Securities and Exchange Commission v. GLT Dain Rauscher, Inc.

Kenneth D. Ough, the vice president of the public-finance department of Dain Rauscher, Inc. (defendant), acted as the lead investment banker in the underwriting of nine municipal-note offerings from 1993 to 1994. The notes were a new type of security in which the issuers were all municipalities that used the proceeds for interest arbitrage, or investment purposes to make a profit. All of the issuers invested their profits in investment pools managed by Robert Citron, the treasurer of Orange County. As underwriter, Ough was responsible for preparing and drafting offering documents and reviewing final statements before issuing notes to investors. The final statements did not disclose that the notes were to be used for interest arbitrage or that the proceeds would go to Orange County investment pools. In making his risk evaluation, Ough relied upon statements by the Orange County treasury, the history of Orange County’s investment pools, and Citron’s experience. Citron used securities that were highly sensitive to interest-rate changes in order to generate high returns, so long as the rates declined or held steady. In 1994, interest rates were raised, causing significant losses that led to Orange County’s bankruptcy. The Securities and Exchange Commission (SEC) (plaintiff) sought a permanent injunction and civil penalties against Ough for violating § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Act of 1934, and Rule G-17 of the Municipal Securities Rulemaking Board. The district court entered summary judgment for Ough, and the SEC appealed.