OT: Royal Bank of Canada - Street Wire
RBC Dain Rauscher fined $500,000 (U.S.) by SEC
Royal Bank of Canada RY
Shares issued 674,440,269 Aug 14 2002 close $ 53.70
Wednesday August 14 2002 Street Wire
by Brent Mudry
U.S. brokerage RBC Dain Rauscher Inc., now a subsidiary of Canadian bank Royal Bank of Canada, has been fined $500,000 by the United States Securities and Exchange Commission for its underwriting role in $680-million worth of municipal bond financings in Orange county, Calif., in 1993 and 1994.
(All figures are in U.S. dollars.) In a consent settlement released Thursday by the SEC, Dain Rauscher also agreed to refrain from future securities violations.
Amid the high-profile Orange County scandal, the Los Angeles-area county and its investment pools filed for bankruptcy in December, 1994, the biggest municipal bankruptcy in U.S. history. Six weeks later, after liquidation, the pools posted a loss of $1.7-billion on participants' deposits of $7.6-billion, a loss of about 22.3 per cent. The biggest losers were four county school districts, who were required under state law to deposit their funds with county treasurer Robert Citron, and the cities of Anaheim and Irvine. Mr. Citron's prowess with leveraged derivatives vaulted him into the No. 1 ranking of financial rogues, beating out even Nick Leesing, who cost Barings Bank a mere $1.5-billion.
During the Orange County scandal, RBC Dain Rauscher, based in Minneapolis, Minn., was known as Rauscher Pierce Refsnes Inc., which subsequently became Dain Rauscher Inc. in a Jan. 3, 1998, merger. Royal Bank acquired Dain Rauscher three years later, on Jan. 10, 2001.
Dain Rauscher's $500,000 fine ends a four-year prosecution, launched by the SEC on Aug. 3, 1998, with a civil complaint alleging the broker-dealer and two of its investment bankers, Kenneth Ough and Virginia Horler, with fraud relating to the offer and sale of more than $980-million in notes by municipal issuers in Orange county in 1993 and 1994. (The reason for the discrepancy between the $680-million figure in the settlement and the $980-million figure in the initial litigation release is not immediately clear.)
The Dain Rauscher fine is less than the $800,000 fine imposed on another key Orange County underwriter, Credit Suisse First Boston, now known as CS First Boston, in a consent settlement with the SEC on Jan. 29, 1998.
With the enthusiastic support of Dain Rauscher, First Boston and other wizards of Wall Street, Orange County treasurer Mr. Citron leveraged the deposits of investors by 158 per cent to 292 per cent, through the wonders of reverse repurchase, or repo, agreements. In June, 1994, just before the music stopped on the massive derivatives scheme, the Orange County pools held $19.8-billion in securities, with $7.2-billion in deposits and $12.6-billion in repo agreements, with leverage of about 274 per cent.
Mr. Citron stuffed his pool accounts with derivatives, with such weightings ranging from 27.6 per cent to 53 per cent.
Mr. Citron, who was especially fond of inverse floaters, which paid interest rates inversely relating to market rates, was wiped out when the risky gamble backfired amid rising interest rates, whacking the value of the underlying securities.
Rauscher Pierce underwrote 11 Orange County bond offerings, serving as lead investment banker for one Anaheim issue, two Irvine issues and eight offerings conducted by the school districts. The money raised was then invested by county treasurer Mr. Citron in his disastrous derivatives pools. In its judgment, in conjunction with RBC Dain Rauscher's consent settlement, the SEC found that the broker-dealer and its investment bankers knew, or ought to have known, that Mr. Citron's investment scheme was quite risky, but failed to disclose and detail the risk factors in financing documents.
More damning, the SEC notes the official financing statements for a series of 1994 Orange County offerings handled by Dain Rauscher failed to disclose that Mr. Citron's investment scheme was already posting negative investment returns, with substantial market losses. The SEC found Dain Rauscher violated several securities regulations by obtaining investor funds through omissions or untrue statements of material facts, resulting in fraud or deceit being perpetrated on purchasers.
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