UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7662 / March 31, 1999 Securities Exchange Act of 1934 Release No. 41232 / March 31, 1999 Administrative Proceeding File No. 3-9859 _________________________ : : In the Matter of : : EUGENE J. YELVERTON, JR. : : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO : SECTION 8A OF THE SECURITIES ACT : OF 1933 AND SECTIONS 15(b), 19(h) : AND 21C OF THE SECURITIES : EXCHANGE ACT OF 1934, MAKING : FINDINGS AND IMPOSING REMEDIAL : SANCTIONS AND CEASE-AND-DESIST Respondent : ORDER : __________________________: I. The Commission deems it appropriate and in the public interest that public proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") be, and they hereby are, institituted against Eugene J. Yelverton, Jr. ("Yelverton" or "Respondent"). II. In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, the Respondent, without admitting or denying the findings set forth herein, except as contained in Section III 1 and 2, below, and as to the jurisdiction of the Commission over the Respondent and over the subject matter of these proceedings, which are admitted, consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b), 19(h) and 21C of the Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). III. Based on this Order and the Respondent’s Offer, the Commission finds the following. [1] 1. Thorn, Welch & Co., Inc., ("TWC"). TWC" is a registered broker-dealer located in Jackson, Mississippi. TWC has been registered with the Commission pursuant to Section 15(b) of the Exchange Act since on or about March 10, 1977. On November 22, 1993, the firm changed its name to Thorn, Welch & Co., Inc. TWC's business consisted primarily of underwriting and trading municipal securities. 2. Yelverton. Thorn" is a resident of Jackson, Mississippi. From 1987 through 1990, Yelverton was a consultant to TWC. From 1990 through the present, Yelverton has been a shareholder of TWC. Yelverton was a municipal securities principal of TWC from January 1991 through 1996. 3. Between November 1987 and May 1996, TWC was the underwriter for 74 offerings of urban renewal revenue notes ("notes") issued by 39 Mississippi political subdivisions, including counties, cities and towns ("municipalities"). The offerings raised a total of approximately $287,300,000. 4. In each offering, the notes were sold based upon a representation that bond counsel had concluded that interest on the notes would be excludable from gross income for federal income tax purposes. The disclosure documents used in connection with the note offerings represented that the note proceeds would be utilized within three years on various public projects. In fact, the municipalities had no intention of spending more than a small percentage of the proceeds on public projects. That percentage, generally close to one percent of the proceeds, was received by the municipality as a "premium" or "fee" for issuing the notes. The remaining proceeds were invested in guaranteed investment contracts ("GICs") or certificates of deposit ("CDs") yielding a higher rate of return than the notes. Those instruments provided the cash flows to pay the debt service required by the notes. This financing structure resulted in a significant risk to the tax exempt status of interest on the notes. 5. Internal Revenue Code ("IRC") Section 103(b) provides that gross income includes interest on any state or local bond which is an "arbitrage bond" as that term is defined by IRC Section 148. IRC Section 148 (a) defines an arbitrage bond as "any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly (1) to acquire higher yielding investments...." 6. IRC Section 148(c)(1) allows the proceeds of certain issues to be invested in higher yielding investments for a reasonable temporary period until such proceeds are needed for the purpose for which the bonds were issued. This provision is known as the "temporary period exception." It provides that the bonds will not be treated as taxable arbitrage bonds if the net sale proceeds and investment proceeds of an issue are reasonably expected to be allocated to expenditures for capital projects within specified time periods. Treas. Reg. Sec. 1.148-2(b)(1) and 2(e)(2)(i)(1993); Treas. Reg. Sec. 1.103-13(a)(2) (1979). When statements regarding reasonable expectations with respect to the amount and use of the proceeds are not made in good faith, the notes are deemed to be taxable arbitrage bonds. Revenue Ruling 85-182, 1985-2 C.B. 39. 7. Although all the note offerings were purportedly structured to comply with the requirements of the temporary period exception, at the time of the offerings, none of the issuers had the resources, intent or expectation to utilize any proceeds from the offerings, other than the premium or fee, for capital projects. Subsequent to the offerings, none of the issuers utilized any of the offering proceeds, other than the premium or fee, for any capital project. The lack of a reasonable expectation to utilize more than a small portion of the proceeds for capital projects would violate the reasonable expectation requirements of IRC Section 148(c)(1) and Treas. Reg. 1.148-2(e)(2). Therefore, a substantial risk exists that the issuers did not satisfy the requirements of the temporary period exception, making the structure of these transactions a prohibited arbitrage scheme that violates IRC Sections 103(b) and 148(a)(1). The violation of these sections created a substantial risk that the IRS would declare interest on the notes includable in gross income for federal income tax purposes. 8. The substantial risk to the tax exempt status of interest on the notes was not disclosed to investors or prospective investors in any of the offerings. The official statements and arbitrage certificates for each offering, among other documents, without exception, represented that the issuers intended to spend the full amount of the offering proceeds within three years on various capital projects, such as roads, parks, a courthouse, and other projects. Each official statement also represented that the issuer was negotiating with a specified firm for "architectural services." These statements were not true. Although the investors were under no duty to independently evaluate the degree of risk to the tax exemption, the false representations dealing with the municipalities' intentions to spend the proceeds and their current negotiations for services in that regard, would have made it difficult for investors, even those with access to tax advice, to ascertain the risk to the tax exemption. 9. TWC, through Yelverton and others, sold the notes from each of the offerings using the official statements. Yelverton knew, or was reckless in not knowing, that the official statements misrepresented the issuers’ intent to spend the proceeds of the offerings on municipal projects. Yelverton also knew, or was reckless in not knowing, that the tax exempt status of the notes was contingent on the issuers having a bona fide intent to utilize the note proceeds on municipal projects within three years from the date of the offering. Yelverton knew, or was reckless in not knowing, that a substantial risk existed as to the tax exempt status of interest payment on the notes. That risk was not disclosed to purchasers of the notes. 10. During the period from November 1987 through May 1996, Yelverton willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by, directly and indirectly, using the means and instrumentalities of interstate commerce and the mails to: (1) employ devices, schemes and artifices to defraud; (2) make untrue statements of material facts and to omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (3) engage in acts, practices, and a course of business which operated or would have operated as a fraud and deceit upon persons, in connection with the purchase and sale of securities, as more particularly described in paragraphs one through nine, above. 11. During the period from November 1987 through May 1996, Yelverton willfully violated Section 17(a) of the Securities Act by, directly and indirectly, using the means and instruments of transportation and communication in interstate commerce and the mails to: (1) employ devices, schemes and artifices to defraud purchasers; (2) obtain money and property by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (3) engage in acts, practices and a course of business which operated or would have operated as a fraud and deceit upon purchasers, in the offer and sale of securities, as more particularly described in paragraphs one through nine, above. . 12. Respondent Yelverton has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay disgorgement plus prejudgment interest. The Commission has reviewed the sworn financial statement and other evidence provided by Respondent Yelverton and has determined that Respondent Yelverton does not have the financial ability to pay completely disgorgement of $877,350, plus prejudgment interest. 13. Yelverton has submitted sworn financial statements and other evidence and has asserted his financial inability to pay a civil penalty. The Commission has reviewed the sworn financial statements and other evidence provided by Yelverton and has determined that Yelverton does not have the financial ability to pay a civil penalty. ACCORDINGLY, IT IS HEREBY ORDERED, 1. that Respondent Yelverton be barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company; 2. that Respondent Yelverton cease and desist from committing or causing any violation or any future violation of Section 17(a) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; 3. that Respondent Yelverton shall pay disgorgement of $877,350, plus prejudgment interest, provided that Yelverton shall pay $3,000 within thirty (30) days of this order and shall pay an additional $27,000 within 270 days to the United States Treasury. Such payment shall be (a) made by United States postal money order, certified check, bank cashier's check or bank money order; (b) made payable to the Securities and Exchange Commission; (c) hand-delivered or delivered by overnight delivery service to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (d) submitted under a cover letter which identifies Yelverton as a respondent in these proceedings. Yelverton is further ordered to comply with his undertaking to forego on any personal income tax return all unused income tax credits which have accrued and to which he may be entitled as of the date of this Order arising from his interest in the seven limited partnerships which own low-income housing projects financed by urban renewal revenue bonds underwritten by TWC between August 1992 and October 1993. Payment of the remainder of the disgorgement is waived based upon Respondent Yelverton’s demonstrated financial inability to pay; 4. that the Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent Yelverton provided accurate and complete financial information at the time such representations were made; and (2) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Respondent Yelverton’s offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Respondent Yelverton was fraudulent, misleading, inaccurate or incomplete in any material respect and whether any additional remedies should be imposed. Respondent Yelverton may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding; By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings herein are made pursuant to the Offer of Settlement of the Respondent and are not binding on any other person or entity named as a respondent in this or any other proceeding.