U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 15829 / August 3, 1998 SECURITIES AND EXCHANGE COMMISSION v. DAIN RAUSCHER, INC., KENNETH D. OUGH, AND VIRGINIA O. HORLER, Civil Action No. SA CV 98-639 LHM (ANx) (C.D. Cal.). The Securities and Exchange Commission announced that on August 3, 1998, it filed a Complaint in federal court in Los Angeles against the broker-dealer Dain Rauscher, Inc. and two investment bankers, Kenneth D. Ough and Virginia O. Horler. The Complaint charges the defendants with fraud in the offer and sale of over $980 million in notes by municipal issuers in Orange County, California, in 1993 and 1994. This lawsuit is the Commission's latest enforcement action in its ongoing investigation relating to the financial collapse of Orange County. The Commission is seeking permanent injunctions and civil penalties against each of the defendants. Dain Rauscher underwrote or was financial adviser for thirteen municipal bond offerings related to the Orange County Investment Pools (the "Pools"). Twelve of the municipal bond offerings were of Taxable Notes. These notes were offered for the sole purpose of generating profits by investing the proceeds in the Pools, specifically either in the Commingled Pool or in specific investments with the Orange County Treasurer. The municipalities which issued these Taxable Notes were the City of Anaheim, City of Irvine, North Orange County Community College District, Irvine Unified School District, Orange County Board of Education, and Newport-Mesa Unified School District. The thirteenth offering was a pooled offering of tax-exempt Tax and Revenue Anticipation Notes (the "Pooled TRANs") issued by Orange County on behalf of 27 educational districts located in Orange County. The repayment account for the Pooled TRANs was invested in the Commingled Pool. The Commission alleges in its Complaint that the offering documents for the Taxable Notes and the Pooled TRANs (known as "Official Statements") were materially misleading to investors in the securities. Dain Rauscher, Ough, and Horler participated in drafting the Official Statements and approved these documents for use in sales to investors. The Complaint further alleges that Dain Rauscher, Ough, and Horler knew, or were reckless in not knowing, significant negative information that was misrepresented in and/or omitted from the Official Statements. Specifically, the Official Statements failed to disclose to investors that: the sole purpose of the offerings was to invest in the Pools for investment profit; the Pools' investment strategy was premised on the assumption that interest rates would remain relatively low for at least three years; the Pools employed a high degree of leverage through reverse repurchase agreements, which magnified the risk of loss in the event of a rise in interest rates; the Pools invested heavily in certain risky derivative securities that reacted negatively to a rise in interest rates; and as a result of rises in interest rates during 1994, the Pools had suffered significant market losses and collateral calls. The Complaint further alleges that, with respect to the Pooled TRANs offering, Dain Rauscher and Ough also knew, or were reckless in not knowing, that 17 of the educational districts in the Pooled TRANs offering passed resolutions restricting certain moneys in their general funds. The effect of the restrictions was to increase the amount the districts could borrow on a tax- exempt basis and invest in the Commingled Pool. The Official Statement for the Pooled TRANs failed to disclose these facts to investors, and failed to disclose that the Internal Revenue Service could challenge the tax-exempt status of the offering based upon the actions taken by these 17 school districts. The Commission's Complaint charges Dain Rauscher, Ough, and Horler with fraud in the offer and sale of these securities in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and with deceptive, dishonest, and unfair practices in violation of Section 15B(c)(1) of the Exchange Act and Rule G-17 of the Municipal Securities Rulemaking Board. The Commission has also charged Dain Rauscher with fraud by a broker-dealer in violation of Section 15(c)(1) of the Exchange Act and Rule 15c1-2. The defendants named in this action are: Dain Rauscher, Inc., a registered broker-dealer. Rauscher Pierce Refsnes, Inc., a Dallas-based brokerage firm and investment adviser, merged into Dain Rauscher on January 3, 1998. Dain Rauscher was the senior underwriter for 11 of the Taxable Note offerings. As underwriter, Dain Rauscher purchased the Taxable Notes from the issuers and sold them to investors. Dain Rauscher also was the financial adviser for one offering of Taxable Notes and the Pooled TRANs offering. As financial adviser, Dain Rauscher advised the issuers on structuring the transactions, and participated in drafting and reviewing the Official Statements; Kenneth D. Ough, age 45, of Post Falls, Idaho. Ough was employed by Dain Rauscher from 1993 through 1995 in Glendale, California, and from 1996 to 1997 in the firm's San Francisco office. In 1993 and 1994, Ough was a Vice President in the Public Finance Department of Dain Rauscher's Municipal Securities Division. Ough was the investment banker assigned to Dain Rauscher's underwriting of nine of the Taxable Note offerings. Ough was also the Dain Rauscher investment banker assigned to represent the firm in its financial adviser engagements in connection with one Taxable Note offering and the Pooled TRANs; and Virginia O. HorlerViVvvFFfiiiwkw, age 57, of Moraga, California. Horler was employed by Dain Rauscher from 1983 through March 1998. In 1993 and 1994, Horler was a Senior Vice President and co-Managing Director in the Public Finance Department of the Municipal Securities Division in Dain Rauscher's San Francisco office. Horler was the investment banker assigned to two of the Taxable Note offerings. Earlier this year, the Commission instituted and settled an administrative proceeding against CS First Boston and two of that broker-dealer's investment bankers for fraudulent conduct in the offer and sale of securities issued by Orange County. In a lawsuit filed in 1996, the Commission obtained injunctions against Orange County's former Treasurer-Tax Collector Robert L. Citron and former Assistant Treasurer Matthew R. Raabe for their fraudulent conduct in the offer and sale of over $2.1 billion in municipal securities issued by Orange County and two local governmental agencies. In a separate administrative proceeding, the Commission ordered Orange County, the Orange County Board of Supervisors, and a local government agency to cease and desist from future fraudulent conduct in the offer and sale of securities. The Commission also previously issued a report relating to the conduct of the individual members of the Board of Supervisors in the offer and sale of securities. The Commission's investigation remains ongoing. - 1 -