Securities Act of 1933 (Securities Act) and Sections 15(b), 15B, and 21C of the Securities Exchange Act of 1934 (Exchange Act).

The proceeding arises out of the issuance of $75.35 million in long-term, non-taxable municipal bonds by the Dauphin County General Authority (DCGA or Authority), a non-party, to finance the purchase of Forum Place, an office building and parking lot complex in Harrisburg, Pennsylvania, in July 1998. According to the OIP, the Official Statement (OS) and the financial projections used to market the bonds to prospective investors were misleading and omitted to state material facts about Forum Place, specifically, the departure of a major tenant.

Public Finance Consultants, Inc. (PFC), of Harrisburg, Robert D. Fowler (Fowler), PFC’s President, Dolphin and Bradbury, Inc. (D&B), a broker and dealer located in Philadelphia, Pennsylvania, and Robert J. Bradbury (Bradbury), D&B’s chief executive officer, are named as Respondents. PFC and Fowler served as financial advisors to DCGA, and D&B and Bradbury served as the underwriter for the Forum Place bond transaction.

The OIP alleges that the Authority violated, and PFC and Fowler caused the Authority’s violations of, Sections 17(a)(2) and 17(a)(3) of the Securities Act.¹ The OIP also asserts that D&B and Bradbury willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Municipal Securities Rulemaking Board Rule G-17 (MSRB Rule G-17). Finally, the OIP claims that D&B willfully violated, and Bradbury willfully aided and abetted and caused D&B’s violations of, Section 15B(c)(1) of the Exchange Act.

The Commission’s Division of Enforcement (Division) seeks the imposition of cease-and-desist orders, disgorgement of ill-gotten gains, and prejudgment interest against all Respondents. In addition, the Division requests civil monetary penalties against D&B and Bradbury. Respondents maintain that all charges should be dismissed.

I held a seven-day hearing in Philadelphia during August 2004.² The parties have filed posthearing pleadings and the matter is ready for decision.³ I base my findings and conclusions on the entire record and on the demeanor of the witnesses who testified at the hearing. I have applied “preponderance of the evidence” as the standard of proof. See Steadman v. SEC, 450 U.S. 91, 97-104 (1981). I have considered and rejected all arguments, proposed findings, and proposed conclusions that are inconsistent with this decision.

PFC is a financial advisory business incorporated in Pennsylvania in 1986 (PFC Answer). The firm is not registered with the Commission in any capacity (PFC Answer). PFC was a financial advisor on approximately two-thirds of DCGA’s bond transactions between 1986 and June 1, 2000 (PFC Answer; Tr. 879; DX 1). DCGA did not use a financial advisor on some of the remaining one-third of its bond transactions (Tr. 879). PFC served as a financial advisor to DCGA in connection with the Forum Place bond transaction in 1998 (PFC Answer). The relationship between PFC and DCGA was based on a handshake (Tr. 973).

Fowler, age fifty-one, is a founder and President of PFC (PFC Answer; DX 2). He earned a B.A. degree in Economics from the University of Virginia in 1974 and has worked in the financial services industry for twenty-eight years (PFC Answer; Tr. 864). In addition to owning PFC, Fowler operates a second firm, Program Administration Services, Inc. (PASI), which performs program administration services for municipal bond issuers (Tr. 864-65). Before starting his own firms, Fowler worked as an investment banker for approximately ten years (Tr. 866). Fowler resides in Hummelstown, Pennsylvania (Tr. 864).

D&B is an investment banking firm located in Philadelphia (D&B Answer; Tr. 801-02). It specializes in the origination and distribution of non-taxable bonds issued by municipalities and municipal authorities within the Commonwealth of Pennsylvania (Commonwealth) (D&B Answer; RX 28). D&B has fourteen employees (Tr. 802). It has been registered with the Commission as a broker and dealer since 1986 (D&B Answer). Before 1986, D&B operated as a partnership (RX 28). D&B had worked closely with DCGA since 1989 as underwriter on several successful bond issuances (D&B Answer; Tr. 745). DCGA retained D&B in 1998 to underwrite the bond issue for the purchase of Forum Place (D&B Answer).

Bradbury, age fifty-six, owns 38% of D&B and serves as the firm’s chief executive officer (D&B Answer; Tr. 665, 667). He has been licensed by the National Association of Securities Dealers since 1969 (D&B Answer). Bradbury has approximately thirty-five years of experience in underwriting municipal bonds and performing related broker-dealer activities (D&B Answer). He earned a B.S. degree from La Salle University in 1969 and resides in Chadds Ford, Pennsylvania (Tr. 661).

Dauphin County is located in south-central Pennsylvania. It has a population of 251,798 (2000 census). Dauphin County is governed by a three-member Board of Commissioners (Tr. 1303). The largest employer in Dauphin County is the Commonwealth (DX 4 at PW 248, 252-54). Harrisburg is the county seat of Dauphin County and the capital of Pennsylvania (DX 4 at PW 248). Harrisburg has a population of 48,950 (2000 census). See Pennsylvania State Data Center, http://pasdc.hbg.psu.edu.

DCGA is a municipal authority organized under the Municipality Authorities Act of 1945.⁴ It was incorporated in 1984 and its office is in Harrisburg (DX 16 at 14). The governing body of DCGA is a Board consisting of five members appointed by the Commissioners of Dauphin County to five-year staggered terms (Tr. 826-27; DX 16 at 14). During 1998, DCGA employed a full-time executive director, an administrative assistant/secretary, and a bookkeeper (Tr. 13). Gregory J. Ricci (Ricci) was chairman of DCGA’s Board and Sidney A. Reese (Reese) was DCGA’s executive director while the Forum Place offering was under consideration (DX 16 at 15).

DCGA was an active issuer of municipal bonds (Tr. 933, 1516-17; DX 1). It was especially aggressive during 1997 and 1998, when interest rates were low (Tr. 937-38; DX 1). The Authority met on a monthly basis from 1986 to 1996, and on a weekly basis during 1997 and 1998 (Tr. 11-12, 49-50; DX 16 at 14, DX 18 at 12). DCGA was the second largest bond issuer in Pennsylvania during 1997, ranking only behind the Commonwealth itself (RX 44, Minutes of Mar. 17, 1998, Meeting at 3) (discussing Daniel Kruger, “1997 Was A Very Good Year for the Region’s Large Issuers,” 323 Bond Buyer 26 (Feb. 9, 1998)). DCGA continued to be an active issuer until 2000 (RX 41 ¶¶ 181, 536).

Fowler and the Authority shared an expansive understanding of the Municipality Authorities Act: project financing for public purposes was permissible if it benefited any residents of the Commonwealth; the project did not necessarily have to be located in Dauphin County or even benefit the residents of Dauphin County (Tr. 10, 881-84, 928, 1306, 1401). As a result, several of DCGA’s bond issues involved financing for projects outside of Dauphin County (DX 1).⁵ These included a $64 million offering for a Hyatt Regency Hotel at Pittsburgh International Airport, issuances for golf courses in other counties, and financing for colleges, hospitals, and nursing homes throughout Pennsylvania (Tr. 884-86, 927-28, 936-37, 1401; DX 1). These project financings were so wide-ranging that the Authority even proposed to change its name to reflect the perceived breadth of its mission (RX 44, Minutes of Aug. 18, 1998, Meeting at 8 (adopting Resolution 19-98 and proposing to change DCGA’s name to “General Authority of Pennsylvania”), Minutes of Oct. 20, 1998, Meeting at 6).

DCGA also encouraged Hummelstown, a borough in Dauphin County, to create its own authority to handle bond offerings that DCGA could not (DX 26 at 3; RX 44, Minutes of June 23, 1998, Executive Session at 1, Minutes of July 21, 1998, Meeting at 7-8, Minutes of Aug. 18, 1998, Meeting at 9). Under this proposal, DCGA would provide administrative staff and services to the Hummelstown General Authority, and it also agreed to pay for any start-up expenses the Hummelstown General Authority incurred (RX 44, Minutes of June 23, 1998, Executive Session at 1, Minutes of July 8, 1998, Meeting at 7 (short version)). Hummelstown’s population is 4,360 (2000 census).

DCGA issued revenue bonds to finance two major projects in Dauphin County during 1998: Forum Place, the $75.35 million transaction that is the subject of the OIP, and Riverfront Office Center, the $45.4 million transaction that served as a model for the Forum Place disclosure document.

In mid-1998, the Dauphin County Commissioners began to rein in the Authority. In July 1998, the Commissioners instructed the Authority to “get out of the golf business” (DX 26 at 3). In the autumn of 1998, shortly after the closings on Riverfront Office Center and Forum Place, the Commissioners summoned DCGA’s Board to a public meeting, at which the Commissioners expressed the views that certain projects undertaken by DCGA did not comply with the purpose the Commissioners believed DCGA should serve (RX 44, Minutes of Sept. 22, 1998, Meeting at 1-2, Minutes of Sept. 22, 1998, Executive Session, Minutes of Oct. 5, 1998, Special Meeting at 1-3). The Commissioners subsequently adopted Ordinances that significantly curtailed DCGA’s powers (RX 44, Minutes of Oct. 20, 1998, Meeting at 6).⁶

There were three bond offerings during 1998 in which public authorities acquired privately owned office buildings in Harrisburg for use by Commonwealth agencies and other governmental bodies. These transactions did not utilize general obligation bonds, backed by the full faith and credit of the issuer. Rather, they involved revenue bonds and repayment was limited to the stream of revenue generated by the buildings themselves. The transactions were based on negotiated sales, not competitive bids. Bradbury and Fowler were involved in all three transactions (DX 16, DX 18, DX 19).

An important issue in these transactions was the negotiation of a voluntary payment-in-lieu-of-taxation (PILOT), by which the acquiring authority would enter into a municipal services agreement with the host jurisdiction(s) (Tr. 749, 1305-06; RX 16 at 55, 58, 98, 120, 130). The PILOT agreements with respect to the Riverfront Office Center and Forum Place capped the Authority’s annual payments to the host jurisdictions and subordinated the payments to operating expenses and debt service to bondholders (DX 16 at 14, DX 18 at 12). The absence of a PILOT agreement involving the Capitol Associates Project proved to be quite contentious.

Capitol Associates Project. Bradbury, like Fowler, shared an expansive understanding of the Municipality Authorities Act. The Capitol Associates Project illustrates how Bradbury generated demand for his underwriting services by promoting competition among local authorities.

Capitol Associates, a group of private developers, owned a 3.7 acre tract of land in Harrisburg (DX 19). The tract contains two three-story office buildings and a seven-story parking garage (DX 19). The office buildings house a variety of Commonwealth agencies (DX 19).

New Garden Township is located in Chester County, Pennsylvania (Tr. 673). It is near the Pennsylvania-Delaware border, approximately seventy-three miles from Harrisburg, and has a population of 9,083 (Mapquest; 2000 census). In 1997, Bradbury encouraged New Garden Township to form its own municipal authority, the New Garden General Authority, to purchase the Capitol Associates property in Harrisburg (Tr. 674).

However, the transaction did not occur. Once the Mayor of Harrisburg learned of New Garden General Authority’s plan to acquire a commercial property in his city and remove it from the tax rolls, he denounced the scheme as a raid on his city’s tax base by a sister jurisdiction (Tr. 675-77). Under the spotlight of adverse publicity, New Garden General Authority chose not to proceed (Tr. 675-76). In a defensive maneuver, the Mayor of Harrisburg then arranged for his own local authority, the Harrisburg Authority, to purchase the Capitol Associates Project from its private-sector owners (Tr. 677; DX 19; RX 16 at 24-25).

The Harrisburg Authority purchased the Capitol Associates Project in June 1998 for $19.1 million and financed the purchase by issuing unrated, non-taxable revenue bonds (DX 19). As part of the purchase, the Harrisburg Authority agreed to pay a PILOT, to be split among three taxing jurisdictions: the City of Harrisburg, the Harrisburg School District, and Dauphin County (DX 19 at 13).

If New Garden General Authority had completed the purchase of the Capitol Associates Project, Bradbury expected that he would be the underwriter and Fowler would be the financial advisor (Tr. 674, 676-77). When the Harrisburg Authority purchased the Capitol Associates Project, Bradbury was co-underwriter and Fowler was co-financial advisor (Tr. 877-78; DX 19 at 3). The political tempest surrounding New Garden’s unsuccessful effort to acquire the Capitol Associates Project created a stampede mentality at DCGA. Members of DCGA began to think: if we do not finance a project, some other authority will finance it and deny Dauphin County a PILOT (Tr. 51, 672-73, 1303-06).

Riverfront Office Center. In June 1998, DCGA purchased Riverfront Office Center from a private owner (DX 18). Riverfront Office Center consists of 19.11 acres of land in Harrisburg, a five-story office building with 365,000 square feet of space, and parking for 1,230 vehicles (DX 18). Before the purchase, the private owner had negotiated leases for office space with the Commonwealth. At closing, the seller assigned the leases to the Authority. DCGA intended to operate the Riverfront Office Center for the public purpose of leasing space to departments and agencies of the Commonwealth or other governmental units (DX 18). DCGA financed the purchase through the public offer and sale of $45.3 million in unrated, non-taxable revenue bonds.

Forum Place. In July 1998, DCGA purchased Forum Place from another private owner, John O. Vartan (Vartan), trustee of the Musalair Trust (Tr. 84; DX 16 at 6; RX 31). Forum Place consists of approximately 2.2 acres of land with a nine-story office building and two below-grade parking levels at Fifth and Walnut Streets in Harrisburg (DX 4 at PW 179, 189, DX 16 at 6). The building contains approximately 376,000 square feet of net leasable office space and a parking garage for approximately 1,090 vehicles (DX 4 at PW 189, DX 16 at 6). Forum Place is located in downtown Harrisburg and is adjacent to the Capitol Complex (DX 4 at PW 187). The location is very convenient and desirable for Commonwealth agencies.

Vartan is a well-known builder, owner, and property manager in the Harrisburg area. He completed construction of Forum Place in 1996 (Tr. 1460). He also negotiated several leases for office space at Forum Place with the Commonwealth and the United States Social Security Administration (DX 16 at 13). By mid-1998, approximately 375,500 square feet of the total net leasable space in the office building was occupied (DX 16 at 13). Terms of the current office leases ran from two to ten years, with various renewal options (DX 16 at 13). Terms of the current parking leases ran from three to eight years (DX 16 at 13). The anchor tenant at Forum Place was the Commonwealth’s Department of Transportation (PennDOT) (DX 16, Appendix C).

As with the Riverfront Office Center, DCGA intended to operate Forum Place for the public purpose of leasing space to departments and agencies of the Commonwealth or other governmental units (DX 16). DCGA financed the purchase through the public offer and sale of unrated, non-taxable revenue bonds. The Forum Place offering consisted of $72.25 million Office and Parking Revenue Bonds, Series A of 1998, and $3.1 million Subordinated Office and Parking Revenue Bonds, Series B of 1998. The offering also included $10.9 million of Subordinated Office and Parking Revenue Bonds, Series C of 1998. However, the Series C bonds were not sold publicly and are not the subject of this proceeding.

DCGA’s purposes were not entirely altruistic. The Authority stood to earn a fee of $125,000 upon closing the Forum Place transaction (DX 13 at 2, DX 24 at 4-5). In addition, Fowler expected the cash flow at Forum Place to generate an annual surplus of up to $250,000, which would accrue to the Authority (DX 13 at 8, DX 24 at 5). Under the Municipality Authorities Act, an authority has the express power to acquire, hold, and lease “buildings to be devoted wholly or partially for public uses . . . and for revenue-producing purposes.” 53 P.S. � 306A(a)(2).

Section 103(a) of the Internal Revenue Code (Code) excludes from a taxpayer’s gross income interest received on state or local bonds. The general rule in Section 103(a) of the Code is subject to several exceptions listed in Section 103(b), including an exception for private activity bonds, as defined in Section 141 of the Code.

The Forum Place bonds initially qualified as non-taxable under Section 103 of the Code (DX 16 at 16-17, DX 28). DCGA pledged to preserve the non-taxable status of interest on the bonds throughout the life of the bonds (DX 16 at 17). This, in turn, required that at least 90% of Forum Place be leased exclusively by state or local governmental entities. Under the common terms of public finance, at least 90% of Forum Place’s value had to be “good use,” i.e., use by state and local government entities, and not more than 10% could be “bad use,” i.e., use by any other entities or individuals. Use by the federal government, individuals, private for-profit entities, and private not-for-profit entities would all be “bad use” that could cause the retroactive loss of the bonds’ non-taxable status if it collectively exceeded the 10% cap (DX 94 ¶ 9; RX 44, Minutes of June 19, 1998, Meeting at 4-5).

Thus, if the Forum Place bondholders were to receive tax-free interest payments over the life of the bonds, the tenants of 90% of the space would have to be state or local government entities. In attracting such tenants, Forum Place would face competition from other commercial office buildings in Harrisburg. However, the Authority could not lease more than a small amount of space at Forum Place to entities other than state and local governments without threatening the non-taxable status of the bonds (DX 94 ¶¶ 10, 51.c, 58).

Fowler suggested that Dauphin County needed additional office space in 1998, and that Forum Place might satisfy that need (Tr. 930, 1009-1011). This suggestion lacks record support. There is no evidence that Dauphin County had a large number of employees (DX 4 at PW 252, 254). Moreover, by February 1998, Dauphin County had announced that it would acquire another office building in Harrisburg, known as 100 Chestnut Street (RX 22). In September 1998, DCGA finalized the purchase of 100 Chestnut Street (DX 1; RX 44, Minutes of May 19, 1998, Meeting at 15, Minutes of June 19, 1998, Meeting at 4-5). Dauphin County expected to use 70% to 75% of the space at 100 Chestnut Street for its own employees by 2000 or 2001 (RX 44, Minutes of June 19, 1998, Meeting at 4-5, Minutes of Sept. 10, 1998, Meeting at 2). I find as a fact that Dauphin County had no need to lease a significant amount of additional office space in 1998 or later. Realistically, the only qualified tenant that might lease a large block of office space at Forum Place was the Commonwealth.

At all relevant times, the Commonwealth leased a greater proportion of its office space than many other state governments (DX 91 at 23). As of August 1998, the Commonwealth satisfied 54% of its demand for office space in the Harrisburg area with leased space (DX 91 at 16).

The Commonwealth’s Department of General Services (DGS) serves as the leasing agent, real estate agent, or tenant representative for most of the Commonwealth’s agencies (Tr. 171, 915, 1606). When an agency determines that it needs additional office space in a building not owned by the Commonwealth, it advises DGS of its needs and the agency and DGS jointly prepare a requirements statement (Tr. 157, 1606). DGS then issues a Request for Proposals (RFP) and advertises it to the public (Tr. 157, 170, 1606; RX 16 at 40). Thereafter, DGS reviews the responses to the RFP (Tr. 1606). DGS’s Bureau of Real Estate analyzes the economic aspects of the proposals received from bidders and creates a short list of the proposals that offer acceptable rental rates (Tr. 1606-07). DGS then forwards the short list of bidders to the requesting agency, and that agency determines which submission to accept (Tr. 1607-08).

After the requesting agency makes its selection, DGS prepares a lease and the Secretary of DGS executes it on behalf of the Commonwealth (Tr. 1607, 1610-11, 1629; DX 92 at 19). The lease is then submitted for approval to the Board of Commissioners of Public Grounds and Buildings, comprised of the Governor and the Treasurer (Tr. 157; DX 92 at 19; RX 16 at 40-41).⁷

If an agency vacates a leased space with time remaining on the lease, DGS tries to find another Commonwealth entity to replace it (Tr. 1611). As a general matter, the Commonwealth does not enter into leases lasting more than ten years (Tr. 912; DX 94 ¶ 8).

Gary Crowell (Crowell) served as Secretary of DGS from January 1995 to July 2001 (Tr. 155, 169). In that position, he was responsible for renovating Commonwealth-owned buildings and leasing real estate not owned by the Commonwealth (DX 65 ¶ 3). Crowell reported directly to then-Governor Thomas Ridge (Tr. 124, 169, 202).

Until the mid-1990s, most of PennDOT’s employees in Harrisburg maintained offices in the Commonwealth-owned Transportation & Safety (T&S) Building (Tr. 156). In 1994, a fire destroyed several floors at the T&S Building (Tr. 156-57). The fire, coupled with ongoing environmental problems (asbestos, PCBs, dioxins), resulted in a decision by Crowell, the then-Secretary of DGS, and Brad Mallory, the then-Secretary of Transportation, to remove PennDOT’s employees from the T&S Building and find them suitable facilities elsewhere (Tr. 156-57).

In 1995, DGS issued an RFP for temporary facilities for the occupants of the T&S Building (Tr. 157). At the time of the RFP, the Commonwealth had not yet decided whether to reconstruct the damaged T&S Building, or to tear it down and replace it with a new building (RX 16 at 47-48). By January 1996, however, DGS made a public announcement that the damaged T&S Building would be gutted, demolished, and replaced with a new structure, to be named the Keystone Building (Tr. 179, 187-89).⁸

In October 1995, the Commonwealth and Vartan signed a lease for 284,142 net usable square feet of office space at Forum Place for some of PennDOT’s administrative employees (Tr. 171; DX 92). At the time, Forum Place was still under construction. The term of the lease was sixty-one and one-half months and the Commonwealth had an option to renew for one additional year (Tr. 158, 192; DX 92). The Commonwealth always intended to move PennDOT’s employees out of Forum Place once renovations to or replacement of the T&S Building could be completed (Tr. 158, 192, 908; RX 16 at 47-49). Vartan needed one year to complete the construction of Forum Place, and PennDOT’s administrative employees moved in during October 1996 (Tr. 157-58; DX 16, Appendix C; RX 16 at 47). The Commonwealth’s five-year lease on space for PennDOT thus expired in November 2001 (DX 16, Appendix C).

In June 1996, the Commonwealth also leased 226,104 net usable square feet of office space at Riverfront Office Center for PennDOT’s Department of Motor Vehicles and Licenses (Tr. 184; DX 18, Appendix C). In contrast to the Forum Place lease, the term of the lease at Riverfront was ten years with two five-year options for renewal (Tr. 159, 908; DX 18, Appendix C). The Commonwealth had no plans to move any PennDOT employees from Riverfront to the Keystone Building (Tr. 105, 159-60, 924).

By July 1998, PennDOT occupied 299,000 square feet of office space at Forum Place (DX 16, Appendix C). This lease accounted for approximately 79% of the office space in Forum Place and generated approximately 60% of Forum Place’s total lease revenues (DX 16, Appendix C, DX 57).

Before Vartan leased office space to the Commonwealth in October 1995, he wanted to determine if Forum Place would remain on a sound financial footing after PennDOT moved out (RX 16 at 44-45). Crowell and George Manakos (Manakos), then-Director of DGS’s Bureau of Real Estate, informed Vartan that the Commonwealth had embarked on a renovation program of all the buildings in the Capitol Complex (RX 16 at 39-40, 42-43, 48). Crowell and Manakos told Vartan that the Commonwealth would utilize all of the PennDOT space at Forum Place as “swing space” for other agencies during the renovation program (RX 16 at 48, 50-52).⁹ As evidence of the Commonwealth’s intentions, Crowell and Manakos advised Vartan that DGS would leave office furniture in Forum Place once PennDOT left, so that the vacant space would be ready for immediate occupancy by the next agency (RX 16 at 51). Vartan never received anything in writing from Crowell or Manakos, but he believed them (RX 16 at 51-52).

Approximately two and one-half years later, Crowell was reported to have made similar statements to the media. See Jack Sherzer, “State Lease Study Spurs City Fears,” Harrisburg Patriot News at B1 (Feb. 15, 1998) (RX 22). According to the newspaper article, the Commonwealth had commissioned a Master Space Plan that would, among other things, study whether the Commonwealth should change the way it leased office space around Harrisburg. Some local officials were concerned that the Commonwealth might “abandon or not renew leases for office space in privately owned buildings in the city” (RX 22). As an illustration, the article noted that the planned Keystone Building would be owned by the Commonwealth. However, comments that the article attributed to Crowell dampened some of these concerns. In relevant part, the article stated:

After the PennDOT offices leave Forum Place, Crowell said, the state will still likely use that building as “swing space” to house a variety of agencies that will be temporarily dislocated as the state continues to renovate Capitol Complex buildings.

In fact, [Crowell] said, the study also will examine whether the state should ask developer John O. Vartan, owner of Forum Place, to add space to that building.

The article went on to observe that the Mayor of Harrisburg would also encourage the Commonwealth to “increase its use of Forum Place” (RX 22).

At the hearing, Crowell intimated that he might have been misquoted in the newspaper article (Tr. 182). I reject this suggestion. First, neither Crowell nor his press secretary complained to the newspaper at the time of publication (Tr. 215-16). Second, the comments attributed to Crowell in the February 1998 article are quite similar to those that Vartan attributed to Crowell in 1995. However, I find that Crowell never committed to using “swing space” at Forum Place for a fixed period of time, either in 1995 or in February 1998.

A critical issue in this proceeding is what was known in June and July 1998 about PennDOT’s eventual move to the Keystone Building. The OIP repeatedly refers to PennDOT’s “scheduled move” (OIP ¶¶ III.E.4, E.6, E.11, E.12). The date of the move was not, in fact, “scheduled” as of July 1998. The Commonwealth’s intent to move PennDOT involved a planned action on an uncertain date to an unconstructed building. It is more appropriate to refer to PennDOT’s “anticipated move” or “intended move.”

As noted, the fire-damaged T&S Building had environmental problems (Tr. 156-57, 190). Therefore, the original demolition/construction schedule was unexpectedly and substantially delayed while the building was depleted of asbestos and PCBs. An environmental lawsuit then further delayed the Keystone Building project. By July 1998, the T&S Building was still standing and site preparation had not even begun for the new Keystone Building (Tr. 156, 190-92). Bradbury knew that there was a construction schedule for the Keystone Building, but he did not inquire into the status of that schedule while he was marketing the Forum Place bonds (Tr. 689-90).¹⁰

On August 1, 1998, the T&S Building was imploded (Tr. 107, 192, 1497-98, 1571). Plans for the implosion were well publicized in the Harrisburg area for months in advance (Tr. 188-89, 925).

The Keystone Building was constructed on a fast track (Tr. 161-62, 192).¹¹ PennDOT moved most of its administrative personnel from Forum Place to the Keystone Building in late 2000 (Tr. 158-59, 213). PennDOT vacated 257,140 net usable square feet of space at Forum Place, but left behind some of its computer operations (DX 91 at 5; RX 25 at 15, RX 37 at 11). PennDOT also left behind its furniture, fixtures, and equipment for the next agency expected to move into Forum Place (Tr. 201, 215, 786).¹² The Commonwealth continued to make lease payments to Forum Place for the vacated PennDOT space through November 15, 2001, the end of the five-year lease (Tr. 213).

The Commonwealth’s plan to move PennDOT’s employees from Forum Place to the new Keystone Building, once that building was ready to be occupied, was publicly available information in the Harrisburg area in mid-1998 (Tr. 32-33, 44-45, 93, 111-12, 146, 179, 189, 218-19, 786, 789, 1410-11; DX 24 at 4-5, DX 101). The information was not widely known outside the Harrisburg area at the time (Tr. 225, 309, 1204-05, 1233, 1468; DX 68, DX 69, DX 101).

In March 1998, the Authority and Vartan began to discuss the purchase of Forum Place. There is conflicting evidence about which side initiated the transaction. However, it is undisputed that discussions began approximately two weeks after publication of the February 15, 1998, article in the Harrisburg Patriot News (RX 22).

According to Fowler, Vartan initiated the transaction (Tr. 890). By early March 1998, “word had gotten out” that the Harrisburg Authority was going to purchase the Capitol Associates Project (Tr. 887; DX 3). Once Vartan learned that the private owners of Capitol Associates were selling their buildings, he asked Fowler if DCGA would be interested in buying Forum Place (Tr. 887-90). Fowler maintained that Vartan was unwilling to approach the Harrisburg Authority for political reasons (Tr. 888). Fowler relayed Vartan’s overture to Ricci and Reese, who were willing to explore the matter with Vartan (Tr. 888-89, 1304; DX 3).

According to Vartan, DCGA initiated the transaction (RX 16 at 53-56). Reese, the Authority’s executive director, contacted Vartan to inform him that the Harrisburg Authority was going to purchase the Capitol Associates Project. Reese also told Vartan that DCGA did not want Vartan to sell Forum Place to the Harrisburg Authority. Reese encouraged Vartan to sell Forum Place to DCGA, so that Dauphin County, not the City of Harrisburg, could control the PILOT (RX 16 at 56, 58, 120, 130). Reese asked Vartan to contact Fowler, who was “putting the numbers together” for DCGA (RX 16 at 56).

To the extent that these two accounts cannot be harmonized, I accept Vartan’s explanation as the more complete. Before March 1998, Vartan had not spoken with Fowler in years and had never conducted business with DCGA (RX 16 at 31-32, 56). Vartan did not need to sell Forum Place (RX 16 at 74). Moreover, if Vartan were to sell Forum Place, he did not care who the buyer was, as long as the buyer met his asking price (RX 16 at 59, 120, 128-29). Kristin Milke (Milke) and Ricci, both members of DCGA in 1998, agreed with Bradbury that keeping control of the PILOT was a factor in the Authority’s decision to proceed (Tr. 51, 673, 1305-06).

Fowler, Ricci, Reese, and others met with Vartan to discuss Forum Place throughout March and April 1998 (Tr. 889; DX 3; RX 16 at 57-59). Fowler presented his preliminary findings to the Authority on April 3 and April 21, 1998, and received permission to continue with his evaluation (Tr. 889, 892-96; DX 3, DX 5).

As early as April 1998, the Authority and Fowler were concerned about what would happen to Forum Place once PennDOT moved out (Tr. 908-09). At that time, Fowler recognized the issue as a hurdle for the prospective bondholders, as well as the Authority (Tr. 910-11).

Fowler recommended the underwriter and bond counsel to the Authority (Tr. 14-15, 1408). Bradbury was not involved in negotiating the purchase price of Forum Place with Vartan or in presenting the purchase proposal to the Authority (Tr. 677-78, 720, 729, 976-78). He first learned of the Forum Place project from Fowler, after the Authority had decided to proceed (Tr. 753, 977-78). In their first discussion, Fowler asked Bradbury preliminary questions about likely interest rates, debt service, reserve requirements, and the probable cost of issuing the bonds (Tr. 901-02).

DCGA retained Pepper Hamilton LLP (Pepper Hamilton) as its bond counsel on the Forum Place transaction (Tr. 15; DX 16 at 3, DX 24 at 8). David W. Sweet (Sweet), a former Pennsylvania state legislator and a partner in Pepper Hamilton’s Harrisburg office, served as the lead attorney (Tr. 53-54, 62-63, 66-67; RX 16 at 37). Pepper Hamilton, through Sweet and others, had also been involved in the late stages of negotiations between DCGA and Vartan over the purchase price of Forum Place and related real estate issues (Tr. 15, 898, 902-04, 906; RX 16 at 57, 59-60, 64-65, 72-74, RX 30). Sweet, whose practice also involved lobbying activities, offered to act as a liaison with the Commonwealth (Tr. 54, 345, 368, 687, 943, 956-57). Sweet also drafted some of the language in the offering document and signed Pepper Hamilton’s supplemental opinion letter at closing (Tr. 69-70, 113; DX 28).

D&B retained Lamb, Windle & McErlane, P.C. (LWM), a law firm in West Chester, Pennsylvania, to serve as underwriter’s counsel (Tr. 338, 373-74, 1275; DX 16 at 3, DX 20). LWM concentrates its practice in municipal finance (Tr. 1271, 1274). Thomas J. O’Neill (O’Neill) served as the principal lawyer at LWM with respect to the Forum Place transaction (Tr. 1275-76). O’Neill wrote the bond purchase agreement and prepared drafts of the Preliminary Offering Statement (POS) and OS (Tr. 355, 375-76). James McErlane (McErlane), O’Neill’s law partner, served as a reviewer and took over the assignment while O’Neill was on his summer vacation (Tr. 358, 385, 1276; DX 30, DX 40).

These members of the finance team were well acquainted with each other. D&B had extensive experience in underwriting bond offerings for DCGA (Tr. 744-45). Bradbury had known Fowler since the early 1980s and he first did business with PFC in 1989 (Tr. 710-11, 753). Bradbury had known O’Neill for a long time, as well (Tr. 756). Sweet had known Fowler since approximately 1990 and had worked on several transactions with PFC (Tr. 63-65). Sweet had known Bradbury for several years and Pepper Hamilton had done business with Bradbury for even longer (Tr. 109-10). Sweet and O’Neill had been law partners at one time and were also social friends (Tr. 79-80, 342, 1281). O’Neill had known Fowler for thirty years (Tr. 342). He had worked on more than one hundred transactions with D&B, one dozen transactions with PFC, and three or four transactions with DCGA (Tr. 343). McErlane has known Bradbury as a client and a friend for more than twenty-five years (Tr. 756, 1272-73).

The final member of the finance team was Neil Hendershot (Hendershot), an attorney with the Harrisburg law firm of Goldberg, Katzman & Shipman, P.C. (GKS) (Tr. 26-27, 83, 780, 1645). GKS, through Hendershot, served as the Authority’s solicitor from 1984 to February 2000 (Tr. 1645). Hendershot or another representative of GKS regularly attended the Authority’s meetings (Tr. 1646; DX 24-DX 26). Hendershot signed an opinion letter from GKS to the underwriter and bond counsel at closing, as required by the bond purchase agreement (Tr. 798-99; RX 31 at 5-6).

Pepper Hamilton was serving as underwriter’s counsel to D&B on the Riverfront Office Center project in June 1998 (DX 18 at 3). LWM was not involved in that transaction. On June 16, 1998, Sweet sent O’Neill a computer disc containing the Riverfront POS and related documents to use as a guide for the Forum Place POS (Tr. 73-75, 113-14, 374-75, 1275-76; DX 30).

On June 22, 1998, Bradbury, Sweet, and O’Neill discussed the Forum Place offering by telephone (Tr. 344, 756-58; DX 20). At the hearing, Sweet and O’Neill claimed that they could not recall the specifics of this conversation (Tr. 79, 346-47, 349). During his investigative testimony, O’Neill’s recollection was considerably more precise. O’Neill’s investigative testimony explained that he learned that Forum Place was the third transaction of its type (after Riverfront and Capitol Associates) and that Bradbury had already lined up interested buyers for the Forum Place bonds (Tr. 344-47) (“it was described to me as sort of a done deal”). During his investigative testimony, O’Neill also recalled that the computer disc came with an explanation that the Forum Place project had “a tight time frame,” that “they needed a [draft POS] quickly,” and that using the Riverfront POS “would save a lot of time” (Tr. 347, 349). Bradbury did not remember saying that Forum Place was a “done deal,” but otherwise he did not contradict O’Neill’s investigative testimony (Tr. 727-28). I credit O’Neill’s investigative testimony and I give little weight to the hearing testimony of Sweet and Bradbury on these points.

At O’Neill’s request, Fowler provided O’Neill with copies of the Forum Place tenant leases (Tr. 367, 954, 1011). O’Neill may have had other conversations with Fowler, but he could not remember the subjects discussed (Tr. 366, 390).

O’Neill used the Riverfront POS as a model for drafting the Forum Place POS. He did not know if there were any distinctions between the two transactions and he assumed that there were none (Tr. 395-96).¹³ As a result, the disclosure portions of the Forum Place POS are almost identical to the comparable portions of the Riverfront offering document (Tr. 381, 384; DX 18, DX 33, DX 40, DX 87).

On or about June 26, O’Neill circulated a first draft of the POS for comments (Tr. 357).¹⁴ Bradbury and Sweet reviewed the draft and offered suggestions (Tr. 114, 704-05, 759, 784; DX 31). Fowler knew that the Authority was relying on him to review the OS (Tr. 920). He was aggravated that he had to read a facsimile copy (Tr. 917). He considered the Forum Place POS to be a “knockoff” of the Riverfront POS and “didn’t read it line-by-line” (Tr. 918). I find little record support for the allegation that “Fowler substantially participated in drafting the [OS]” (OIP ¶ III.D.4).

On June 30, 1998, Fowler, Sweet, and Reese met with Crowell (Tr. 123, 126-27, 929-30, 958; DX 3).¹⁵ Fowler, Sweet, and Crowell agreed that the primary purpose of the meeting was to discuss the Commonwealth’s long-range plans for leasing office space in Harrisburg, and specifically, to ascertain the Commonwealth’s plans for leasing space at Forum Place after PennDOT moved to the Keystone Building (Tr. 95-96, 99, 126, 161, 194, 931; DX 65 ¶ 5). Fowler and Sweet testified that another purpose of the meeting was to determine if the Commonwealth was satisfied with Vartan’s management of Forum Place (Tr. 95-96, 125-26, 931; DX 3). Fowler testified that the meeting also presented an opportunity to confirm the expense figures that Vartan had provided for Forum Place, and to make sure that the Commonwealth’s demand for leased space had not changed in the four months after publication of the February 15, 1998, newspaper article (Tr. 931, 958). As of June 30, the Authority had not yet purchased Forum Place, and it still had time to withdraw from the transaction if circumstances warranted (Tr. 933).

The participants in the meeting agreed that Crowell gave his best judgment about what the future would bring and shared his knowledge about pending projects (Tr. 96-97; DX 65 ¶ 5). It is undisputed that Crowell never offered any commitments, assurances, or guarantees that the Commonwealth would continue to lease space at Forum Place after PennDOT’s departure (Tr. 97, 128-29, 915; DX 65 ¶ 5). Nor is there a dispute that Crowell was reasonably happy with Vartan’s management of Forum Place (Tr. 96-97, 125-26). Beyond these basic points, the participants’ accounts of the meeting diverge widely on the specifics.

According to Fowler, Crowell outlined “a whole litany” of “all the buildings in the Capitol Complex” that needed renovation, explained that such renovations would be phased in over time, and estimated that it would take the Commonwealth three to four years per building (Tr. 932-33). Fowler quoted Crowell as saying that the Commonwealth would continue to use Forum Place as swing space for the next fifteen to twenty years (Tr. 932). Fowler took “a tremendous amount of comfort” from Crowell’s words and concluded that there was a “reasonable likelihood” that the Commonwealth would continue to use Forum Place (Tr. 930, 959).

Before the meeting, Fowler had made a note to obtain a letter from Crowell about the Commonwealth’s plans, if any, to use Forum Place after PennDOT’s departure (DX 6). Crowell never provided such a letter (Tr. 939-42, 944). I do not agree with the Division that there is significance to this point. Vartan never received anything in writing from Crowell in 1995.

Sweet testified that Crowell described a series of “fairly extensive” renovation projects in Commonwealth-owned office buildings that would last five to ten years (Tr. 129). Sweet said that Crowell described the Commonwealth’s need for swing space during this period of renovation, repair, and upgrading (Tr. 96). According to Sweet, Crowell stated that Forum Place would be ideal for such swing space, because of its very convenient location (Tr. 128). Finally, Sweet quoted Crowell as stating that the Commonwealth was still in a “growth mode,” in terms of its demand for office space (Tr. 96). When Sweet left the meeting, he took “some comfort” from the fact that Crowell had not identified any “huge negative” to proceeding with the bond offering (Tr. 128).

Crowell’s testimony left the impression that he was much vaguer at the meeting about the Commonwealth’s intent to use Forum Place as swing space. According to Crowell, the Commonwealth had already completed a significant number of capital improvements in the Capitol Complex and was actually retracting from the marketplace for leased office space in the summer of 1998 (Tr. 162, 165). The only remaining renovations under consideration at the time involved two buildings, the Finance Building and the Forum Building. Neither of those was a high priority (Tr. 162, 186; DX 65). Crowell also testified that, if the Commonwealth did need swing space during a period of renovation and repair, it would look first to buildings it already owned and second to privately owned buildings (Tr. 163-64).

Crowell scoffed at the notion that it would take the Commonwealth fifteen to twenty years to renovate the Finance Building and the Forum Building (Tr. 200). He could see the possibility of using Forum Place as swing space for the remainder of the original term of the PennDOT lease, as well as for the additional one-year option period (Tr. 164-65, 196-97). Otherwise, the Commonwealth would have to issue a new RFP for swing space (Tr. 164-65). Crowell confirmed that PennDOT would leave behind desks, chairs, and partitions when it vacated Forum Place (Tr. 201, 215).

Crowell testified that he also discussed PennDOT’s long-term plans for space leased in the Riverfront Office Building during the June 30 meeting (Tr. 159, 161). He noted that, if the Commonwealth exercised one or both of its options under the Riverfront lease, PennDOT could occupy the Riverfront Office Building for another fifteen to twenty years (Tr. 159, 161). In contrast, Fowler could not recall whether the subject of Riverfront ever came up at the meeting (Tr. 939).

The record is inconclusive as to what really happened at this meeting. There are no notes or written summaries. Fowler gave the broadest possible interpretation to Crowell’s words, while Crowell gave the narrowest possible interpretation. Sweet was somewhere in the middle. However, I find that Fowler and Sweet understood that the Commonwealth could choose not to continue to lease space at Forum Place under future leases.

Fowler purportedly told Bradbury about the results of the June 30 meeting (Tr. 680, 694, 786, 964). However, Bradbury did not know how long the swing space program would last (Tr. 716). No member of the finance team told O’Neill or McErlane about the June 30 meeting or about PennDOT’s plan to move out of Forum Place once the Keystone Building was completed (Tr. 116, 353-54, 368, 378, 920, 1014, 1282).

On July 7, O’Neill sent the first half of the revised POS and a draft purchase contract to Sweet for distribution to the Authority at its July 8 meeting (Tr. 358-59; DX 40).

On July 8, the Authority conducted a public meeting that was attended by the Authority’s members, Reese, Fowler, Sweet, and a lawyer from Hendershot’s office (DX 24, DX 25).¹⁶ Agenda items that day included approval of the Authority’s purchase of Forum Place from Vartan, approval of the bond purchase contract with D&B, approval of the POS, and other related matters (DX 24 at 4-8, DX 25 at 3-6, DX 26 at 1-2).

At the meeting, there was a discussion that PennDOT would be leaving Forum Place and moving into the Keystone Building, once it was completed (Tr. 21-22; DX 24 at 5). Fowler also advised the Authority that he, Sweet, and Reese recently met with Crowell and that Crowell told them that the Commonwealth might use Forum Place as swing space for fifteen or twenty years (Tr. 20-22, 34, 961-63; DX 24 at 5, DX 26 at 1). Both Sweet and Reese remained silent as Fowler described to the Authority what had happened at the meeting with Crowell (Tr. 960, 962-63). Disclosure of PennDOT’s intended move in the POS was not addressed during the July 8 meeting (Tr. 920, 954).¹⁷

PFC also prepared financial projections of anticipated tenant revenues at Forum Place through 2008 (Tr. 948-50; DX 13). Fowler presented these projections to the Authority to assure it that the future cash flow at Forum Place would be sufficient to service the debt and eventually retire the bonds (Tr. 948-50). Fowler further advised the Authority that D&B had sold all but $13 million of the bonds as of July 8 (DX 24 at 6).¹⁸

The Authority voted to approve the purchase of Forum Place and proceed with the bond offering (DX 24, DX 25) (Resolution 15-98). It reaffirmed the appointment of bond counsel and the financial advisor, and approved the appointment of the other professionals involved with the project (DX 24 at 8). The Authority also approved the content of the POS and authorized its distribution (DX 24, DX 25).

The members of the Authority did not actually read the POS page-by-page (Tr. 22-23, 946-47). Rather, they relied on the solicitor, bond counsel, and the financial advisor to review it for them (Tr. 22-23, 25-26, 36-37, 1408-09). There is no evidence that the Authority voted to approve the distribution of the financial projections to prospective investors.

There are two versions of the minutes of the July 8 meeting: DX 24 (long version, unsigned) and DX 25 (short version, signed). The differences between the versions are of two sorts. First, DX 24 shows Sweet as an active participant, making several comments during the meeting. In contrast, DX 25 omits most of Sweet’s comments.¹⁹ Second, DX 24 provides an extensive summary of Fowler’s comments regarding PennDOT’s anticipated move and the information Fowler, Sweet, and Reese purportedly gained from their June 30 meeting with Crowell. DX 25 omits all of Fowler’s comments on these subjects.

An Authority member and a memorandum prepared by a lawyer in Hendershot’s office confirm that Fowler’s discussion occurred at the July 8 meeting (Tr. 28, 41-42; DX 26 at 1-2). I find as a fact that the more complete and accurate minutes of what actually took place at the July 8 meeting is DX 24 (the unsigned long version) and not DX 25 (the signed short version).

After the July 8 meeting, McErlane finalized the OS. He added a more detailed summary of the tenant leases, including their expiration dates, to Appendix C (Tr. 384-86, 1277-80; DX 15, DX 16). The final version of the OS is dated July 17, 1998 (DX 16).

Closing on the Forum Place transaction took place on July 31, 1998. D&B purchased the Series A and Series B bonds from the Authority at a 1% discount from par value, or $753,500 (D&B Answer; Tr. 851; DX 13 at 1). PFC received a financial advisory fee of $80,000 from the Authority (Tr. 1008; DX 1, DX 13 at 2).

LWM, as underwriter’s counsel, provided an opinion letter to D&B concerning compliance with Exchange Act Rule 15c2-12 (Tr. 363-66, 799, 1550-51; DX 27). LWM also informed D&B in negative terms (“nothing has come to our attention”) that it was satisfied that the disclosure in the OS was adequate (RX 41 ¶¶ 79-89, 685). Pepper Hamilton, as bond counsel, provided a supplemental opinion letter to D&B, stating that certain sections of the OS fairly described the matters they discussed and that the tax matters discussed in the OS accurately reflected its opinion (Tr. 135-36, 795-99; DX 28; RX 31). GKS, as the Authority’s solicitor, wrote an opinion letter to D&B and Pepper Hamilton affirming the Authority’s power to issue the bonds and consummate the transaction (Tr. 799; RX 31 at 5-6). GKS’s opinion letter also stated that the OS did not contain any untrue statement of a material fact with respect to the Authority (RX 31 at 5).

Some of the key participants in the Forum Place transaction were not in Pennsylvania for parts of the relevant period. Bradbury was in Georgia for several days as part of a long July 4 weekend (Tr. 682-84, 761-63, 782, 814-15, 1227). His vacation began on July 2 and continued at least through July 7 (Tr. 761; DX 40). Although Bradbury was not in his office during this period, he was accessible by cellular telephone and facsimile, and participated in a telephone conversation about the offering on July 6. O’Neill was on vacation from July 12 through July 26 (DX 40). McErlane covered for him during this period (DX 20, DX 40). Vartan was in Europe from mid-July through July 31 (Tr. 989; RX 16 at 8, 75). The parties pushed to complete the necessary documents so that Vartan could review them before he left on his trip (Tr. 989; DX 24 at 6). Hendershot did not attend the Authority’s meeting on July 8 because his wife required emergency surgery (Tr. 1646). An associate from GKS attended the meeting in place of Hendershot (Tr. 1015, 1648; DX 26). Hendershot also did not attend the Authority’s August 18 meeting because he was on vacation (Tr. 1648, 1653). The Authority withheld approval of the minutes of its July 8 meeting until Hendershot returned on September 10 (Tr. 1653, 1664-66; RX 44, Minutes of Aug. 18, 1998, Meeting at 1, Minutes of Sept. 10, 1998, Meeting at 1).

Late in June 1998, sales agents for D&B started contacting institutional investors to determine their level of interest in financing the purchase of Forum Place (Tr. 1450-51). Some of these institutional investors immediately declined when they learned of the “short-term lease vs. long-term bond” risk (Tr. 1186-87, 1450). Others expressed an interest and D&B assembled and distributed an information package to them. The package included the Authority’s POS, the trust indenture, the existing Forum Place leases, an environmental report, the financial projections prepared by Fowler, and a building appraisal from March 1997 (Tr. 438, 485, 1188-90, 1219-20; DX 52). The OIP charges that the Authority’s POS and OS, as well as Fowler’s financial projections and the March 1997 appraisal, were materially misleading or omitted material information (OIP ¶ III.E).

An official statement is a document or set of documents prepared by an issuer of municipal securities or its representative that is complete as of the date it is delivered to the participating underwriter. Exchange Act Rule 15c2-12(f)(3). As relevant to this proceeding, an official statement sets forth information material to an evaluation of the offering. In short, it describes the risks that an investor will take in purchasing the security (DX 94 ¶ 6). A preliminary official statement is an official statement prepared by or for an issuer of municipal securities for dissemination to potential customers prior to the availability of the final official statement. Exchange Act Rule 15c2-12(f)(6).

A participating underwriter must obtain and review a near-final official statement before it bids for, purchases, offers, or sells municipal securities in an offering. Exchange Act Rule 15c2-12(b)(1). After a participating underwriter has reached an understanding with an issuer of municipal securities that it will become a participating underwriter in an offering, and until a final official statement is available, the participating underwriter must promptly send to any potential customer, on request, a copy of the most recent preliminary official statement. Exchange Act Rule 15c2-12(b)(2).

The record in this proceeding contains an undated draft POS (DX 33); a POS, dated July 1, 1998 (DX 40, DX 87); a POS, dated July 8, 1998 (DX 15); and the OS, dated July 17, 1998 (DX 16). The Division alleges that the same material omissions occurred in every version of the POS and OS used here (Tr. 656; Div. Br. at 9 n.5, Div. Reply to PFC at 6 n.6, 15-16).

An offering document should be a “four-corner pronouncement” of all the information necessary for an investor to make an informed decision concerning whether or not to purchase a particular security (Tr. 276, 360-61, 1151, 1487; DX 94 ¶ 33). Investors, including institutional investors, should be able to rely on the assumption that the offering document contains all the information necessary to make an investment decision (Tr. 598-99, 1151-52). Pope, the Division’s expert witness, opined that an offering document must provide complete disclosure to any reasonable and intelligent reader, regardless of where the reader lives and with the assumption that the reader has no knowledge of any particular facts and circumstances not disclosed in the offering document (Tr. 1135; DX 94 ¶ 33).

The Authority cautioned prospective investors on page 4 of its POS and OS: “No dealer, broker, salesman or other person has been authorized to give information or to make any representation not contained in this [OS] and, if given or made, such other information or representation must not be relied upon” (DX 15 at 4, DX 16 at 4).

The POS and OS also explained that the Authority had retained PFC as its financial advisor in connection with the preparation, authorization, and issuance of the Forum Place bonds (DX 15 at 18, DX 16 at 20, DX 33 at 18, DX 40 at 18, DX 87 at 18). The Authority then stated that the scope of the financial advisor’s engagement was limited:

The Financial Advisor is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. The Financial Advisor is an independent advisory firm and is not engaged in the business of underwriting, trading or distributing municipal securities or other public securities.

The POS and OS clearly describe that the Forum Place bonds are limited obligations of the Authority. These documents also explain that the bonds are secured solely by the receipts and revenues received by the Authority from payment on various leases for space in the office building and parking facilities. The POS and OS make clear that neither the general credit of the Authority nor the credit or taxing power of Dauphin County is pledged as payment of the principal and interest on the Forum Place bonds (DX 16 at 1).

The OS conspicuously warned on the cover and on pages 11-13 that the Pennsylvania General Assembly was not required to appropriate the funds necessary to make the rental payments due under the current office or parking leases. The OS also explicitly cautioned that the Commonwealth’s leases were scheduled to expire prior to the stated maturity of the 1998 Series A bonds, with page 13 repeating the warning that the leases would expire and that the Commonwealth did not have to extend or renew their terms. Page 13 of the OS identified the office leases by each Commonwealth agency tenant, including PennDOT, and directed the reader to Appendix C for a breakdown of the terms of each lease. Appendix C to the OS listed the leases and their expiration dates, including the PennDOT lease term ending on November 15, 2001, and its optional extension to November 15, 2002. Appendix C, read in conjunction with the remainder of the OS, reflects that the Commonwealth’s lease for PennDOT’s space expired at least two years before any of the bonds matured and twenty-four years before most of the bonds matured.

Many of these warnings were emphasized by the use of bold fonts and capital letters. The POS and OS clearly stated:

THE OFFICE LEASES ARE SCHEDULED TO EXPIRE PRIOR TO THE MATURITY OF THE 1998 BONDS; THERE IS NO COMMITMENT, REQUIREMENT OR GUARANTEE THAT THE COMMONWEALTH WILL RENEW OR EXTEND ANY OF THE OFFICE LEASES.

These warnings proved sufficient to dissuade several prospective investors (Tr. 544-45, 565, 1187, 1450, 1466).

No version of the POS or OS disclosed PennDOT’s plan to vacate Forum Place once the Keystone Building was constructed (DX 15, DX 16, DX 33, DX 40, DX 87).

Under the Division’s theory of the case, this information was important to prospective investors because there was no certainty that PennDOT would remain at Forum Place and there was near certainty that PennDOT would vacate Forum Place in two or three years. Every investor representative to testify at the hearing considered such information important because the loss of the anchor tenant could impair future debt service on the bonds (Tr. 225, 270-71, 310-11, 336, 423, 487, 534, 548, 578-79). As a credit analyst for one purchaser explained: “[W]hile the bond documents highlighted the fact that the leases expired prior to the term of the bonds, from a credit perspective, there’s a big difference between facing the potential loss of your biggest tenant and actually knowing that you’ll have to replace your major tenant within three years” (Tr. 611).

Bradbury, Fowler, Sweet, O’Neill, and McErlane offered several post hoc rationalizations as to why PennDOT’s planned move from Forum Place to the Keystone Building was omitted from the POS and OS: the contemplated move to an unconstructed building on an indeterminate date was speculative, not a known fact; construction on the Keystone Building had not yet started; and disclosure of PennDOT’s planned move was already subsumed in the cautionary language about short-term leases with no guarantee of renewal (Tr. 104-05, 115-17, 122-23, 393-94, 404-05, 689, 739-40, 789-90, 1282-83).

Fowler, Sweet, and Bradbury each testified that: (1) the finance team knew in July 1998 that the POS and OS did not discuss PennDOT’s planned move; and (2) they never discussed (or, at least, could not remember discussing) among themselves revision of the POS and OS to include such information. Fowler, Sweet, and O’Neill testified that, if they had to do it all over again, they would still omit any disclosure of PennDOT’s planned move (Tr. 102, 104-05, 115-23, 135, 367-68, 393-95, 404-05, 411, 919-20, 952-54, 973-75).

Fowler prepared financial projections of the revenues and expenses at Forum Place that took existing leases and occupants and extrapolated these data for a period of ten years (1998-2008), regardless of the actual lease expiration dates (Tr. 729; DX 13). He presented his projections to the Authority on July 8, 1998, to demonstrate that the cash flow at Forum Place would be sufficient to service the debt and eventually retire the bonds (Tr. 948-50; DX 13 at 8-9). Although Fowler maintained that he prepared the financial projections only for distribution to the Authority, PFC also sent the projections to prospective investors (Tr. 501, 529-30, 942, 985; DX 57).

Fowler did not prepare a written explanation of the assumptions underlying his cash flow analysis, including the assumption that the existing occupants would extend without interruption or be immediately replaced by other qualified tenants at similar rates (DX 94 ¶¶ 12, 64).

Bradbury asked Fowler about the assumptions underlying the financial projections, concluded that the assumptions were reasonable, and added explanatory footnotes (Tr. 806, 853-55). As relevant to this proceeding, footnote 1 to the financial projections states: “Revenues based on actual Commonwealth of Pennsylvania, U.S. Government, and other leases now in effect at the time of Closing and assumes all leases will continue to specific date or renew on similar terms (see Lease Terms and Options on page 5)” (Tr. 451; DX 53 at 4). D&B then circulated the financial projections with footnotes to prospective investors (Tr. 450, 629, 1116).

Neither version of the financial projections was included in the POS or OS (DX 94 ¶ 14). Neither version contained any disclaimer about whether Fowler’s assumptions were realistic. Neither version provided any information about circumstances that might prevent the achievement of the forecasted results. Neither version explained that the Commonwealth was unlikely to renew or extend the lease for the PennDOT space (DX 94 ¶¶ 13, 53).

I find as a fact that DCGA never authorized distribution of Fowler’s financial projections to prospective investors (DX 24-DX 26). O’Neill did not know that D&B was distributing financial projections to prospective investors (Tr. 360-61). Consequently, O’Neill never reviewed the financial projections (Tr. 363).

Based on the footnoted financial projections that D&B sent to investors, Keith Lowe (Lowe), a representative of Evergreen Fund, assumed that “there was a possibility” that PennDOT could continue to remain at Forum Place through 2008 (Tr. 449-52). Representatives of two other institutional investors did not make the same assumption as Lowe (Tr. 507-09, 630-31). In the judgment of the expert witness for D&B and Bradbury, it was not unreasonable for Lowe to draw the conclusion that he did (Tr. 1561-62).

Early in 1997, a bank owned by Vartan engaged an independent appraiser to determine the present day fair market value of Forum Place (DX 4; RX 16 at 108-09). Vartan sought the appraisal in connection with a mortgage loan application (Tr. 975-76; RX 16 at 105-06, 109-10). Among other things, the appraiser determined that occupancy rates for Class A office space in Harrisburg’s Central Business District were 97% to 99% (DX 4 at 42).²⁰ In June and July 1998, D&B distributed the appraisal to prospective investors in the Forum Place bonds. By then, of course, the appraisal was fifteen months old.

According to the OIP, the vacancy rate information in the appraisal, together with the misleading OS and financial projections, misled prospective investors into concluding that PennDOT would not leave Forum Place because there was no single block of available office space in downtown Harrisburg large enough to accommodate its needs (OIP ¶ III.E.11).²¹

Lowe testified that page 42 of the appraisal was important to him as he considered the credit worthiness of the bond offering (Tr. 417-19). Susan McCormack (McCormack), a credit analyst for Putnam Investments, thought there was very little office space available in Harrisburg (Tr. 492). She received the appraisal and her notes reflect that she learned of the 1% vacancy rate for Class A space (Tr. 485; DX 55). David Gilliand (Gilliand), a high yield bond analyst at PaineWebber, based PaineWebber’s credit summary, in part, on information he drew from the appraisal (Tr. 610-11, 640-41, 644; DX 36).

D&B sold Series A bonds to four institutions: Putnam Investments purchased $27 million of the bonds on July 10; Evergreen Funds purchased $26.7 million of the bonds on July 10; PaineWebber purchased $13 million of the bonds on July 10; and Merrill Lynch purchased $5.6 million of the bonds on July 14 (DX 21-DX 23). These were conditional trade dates. The bonds were a “when-issued” transaction, and did not actually settle until the closing on July 31, 1998.²²

D&B sold about two-thirds of the subordinated Series B bonds to Wilmington Trust Bank (DX 22). D&B sold the remainder of the Series B bonds to close friends of Bradbury or retained them for its own account (Tr. 819-20).

As a part of its sales solicitation, D&B arranged for prospective investors to tour Forum Place (Tr. 420-21, 453-56, 1191, 1309-10, 1454). Vartan conducted two tours on July 7. The tours were comprehensive and lasted one to two hours each (Tr. 454, 511-12, 1192). No subject was “off limits” to prospective investors (Tr. 455, 515-16). Representatives of Putnam Investments and Evergreen Funds, the institutions that purchased the largest quantity of bonds, took a tour (Tr. 454-56, 490, 520, 1309-10). Representatives of Merrill Lynch and PaineWebber, the institutions that purchased the smallest quantity of bonds, did not (Tr. 281, 610).

The Forum Place offering was a public offering. The bonds were in small denominations ($5,000) and there were no restrictions barring their sale or resale to the public at large (Tr. 87-88, 728-29, 852-53, 1156-57; DX 16, DX 59, DX 94 ¶ 45). A commercial printer billed DCGA for 200 copies of the OS (Tr. 731-32; DX 89).

D&B thought the institutions that bought the Class A bonds were doing so for the mutual funds they managed (Tr. 801, 806, 1225). With the exception of PaineWebber, D&B was correct (Tr. 221, 269, 307, 547, 580; DX 49). The institutions in question were highly sophisticated investors (Tr. 807-08, 1182, 1445). They were represented by analysts or supervisors with advanced business degrees (Tr. 299, 415, 482, 541-42, 568, 600-01, 1182, 1216). Because interest rates were low during 1998, such institutions were very receptive to unrated, high-yield bond offerings (Tr. 1185-86, 1216, 1223, 1449).

The OIP alleges that one of the institutions that purchased Forum Place bonds from D&B “promptly” resold the bonds to its retail customers (OIP ¶ III.D.6). It is unclear if the intended reference is to PaineWebber or Wilmington Trust Bank. According to the charging document, by the closing on July 31, 1998, “retail investors located across the nation had purchased over $1 million of the bonds” (OIP ¶ III.D.6). There is no evidence in the record to quantify the sale of Forum Place bonds to “retail investors” before July 31, 1998.

There is some evidence that PaineWebber resold an unspecified quantity of the Series A bonds to its retail clients on unknown dates (Tr. 646, 652). Likewise, Wilmington Trust Bank eventually may have resold its Series B bonds to its high net worth clients, although there is no evidence of that in the record (Tr. 819-20).

With one exception, the institutional investors that purchased Series A bonds from D&B did not know of PennDOT’s anticipated move when they made their investment decisions (Tr. 578-79). The exception, Putnam Investments, had actual knowledge of PennDOT’s intended move to the Keystone Building and nevertheless became the single largest purchaser of the Forum Place bonds (Tr. 529, 531). McCormack learned of PennDOT’s plans to leave Forum Place. Although she could not initially remember whether this information came from Fowler or Bradbury, I find that it most likely came from Bradbury (Tr. 486-87, 523-26, 859-60; DX 54 at 3, DX 55). McCormack also learned from either Fowler or Bradbury that the Commonwealth might use Forum Place for its swing space program, although there was no guarantee that it would do so (Tr. 487-90, 492-93, 518, 525-27, 531, 1079-81). McCormack’s report and notes reflect that the Commonwealth’s swing space program was tentative: “[T]here is no assurance that the Department of Finance will indeed move into Forum Place” (DX 54, DX 55).

Putnam Investments enlisted its outside counsel, a law firm in Boston, Massachusetts, to review the draft POS and the draft trust indenture for Forum Place (Tr. 496-98, 521-23, 532-33; DX 56, DX 90). The law firm recommended certain language changes to the draft trust indenture (DX 90). However, neither Putnam Investments nor its outside counsel recommended any language additions to the POS concerning PennDOT’s anticipated move to the Keystone Building.

Steven Syfert (Syfert), a sales agent at D&B, solicited a Merrill Lynch portfolio manager to purchase Forum Place bonds during the initial offering (Tr. 275-76, 1450).

James Loffredo (Loffredo) is the director of research for Merrill Lynch’s Municipal Products Group (Tr. 301). In July 1998, the Merrill Lynch portfolio manager asked Loffredo to evaluate the Forum Place bond offering (Tr. 301-03). Loffredo assigned the task to Christopher Fornal (Fornal), a junior analyst-in-training (Tr. 302-03). Loffredo handed Fornal a copy of the POS and told him to prepare a credit worthiness report (Tr. 221, 301-03). Merrill Lynch policy required such a report before a bond purchase could be considered (Tr. 225, 302).

Fornal never spoke with anyone at D&B or toured Forum Place (Tr. 222-23). Although Loffredo edited Fornal’s report, Loffredo could not recall if he personally read the POS. He testified that, “most likely,” he did review parts of it (Tr. 304). Neither Fornal nor Loffredo knew of PennDOT’s intended move when they wrote the report (Tr. 225, 309).

Paragraph III.E.12 of the OIP asserts that Merrill Lynch learned “in September 1998” of PennDOT’s planned move to the Keystone Building and “promptly” sold its entire position of Forum Place bonds in the secondary market.

There is a considerable degree of embellishment here. Merrill Lynch learned of PennDOT’s planned move early in August 1998 (Tr. 270-71, 282-86, 296). Merrill Lynch then investigated the matter thoroughly (Tr. 270-71, 288, 309-10; DX 71). James Schwartz (Schwartz), a Merrill Lynch senior research analyst, telephoned Crowell, who immediately confirmed PennDOT’s intent to move (Tr. 268, 288-89). Schwartz then purportedly complained to Syfert about the omission of PennDOT’s anticipated move from the OS (Tr. 291-92). Syfert did not remember such a conversation and I credit his testimony over that of Schwartz (Tr. 1461-62). Fornal and Loffredo next made several revisions to the credit worthiness report that they had written in July 1998 (Tr. 223-24, 228-29, 238-39, 306; DX 49). In the process of revising their original report, Fornal and Loffredo used language that tracked, without attribution, the February 1998 newspaper article discussing PennDOT’s intended move from Forum Place (Tr. 247-48; RX 22). In addition, Fornal and Loffredo either omitted or deleted the date of the report’s revision (Tr. 238-39; DX 49).

In mid-September 1998, Merrill Lynch sold its entire inventory of Forum Place bonds to PaineWebber and Maxcor Financial (Tr. 252-55, 292-95; DX 50). Merrill Lynch, which had purchased the bonds for $99.625 per $100 of par value two months earlier, sold them at prices ranging from $99.71 to $100.261 per $100 of par value (DX 21, DX 50). Merrill Lynch found that it was “pretty easy” to sell the bonds (Tr. 331-32). The timing of Merrill Lynch’s sales cannot fairly be described as prompt (Tr. 270-71, 292).

Gilliand learned of the Forum Place offering from a colleague who worked for PFC (Tr. 602-03, 649). The colleague encouraged D&B to contact Gilliand, which it did (Tr. 604-06, 1216; DX 32, DX 51). D&B had conducted business with PaineWebber before July 1998, but it had dealt with another individual who purchased credits for PaineWebber’s high-yield municipal bond fund (Tr. 816). Gilliand was new to PaineWebber, having joined the firm in March 1998 (Tr. 617).

PaineWebber moved quickly. Gilliand’s first contact with D&B occurred on July 7. By July 10, PaineWebber had taken all the Forum Place bonds that were available (Tr. 1221-24; DX 23, DX 32, DX 51). By July 13, Gilliand had authored PaineWebber’s credit report on the Forum Place bonds (DX 36).

D&B denied knowing that PaineWebber was buying Forum Place bonds to resell them to others (Tr. 815-16, 862, 1225). The POS and OS did not identify PaineWebber as a participating underwriter or dealer in the distribution of the bonds. PaineWebber did not seek or receive a dealer’s concession on the bonds it purchased from D&B (Tr. 817, 1225, 1461). In fact, PaineWebber paid D&B the same price for the bonds as did Putnam, Evergreen, and Merrill Lynch (DX 21, DX 22, DX 23). PaineWebber’s profits on Forum Place bonds came from mark-ups on the resale (DX 60, DX 61). Such markups reduced the yield to investors (RX 41 ¶ 230).

D&B paid its sales agent, Wendy Bradbury Armstrong (Armstrong), a commission on the bonds she sold to PaineWebber (Tr. 1225-26, 1234-35). If PaineWebber had identified itself as a dealer and received a dealer’s concession, Armstrong would not have earned a commission (Tr. 817-18, 1225-26).

According to Gilliand, Bradbury told him “there [were] several institutions that [D&B] did not want [PaineWebber] to approach,” ostensibly because D&B already had orders from those institutions (Tr. 614). If true, Gilliand’s testimony would completely undercut Bradbury’s claim that he never knew PaineWebber would be acting as a dealer. Gilliand specifically identified Putnam Investments and Delaware Investments as two institutions that D&B did not want PaineWebber to approach (Tr. 614). Both Bradbury and Armstrong denied making any such statements to PaineWebber (Tr. 815, 1226). Gilliand’s identification of Delaware Investments as a firm that had already placed an order with D&B is puzzling. Delaware Investments did not receive an allotment in the Forum Place bond offering and only purchased Forum Place bonds later in the secondary market (Tr. 775; DX 21, DX 22; RX 41 ¶ 225). In these circumstances, I credit the testimony of Bradbury and Armstrong and reject the contrary testimony of Gilliand.

Barnett Sherman (Sherman), a senior municipal analyst with Van Kampen Investments, was responsible for reviewing potential bond investments and making recommendations to the portfolio managers of Van Kampen’s mutual funds (Tr. 543). Dan Kluger (Kluger), a sales agent for D&B, sent Sherman a POS and some supporting documents on the Forum Place transaction (Tr. 543, 550). Sherman reviewed the POS, asked questions of Kluger and Bradbury, and ultimately informed D&B that Van Kampen was not interested in purchasing Forum Place bonds (Tr. 543-45, 559-61, 565). Sherman then went on vacation.

Unknown to Sherman at the time, Van Kampen bought $4 million in Forum Place bonds from PaineWebber on July 28 and July 29, 1998 (Tr. 569-72, 586; DX 60, DX 61). Wayne Godlin (Godlin), a portfolio manager for Van Kampen’s high-yield municipal bond fund and Sherman’s supervisor, decided to purchase the bonds that his subordinate had rejected (Tr. 547, 566, 568, 572). Godlin did not speak with Sherman before buying the bonds (Tr. 566, 583-84).

Godlin learned of the Forum Place offering from PaineWebber (Tr. 569-71). Gilliand sent Godlin a copy of PaineWebber’s credit report on Forum Place and discussed the transaction with Godlin “at length” (Tr. 570-71; DX 59). Godlin then requested and reviewed the POS or OS, although he could not remember which one (Tr. 570, 573, 581). Godlin also requested “any other pertinent documentation” or “additional documentation” about the transaction (Tr. 570-71, 576). However, there is no credible evidence that Godlin ever saw Fowler’s financial projections or the 1997 appraisal.

Godlin had spoken with Kluger, D&B’s sales representative, in connection with some previous bond offerings. However, neither Godlin nor Kluger could remember speaking to each other about the Forum Place transaction (Tr. 571, 588-89, 1199-1201). I find as a fact that Godlin and Kluger did not speak to each other about Forum Place. Godlin did not speak to Fowler (Tr. 595). There is no evidence that Godlin spoke to Bradbury, either.

In deciding to buy the bonds, Godlin relied, in part, on the credit report that Gilliand had authored for PaineWebber (Tr. 569-70, 580-81, 586; DX 36, DX 59). The credit report makes several representations about the Forum Place bonds that do not appear in any documents authored, reviewed, or distributed by D&B. In addition, the credit report contains several inaccuracies (RX 41 ¶¶ 33, 232, 246, 481). Godlin possessed a great deal of misinformation about the Forum Place bond offering. He believed that PennDOT had an AA credit rating, that PennDOT was responsible for repaying the bonds, and that PennDOT had invested a considerable amount of money in improvements to Forum Place (Tr. 577-78, 590-92). There is no evidence that this misinformation came from the POS, OS, or anyone at D&B.

On August 1, 1998, one day after the Forum Place bond closing, the T&S Building was imploded (Tr. 107, 192, 1497-98, 1571).

Late in August 1998, Fowler received $20,150 from IMAGE for advisory and analytical services regarding the investment of certain proceeds of the Forum Place bonds (PFC Answer; Tr. 1008).²³ To the extent that the OIP alleges that this payment came “from the Authority,” it is in error (OIP ¶ III.D.7).

Reese, DCGA’s long-time executive director, retired at the end of September 1998 (Tr. 1299, 1319; RX 44, Minutes of June 23, 1998, Executive Session at 2, Minutes of Aug. 18, 1998, Executive Session at 2, Minutes of Sept. 10, 1998, Meeting at 9). Ricci resigned as the Authority’s chairman and succeeded Reese as executive director on October 1, 1998 (Tr. 1299-1300, 1319).

For the remainder of 1998 and through 1999, there were no problems filling Forum Place with Commonwealth agency tenants (Tr. 1325). DGS increased the square footage of one lease and extended the term of the lease for two years (Tr. 202-03; RX 23). Vartan, as property manager, was also able to replace one departing government tenant with another government tenant (Tr. 1324-25).

Members of the Authority serve at the pleasure of the Dauphin County Commissioners (Tr. 31, 826-27, 1303). November 1999 produced a sea change in the composition of the Dauphin County Commission, as two sitting Commissioners retired and two new Commissioners were elected (Tr. 1328). After the election, the newly constituted Commission demanded that the sitting Authority members (with one exception) resign, which they did (Tr. 1328-29). The new Commissioners then appointed their own people to the Authority (RX 16 at 88).

Respondents contend that the eventual bond default was, in significant part, a result of the decision of certain new DCGA members to change Authority policies after the closing of the Forum Place bond transaction (RX 41 ¶¶ 162-66, 485-514, 542-54).

The newly constituted Authority fired Vartan as the manager of Forum Place early in 2000 (Tr. 1325-27; RX 16 at 83-87).²⁴ The Authority had no one of equal competence to replace Vartan (RX 16 at 86). As a result, the Authority itself assumed management of Forum Place, despite the fact that its staff lacked experience in property management (Tr. 823-24, 1331-32). This proved unsettling, because Vartan, Bradbury, and DCGA (as constituted in July 1998) expected that Vartan (the Series C bondholder) would continue to manage Forum Place and work to ensure that it was occupied by Commonwealth agency tenants (Tr. 37, 39-40, 753-55, 823-24, 1318-19; DX 24 at 5; RX 16 at 84).

The bondholders also assumed that Vartan or someone of equal competence would continue to manage Forum Place and they were disappointed when he was dismissed (Tr. 454, 457, 860-61, 1201; DX 54 at 7; RX 26).²⁵ As grounds for its decision to fire Vartan, the new Authority Board asserted that Vartan’s management fee of $180,000 per year was excessive (Tr. 1268; RX 16 at 84, 100-01). However, the Authority’s management fee was 5% of gross revenues, a larger amount (Tr. 1355; RX 32 at 13-14, RX 38 at 2, RX 41 ¶¶ 495, 514).

On September 22, 2000, the Commonwealth released its Master Space Plan (DX 91; RX 25). In relevant part, the document characterized Forum Place as “available, flexible, [and] conveniently located” (DX 91 at iv; RX 25 at iv). The Master Space Plan “strongly recommended” Forum Place as “the best swing space location” while the Finance Building was being renovated (DX 91 at iv; RX 25 at iv). Among its Long Term Recommendations, the Master Space Plan counseled against continuing the Commonwealth’s practice of leasing small blocks of office space (RX 25 at 69) (“Forum Place illustrates the value of large blocks of space. . . . [I]t was usable by [PennDOT] and other groups and now, it can be appropriately re-used as swing space—or as permanent space—by other Commonwealth functions.”).

PennDot vacated most of its space in Forum Place late in 2000 and moved into the newly completed Keystone Building (Tr. 158-59, 213).

Paragraph III.A of the OIP alleges that the Authority has been “unable” to replace PennDOT as a tenant. Respondents contend that this is a half-truth, and that it would be more accurate to say that the new Authority Board has been unwilling to replace PennDOT (RX 41 ¶¶ 162-66, 485-514, 542-54). In their posthearing pleadings, Respondents contend that the new Authority Board “directly caused” the default of the bonds and any resulting loss to the bondholders (D&B Br. at 33, PFC Br. at 30).

The Commonwealth continued to pay rent on the vacant PennDOT space until the lease expired on November 15, 2001 (Tr. 213, 1334).

By November 2001, the market for leasing office space in Harrisburg to the Commonwealth was “very soft” (Tr. 1613-14; DX 100). DGS anticipated that the Commonwealth would not have any large-block office space needs in the Harrisburg area, i.e., requests to lease space in blocks at and above 35,000 to 50,000 square feet (Tr. 1615-16; DX 100). Rather, DGS expected that it would issue only three or four RFPs per year for office leases, and that those RFPs would be in the range of 10,000 to 20,000 square feet each (Tr. 1615-17; DX 100). At about the same time as PennDOT vacated its space in Forum Place, the rates the Commonwealth paid for leasing office space in Harrisburg began to fall (Tr. 1617-18; DX 100). By December 2001, Forum Place was 55% empty (RX 37 at 17).

There is conflicting evidence as to whether DCGA diligently competed for new government tenants at Forum Place. Michael Adams (Adams), Director of DGS’s Bureau of Real Estate after January 1998, was not aware of any significant RFPs for leased space that DCGA failed to pursue (Tr. 1603-04, 1619). However, Adams candidly acknowledged that he did not make a practice of checking on DCGA’s responses to RFPs (Tr. 1619). In contrast, Fowler and Bradbury observed that the Commonwealth’s Housing and Finance Agency was looking for 160,000 square feet of space, and that DCGA did not even know of that fact until Fowler brought it to the Authority’s attention (Tr. 826, 988-89; RX 41 ¶ 505). Fowler’s and Bradbury’s testimony about DCGA’s passive approach to finding new tenants for Forum Place is corroborated by Vartan (RX 16 at 97-98). I credit Fowler’s and Bradbury’s testimony on this point over Adams’s more generalized recollection.

DGS issued and then withdrew a RFP for approximately 50,000 square feet of office space for the Commonwealth’s Department of State in 2001 (Tr. 1621-23). Forum Place had been the successful bidder on this RFP, and a final lease had been presented for DCGA’s approval. Instead of leasing space at Forum Place, however, the Department of State moved into Commonwealth-owned space in the North Office Building (Tr. 1620-22).

Respondents argue that DCGA’s dilatory conduct allowed negotiations over space for the Department of State to collapse. The Authority twice sent Ricci back to renegotiate the terms of the Department of State lease, but DGS refused to renegotiate (RX 32 at 9-12, 15, RX 33 at 22, 27-28, RX 34 at 1, 4, 8, 12-13, RX 35 at 1, 5-6, RX 37 at 12). Ricci and others cautioned the Authority that its hard-nosed approach to reopening negotiations might prompt DGS to debar it from bidding on future Commonwealth lease proposals (RX 34 at 1, 8).

Some members of the new Authority Board wanted to lease Forum Place at higher “market rates” and not at rates similar to those in place in July 1998. Ricci, the former Authority Board chairman and current executive director, expressed an obligation to bondholders to lease space in the building at lower rates that would at least permit bondholder debt service (Tr. 1341-47; RX 32, RX 34, RX 37).

At public meetings during 2001, members of the Authority expressed the view that perhaps defaulting on the Forum Place bonds, so as to force a sale of the property, might be the best way to proceed (Tr. 1382-83; DX 32 at 13-14, DX 34 at 5-6, DX 37 at 13-14, 18). One member of the Authority and the Authority’s new solicitor engaged in a discussion suggesting that the financial advisor and the underwriter could be held accountable in the event of a default (Tr. 1386-87; RX 37 at 19).

In September 2001, the Authority forced Ricci to resign as executive director and appointed William Hawk (Hawk) as his successor (Tr. 1330, 1387-88, 1394-95, 1397; RX 38 at 9). Hawk sought, and eventually obtained, a letter from Adams stating that DCGA and DGS’s Bureau of Real Estate enjoyed a good working relationship (Tr. 1619-20, 1633-34; DX 100). Upon close questioning, Adams acknowledged that “there were issues” between DGS and DCGA and that Hawk “wrote down . . . what he wanted to see” in the letter (Tr. 1620, 1634). I find as a fact that the working relationship between DCGA and DGS was not good at the time, and that Adams’s letter, drafted in relevant part by Hawk, did not accurately reflect the reality of the situation.

In 2002, after the Pennsylvania legislature enacted a law that increased the size of the Department of State, DGS issued a new RFP for bids on 70,000 square feet of leased space for that agency (Tr. 1623). Ten or eleven bids were submitted in response to the RFP (Tr. 1623-24). DGS then narrowed the responsive proposals to three and submitted those three to the Department of State for evaluation (Tr. 1623-24). Forum Place was one of the final contenders (Tr. 1624).

Although Forum Place’s proposal was extremely competitive, the Department of State chose the competing proposal of a new building on the site of the former Polyclinic Hospital (Polyclinic) (Tr. 1625, 1639-40). Consultants on the Commonwealth’s Master Space Plan had recommended that the Department of State’s consolidated site should be located away from the Capitol Complex (DX 91 at 70). Polyclinic is ten to twelve blocks from the Capitol Complex (Tr. 1640).

The Series A bonds have been in technical default since July 2002. In violation of the trust indenture, DCGA has tapped the debt service reserve fund to make payments of interest and principal to the Series A bondholders (Tr. 424, 473-74; DX 16, Appendix A). The Series B bonds are in default. DCGA has not paid interest or principal on the Series B bonds since July 2002 (D&B Answer; Tr. 424; DX 3).

The bondholders eventually forced Forum Place into receivership (Tr. 425, 473). See Manufacturers and Traders Trust Co., Trustee, v. Dauphin Co. Gen. Auth., Dauphin County Court of Common Pleas, Equity Action No. 2003-EQ-0040 (official notice). On July 21, 2003, the Dauphin County Court of Common Pleas appointed Robert E. Chernicoff (Chernicoff) as the receiver for Forum Place. On August 1, 2003, Chernicoff engaged Vartan Management, Inc. (Vartan Management), to resume management of Forum Place (Tr. 1247-48, 1260).

Vartan Management inspected the property and identified several problems (Tr. 1248-54). These included out-of-date fire extinguishers, deficient sprinkler heads, non-functioning smoke and heat detectors, and a disabled alarm system. The inspection also determined that painting, sanding, and general cleaning had been deferred during the two and one-half years that DCGA had managed the property. After addressing these health, safety, and cleanliness issues, Vartan Management began a marketing campaign to attract eligible tenants to Forum Place (Tr. 1255-57).

Since August 1, 2003, Vartan Management has had some success in filling Forum Place’s vacant office space with new tenants and in persuading existing tenants to renew their leases (Tr. 1255-59). In 2004, for example, Vartan Management successfully negotiated a ten-year lease for the use of 32,000 square feet by the Commonwealth’s Department of Labor & Industry and another ten-year lease for the use of 35,000 square feet by DGS’s Procurement Division (Tr. 1257-58). In addition, Vartan Management persuaded an existing tenant, the Pennsylvania Local Government Commission, to renew for ten years its lease of 5,000 square feet (Tr. 1257).

At the time of the hearing, the occupancy rate for Forum Place was about 55% and the Series A bonds traded at approximately half of their par value (Tr. 424, 426; DX 21).

The minutes of the Authority’s meetings were transcribed from tapes (Tr. 1336-39, 1390-91, 1647-50). With the exception of DX 25, which I have previously discussed, I consider these detailed minutes to be extremely reliable exhibits (DX 5, DX 24; RX 32-RX 40, RX 43-RX 45). I also consider McCormack’s report and notes to be very reliable (DX 54, DX 55). DX 20 is LWM’s bill to D&B for $13,425. Undisputed testimony establishes that Bradbury paid LWM triple that amount to compensate for prior transactions that had collapsed (Tr. 675, 1283-84).

It was almost four years from the bond closing to the commencement of the Division’s investigation and more than six years from the bond closing to the start of the hearing. For that reason, there was a considerable amount of “I don’t remember” or “I don’t recall” testimony by various witnesses. This vague testimony was not confined to witnesses who might have an incentive to “forget” (O’Neill, Sweet). It also came from witnesses with no real stake in the outcome (Milke). Bradbury could not remember certain exculpatory details, even after the exhibits and the testimony of other witnesses had established them as facts (Tr. 782, 811-13).

Adams, Milke, McErlane, and Yingling were generally credible witnesses. Pope and Robert W. Doty (Doty), the expert witnesses for the Division and D&B, respectively, were extremely well qualified. It was dismaying to hear that Pope gave little regard to the allegations in the OIP as he drafted his direct testimony (Tr. 1087, 1091, 1133-34). Instead, he concentrated on issues identified by the Division in private conversations (Tr. 1091, 1133). His report opines on several matters that were not specifically identified as grounds for liability in the OIP. That has needlessly confused the issues that are a proper basis for a decision. Doty frequently drew legal conclusions on ultimate issues, and I have not relied on those aspects of his report in reaching my decision.

I have evaluated the investor testimony with a mild degree of skepticism. First, with the exception of Godlin, the investor representatives who testified were not the portfolio managers who decided to purchase the bonds. Rather, they were the credit analysts who made recommendations to the portfolio managers. As a group, the institutional investors were quite aggressive in snapping up the riskier bond offerings during 1998, a period of low interest rates. Second, some of the institutional investors are now involved in litigation against the Authority, through their bondholder committee. Such investors stand to benefit financially if this proceeding results in an order requiring the payment of substantial civil penalties, disgorgement, and prejudgment interest to an investor fund. Third, there is at least a touch of scapegoating here. To the extent that the investor witnesses can exculpate themselves of responsibility for an ill-advised purchase, they will have less to explain to their supervisors and their supervisors will have less to explain to the shareholders of the mutual funds they advise.

I was troubled by the testimony of the Merrill Lynch witnesses (Fornal, Schwartz, and Loffredo). They left the impression that a Merrill Lynch portfolio manager had tentatively decided to buy Forum Place bonds, but, because of a Merrill Lynch internal policy, needed Loffredo and Fornal to “paper the transaction” by preparing a credit worthiness report. I am persuaded that Merrill Lynch later engaged in a deliberate effort to “muddy the trail” by revising Loffredo and Fornal’s report after learning of PennDOT’s intended move. It then sold its Forum Place bonds at a profit.

The Division failed to address two facts arising from Godlin’s testimony: first, PaineWebber, not D&B, solicited Godlin; and second, Godlin’s decision to buy Forum Place bonds was based in part on misinformation that the Division could not attribute to D&B.

Among the investor witnesses, I found McCormack and Sherman to be very credible. Lowe was generally credible. Gilliand, Fornal, Schwartz, Loffredo, and Godlin were only marginally credible.

Kluger and Syfert, D&B’s sales agents, were generally credible. There are gaps in the record concerning what happened during conversations between Armstrong and Gilliand, and then between Bradbury and Gilliand. The Division has devoted very little of its posthearing pleadings to explaining this aspect of its case. In July 1998, Armstrong had just become a registered representative. Forum Place was her first bond sale and she was thrilled to earn a big commission. However, these facts hardly warrant an inference that she was incredible.

Ricci offered a partisan view of his dealings with the newly constituted Authority after the November 1999 election. In general, he portrayed himself as a responsible official who advocated for the bondholders’ interest, and he depicted the new members of the Authority as irresponsible officials who changed the Authority’s policies to the detriment of the bondholders. According to Ricci, the new members also micromanaged his actions because they did not trust him (Tr. 1351 (“it was like pulling teeth with this Board”), Tr. 1395 (“they thought I couldn’t negotiate my way out of a paper bag”)). I have evaluated Ricci’s testimony with these factors in mind. Ricci was generally credible in discussing events before November 1999.

Vartan did not testify in person. He was ill with throat cancer and had a limited ability to travel. The cancer makes it difficult for Vartan to speak above a whisper and, thus, difficult for listeners to understand him (Tr. 1244). The Division did not object to the introduction of Vartan’s investigative testimony (Tr. 1245). The Division also said it was prepared to cross-examine Yingling, president of Vartan Management, as a substitute witness (Tr. 1246-47). In these circumstances, I give little regard to the Division insinuation that Vartan was a malingerer (Div. Prop. Find. # 15). Because I did not observe Vartan, I make no demeanor-based credibility findings. However, I have relied on Vartan’s investigative testimony to the extent that I find it logical, persuasive, and corroborative of the testimony of others.

Crowell was a reliable witness on matters concerning the T&S Building, the Commonwealth’s RFP process, and the leasing of space at Riverfront and Forum Place in 1995-96. He was only marginally reliable as to the events of June 30, 1998, and the swing space program. My general impression is that Crowell attempted to ingratiate himself to whomever he was addressing at a given moment, whether it was Vartan in 1995; a newspaper reporter in February 1998; Fowler, Reese, and Sweet on June 30, 1998; or the Division at the hearing. When Crowell was telling the press about the swing space program in February 1998, the program was growing. According to Crowell’s hearing testimony, the swing space program was nearly completed by June 30, 1998. The lack of funding is not a satisfactory explanation for these discrepancies.

Crowell’s hearing testimony about the events of June 30 makes it difficult to distinguish between what he now knows to be true (with the benefit of hindsight) and what he told Fowler, Reese, and Sweet at the time (as he looked into the future). Accordingly, I do not accept the Division’s argument that Crowell’s hearing testimony was a more accurate summary of the June 30 meeting than the accounts offered by Fowler and Sweet. As previously noted, the record is inconclusive as to what actually happened at this meeting.

The Division did not take Crowell’s testimony under oath during its investigation. Rather, it took notes, for which it now claims privilege, and then sculpted an affidavit that Crowell signed without change (Supplement to Division’s Withheld Document List, dated May 27, 2004, items 7k, 7l, 7o, 7s; Tr. 214-15; DX 65). While this is certainly permissible, see United States v. Lieberman, 608 F.2d 889, 897 (1st Cir. 1979), it suggests that the Division may have had some concerns about the credibility of this important witness and was not anxious to create materials that Respondents could use to impeach him at the hearing.

O’Neill’s poor memory at the hearing was refreshed and/or impeached by references to his investigative testimony. To the extent that the conflicts were not resolved, I have given more weight to O’Neill’s investigative testimony. There were also conflicts between Bradbury’s hearing testimony and his investigative testimony, but I do not agree with the Division that Bradbury’s investigative testimony should always trump his hearing testimony. For example, during the hearing, Bradbury testified that he added footnotes to Fowler’s financial projections (Tr. 806, 853). During the investigation, he could not remember doing so. I find Bradbury’s hearing testimony on this point to be more reliable. I have considered Bradbury’s and Fowler’s testimony throughout this decision, and noted when I find it incredible.

Sweet’s poor memory at the hearing cannot be explained by the age of the case alone. Sweet purportedly could not remember who arranged the June 30 meeting with Crowell (Tr. 99, 147), although he knew Crowell well, considered himself a lobbyist, and volunteered to act as the finance team’s liaison with the Commonwealth. There is little doubt that Sweet arranged the meeting. Sweet also portrayed himself as more of a bystander than a participant in the June 30 meeting and could not remember the precise conversation at that meeting about PennDOT’s plans to vacate Forum Place (Tr. 95). He could not remember his June 22 telephone conversation with Bradbury and O’Neill (Tr. 79) or telling Bradbury about the June 30 meeting with Crowell (Tr. 132). As to the July 8 meeting of the Authority, Sweet did not remember if the Crowell meeting was discussed (Tr. 103-04, 139), the specifics of Fowler’s presentation (Tr. 131, 139), or even if he personally made extensive remarks that day (Tr. 104). Finally, Sweet did not remember talking with the Boston law firm representing Putnam Investments about revising the trust indenture (Tr. 133-34, 148). I consider this witness to be thoroughly disingenuous.

Hendershot was a minor witness, but he, too, was generally unreliable. The Division called Hendershot to rebut the contention that he had revised the minutes of the Authority’s July 8 meeting. The Division suggested that Fowler shortened the minutes (Div. Prop. Find. ## 191-92), while Fowler argued that Hendershot was the culprit (PFC Prop. Find. ## 18, 146).

Hendershot’s efforts to distance himself from the minutes of the July 8 meeting were unrelenting (Tr. 1652 (“I had nothing to do with either set of these minutes”), Tr. 1660 (purging his partner’s handwritten notes of the July 8 meeting from GKS’s files), Tr. 1665-66 (disavowing the significance of his own handwritten note, showing approval of the July 8 minutes), Tr. 1667 (“I don’t know if I was present . . . I often came . . . late. I’m not sure I was in the room when that motion was adopted.”), Tr. 1670 (“Steve’s limitation is that he was never really schooled in municipal finance. . . . It could be inaccurate. It could be incomplete.”)). I agree with Fowler that the longer version of the minutes helps him, and I see no motive for Fowler to have acted as the Division alleges he did. Beyond that, I express no view as to who made the revisions.

The Division urges me to find that Bradbury, Fowler, and Sweet were not testifying truthfully when they claimed that the finance team never discussed the need to disclose PennDOT’s anticipated move (Div. Br. at 27). This is a major request, because it would fundamentally change the character of the case. If I were to make such an adverse group credibility finding, Bradbury’s scienter and Fowler’s role in reviewing the disclosure language in the POS could almost be assumed. Such a finding would also imply that Bradbury, Fowler, and Sweet conspired during the investigation to cover up the true extent of their discussions. Such an adverse group credibility finding, if sustained on appeal to the Commission and the court of appeals, would virtually guarantee the Division a back-door victory. If the Division had evidence of such a conspiracy, it should have alleged it in the OIP and proven it at the hearing. I decline to make the requested adverse group credibility finding.

PFC’s Brief addresses several documents that are not part of the record, including the minutes of five Authority meetings (December 1999 through March 2001) and various newspaper articles (PFC Br. at 36-38, 48). The Division objects to any consideration of these documents. I agree with the Division.

The Division also strays beyond the record at times. During the hearing, the Division read into the record a passage of investigative testimony to test the validity of Doty’s opinions (Tr. 1502-05). It was entirely proper for the Division to use the investigative testimony for this limited purpose. Cf. Fed. R. Evid. 105, 703. However, in its posthearing pleadings, the Division now treats the investigative testimony as if it had been given at the hearing, and as if it were admissible as substantive evidence for all purposes (Div. Prop. Find. ## 105, 252). This is inappropriate. Cf. Fed. R. Evid. 105, 703. The Division cites Pope’s report as support for certain proposed factual findings (Div. Prop. Find. ## 4-5). This is also inappropriate. Pope based his opinions on his understanding of the facts, as developed during the Division’s investigation (DX 94 ¶ 4 and Exhibit C). However, Pope’s report never identified the specific facts upon which it was based (Tr. 1047-48). The Division cannot assume that the “facts” from the investigation are the facts adjudicated at the hearing.

The Division’s Reply to PFC’s Brief also raises several new factual allegations that lack record support and presents argument on matters that are beyond the scope of the OIP. For example, the OIP does not allege that PFC and Fowler directly violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. It only alleges that they caused the Authority’s violations of these provisions. When the Commission wants to charge an individual as both a direct violator and as a cause of the violation of another actor, it knows how to do so. See Paragraph II.F of the OIP in Admin. Pro. No. 3-11462, Ira Weiss (Apr. 22, 2004). Accordingly, the Division’s arguments of direct liability by PFC and Fowler will not be considered further.

Congress exempted offerings of municipal securities from the registration requirements and civil liability provisions of the Securities Act and the periodic reporting requirements of the Exchange Act. See Section 3(a)(2) of the Securities Act; Section 3(a)(12) of the Exchange Act. However, Congress did not exempt municipal securities transactions from the antifraud provisions of those statutes.

In 1975, Congress enacted the Securities Acts Amendments of 1975, Pub. L. No. 94-29, 89 Stat. 97 (1975). The 1975 Amendments created the MSRB and provided a system of regulation for both municipal securities professionals and the municipal securities markets.

In 1988, the Commission sought comments on a proposal to prevent fraud by enhancing the timely access of underwriters, public investors, and other interested persons to municipal official statements. See Municipal Securities Disclosure, 41 SEC Docket 1402 (Sept. 22, 1988). At the same time, the Commission published its interpretation of an underwriter’s obligation to have a reasonable basis for its implied recommendation of any municipal securities that it underwrites. Id. at 1411-15 (1988 Interpretive Statement). The Commission also invited comments on its interpretation. Id. at 1414.

In 1989, the Commission adopted Exchange Act Rule 15c2-12, which requires underwriters to obtain and review a municipal issuer’s official statement prior to selling bonds, and to provide official statements to investors and potential investors. Municipal Securities Disclosure, 43 SEC Docket 2245 (June 28, 1989). At the same time, the Commission modified, in limited respects, its previously published interpretation of the legal obligations of municipal securities underwriters under the antifraud provisions of the federal securities laws. Id. at 2257-58 (1989 Interpretive Statement).

In March 1994, the Commission issued another interpretation. Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others, 56 SEC Docket 596, 597 (Mar. 9, 1994) (1994 Interpretive Statement). As relevant to this proceeding, the Commission stated that increased attention needed to be directed at disclosure of the risks of the securities being offered. In November 1994, the Commission adopted amendments to Rule 15c2-12 to prohibit the underwriting of municipal issues unless continuing information covenants are provided by the issuer. Municipal Securities Disclosure, 57 SEC Docket 2993 (Nov. 10, 1994).

Paragraph III.F.1 of the OIP alleges that the Authority violated Sections 17(a)(2) and 17(a)(3) of the Securities Act. Paragraph III.F.3 of the OIP alleges that D&B and Bradbury willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.²⁶

Section 17(a) of the Securities Act proscribes fraudulent conduct in the offer or sale of securities and Section 10(b) of the Exchange Act and Rule 10b-5 proscribe fraudulent conduct in connection with the purchase or sale of securities. These provisions prohibit essentially the same type of conduct. See United States v. Naftalin, 441 U.S. 768, 773 n.4, 777-78 (1979). To prevail under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5, the Division must show: (1) misstatements or omissions of material facts or other fraudulent devices; (2) made in connection with the offer, sale, or purchase of securities; and (3) that respondents acted with scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). No scienter requirement exists for violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act; negligence alone is sufficient. Aaron v. SEC, 446 U.S. 680, 701-02 (1980); Pagel, Inc. v. SEC, 803 F.2d 942, 946 (8th Cir. 1986).

Scienter is defined as “a mental state embracing intent to deceive, manipulate, or defraud.” Hochfelder, 425 U.S. at 193 n.12. It may be established by a showing of recklessness. David Disner, 52 S.E.C. 1217, 1222 & n.20 (1997) (citing Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990) (en banc)). The en banc Ninth Circuit adopted the standard of recklessness articulated by the Seventh Circuit in Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir. 1977): “[A] highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Scienter is a question of fact and can be proved by circumstantial evidence. SEC v. Hasho, 784 F. Supp. 1059, 1107 (S.D.N.Y. 1992) (collecting cases).

An omission is material if there is a substantial likelihood that a reasonable investor would have considered the omitted fact important in making an investment decision and disclosure of the omitted fact would have significantly altered the total mix of information available. Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996). Materiality presents a mixed question of law and fact. TSC Indus., 426 U.S. at 450.

Willfulness is shown where a person intends to commit an act that constitutes a violation. There is no requirement that the actor must also be aware that he is violating any statutes or regulations. Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965).

The jurisdictional requirements of the antifraud provisions are interpreted broadly, and are satisfied by intrastate telephone calls and even the most ancillary mailings. SEC v. Softpoint, Inc., 958 F. Supp. 846, 865 (S.D.N.Y. 1997), aff’d, 159 F.3d 1348 (2d Cir. 1998). There is no dispute that the jurisdictional requirements have been satisfied in this proceeding.

Paragraph III.F.2 of the OIP alleges that PFC and Fowler caused the Authority’s violations of Section 17(a)(2) and 17(a)(3) of the Exchange Act.

The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990) (Remedies Act), created a distinct class of secondary liability, causing liability, and made it subject to a new administrative remedy, a cease-and-desist order. As here relevant, Section 8A of the Securities Act and Section 21C(a) of the Exchange Act specify that a respondent is a cause of another’s violation if the respondent knew or should have known that his or her act or omission would contribute to such violation.

The Commission has determined that causing liability under these statutory provisions requires findings that: (1) a primary violation occurred; (2) an act or omission by the respondent caused the violation; and (3) the respondent knew, or should have known, that his or her conduct would contribute to the violation. See Robert M. Fuller, 80 SEC Docket 3539, 3545 (Aug. 25, 2003), pet. denied, 2004 U.S. App. LEXIS 12893 (D.C. Cir. Apr. 23, 2004); Erik W. Chan, 77 SEC Docket 851, 859-60 (Apr. 4, 2002).

Negligence is sufficient to establish liability for causing a primary violation that does not require scienter. Howard v. SEC, 376 F.3d 1136, 1141 (D.C. Cir. 2004); KPMG Peat Marwick LLP, 54 S.E.C. 1135, 1175 (2001), recon. denied, 74 SEC Docket 1351 (Mar. 8, 2001), pet. denied, 289 F.3d 109 (D.C. Cir. 2002). Negligence is the failure to exercise reasonable care or competence. Byron G. Borgardt, 80 SEC Docket 3559, 3577 & n.35 (Aug. 25, 2003).

The Commission has yet to announce the criteria it will use in deciding whether a secondary actor should have known that specific acts or omissions “would contribute to” a primary violation for purposes of Section 8A(a) of the Securities Act or Section 21C(a) of the Exchange Act. However, a proceeding involving this issue is now pending on the Commission’s docket. See Jeffrey M. Steinberg, 76 SEC Docket 1538, 1582-89 (Dec. 20, 2001) (Initial Decision) (rejecting the Division’s argument that any act that contributes to a primary violation is a cause of that violation for purposes of Section 21C(a) of the Exchange Act; and also requiring the Division to establish “a sufficient nexus between the respondents’ alleged conduct and the underlying violation”), review granted; see also Simon M. Lorne & W. Hardy Callcott, Administrative Actions Against Lawyers Before the SEC, 50 Bus. Law. 1293, 1308 (Aug. 1995) (“‘Causing’ liability under the Remedies Act poses several questions that the SEC has not yet finally resolved. . . . [One question] is the issue of how close a nexus must there be between the ‘cause’ and the underlying violation.”).

Paragraph III.F.5 of the OIP alleges that D&B and Bradbury willfully violated MSRB Rule G-17.²⁷ The applicable version of that provision requires that, in the conduct of its municipal securities business, “each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.”

The state of mind necessary to establish a violation of MSRB Rule G-17 presents an open question. See Wheat, 80 SEC Docket at 3425 & n.42 (“We believe that Rule G-17 requires a showing of at least negligence to establish an unfair practice violation.”) (emphasis added). The Commission determined that, even if proof of scienter were required, the respondents had acted with scienter. Id.

In SEC v. GLT Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001), the court observed that the parties before it did not dispute that negligence was the standard by which MSRB Rule G-17 liability should be evaluated. The court also cited a settled administrative proceeding, Merrill Lynch, Pierce, Fenner & Smith, Inc., 67 SEC Docket 2487, 2501-02 (Aug. 24, 1998), which identified negligence as the appropriate standard.

The present OIP covers all the bases: it alleges that D&B and Bradbury willfully violated MSRB Rule G-17 by knowing, reckless, or negligent conduct (OIP ¶ III.F.5). The parties disagree about the applicable legal standard (Div. Prehearing Br. at 17; D&B Br. at 7-9; Div. Reply to D&B at 23). Because Wheat leaves the issue unresolved, I will make a determination under both the negligence and scienter standards.

Paragraph III.F.4 of the OIP alleges that D&B willfully violated Section 15B(c)(1) of the Exchange Act. Section 15B(c)(1) prohibits any broker, dealer, or municipal securities dealer from using the mails or interstate commerce “to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of any rule” of the MSRB, including MSRB Rule G-17. Negligence is sufficient to violate Section 15B(c)(1). See SEC v. Fitzgerald, 135 F. Supp. 2d 992, 1027 nn.11-12 (N.D. Cal. 2001).