Washington--The Securities and Exchange Commission yesterday filed its first insider trading charges ever for a municipal bond case.

At the same time, an SEC commissioner put the municipal market on notice that the agency will take enforcement action against such violations in the future.

The SEC filed the charges at the same time it announced a settlement of the case with N. Donald Morse 2d, secretary-treasurer of the Kentucky Infrastructure Authority from May 1990 to August 1990, who was charged with secretly buying authority bonds and selling them back to the agency after recommending that the ones he purchased be called.

Under the settlement, Mr. Morse agreed to "disgorge" profits from the alleged insider trading scheme and was barred from future violations of antifraud statutes.

The complaint, filed in the U.S. District Court for the Eastern District of Kentucky, alleges that Mr. Morse used nonpublic information to profit from the sale of state agency bonds.

In late 1990, Mr. Morse and his father were indicted by a Franklin County, Ky., grand jury for violating a state law that makes "misuse of confidential information" a felony. Theirs were the first indictments involving insider trading in the municipal market.

The SEC's complaint charges that in June 1990, the younger Mr. Morse was in charge of selecting authority term bonds issued in 1973 to be redeemed. The agency said Mr. Morse knew the authority lacked the required amount to redeem the bonds when on June 21, 1990, he proceeded to buy some of the bonds at a price of 94. The agency said he selected the bonds for tender to the authority at a price of 99-7/8, the highest price paid to any bondholder. He tendered them to the authority in the name of a local bank rather than in his own name, the SEC has alleged.

On Aug. 1, 1990, the SEC said, Mr. Morse sold the bonds to the authority without acknowledging that he owned them. Mr. Morse also did not acknowledge that another bondholder had been willing to sell them at a lower price, the SEC said. Mr. Morse's profit on the transaction was $6,462.50, the SEC said.

Mr. Morse's lawyer, J. Guthrie True, a partner with Stoll, Keenon & Park, in Frankfort, Ky., was unavailable for comment.

"While only a small amount of money is involved and the participant has been indicted by Kentucky authorities, this case is important because it established that the insider trading prohibitions apply to municipal securities transactions," said Securities and Exchange Commissioner Richard Roberts.

And it demonstrates that the SEC will pursue such violations in the municipal market, he said.

"There is a perception among some members of the municipal securities industry that the insider trading prohibitions do not apply to transactions in debt securities," commented Mr. Roberts, who had been strongly urging the agency's enforcement staff to bring an insider trading case in the municipal arena. "This case should correct such an erroneous perception."

"This case should also make it clear that the commission has focused more enforcement attention on the municipal securities market," he said.

The SEC settlement comes amid growing warnings by prominent lawyers that those who think the municipal securities market is immune to insider trading scandals should think again. Oliver Lee, a partner specializing in public finance at the Atlanta law firm of Troutman, Sanders, Lockerman & Ashmore warned last summer that "it is a thing of the past, a dinosaur" to think that the increasingly complex municipal market does not have insider trading problems and will not be subject to federal enforcement action.

Meanwhile, the SEC in March informed New York City officials and the city's disclosure counsel that it would review allegations of insider trading and impropriety the city made against First Boston Corp. in connection with a $1 billion bond offering, according to city officials.

Sources reported soon after that the SEC's enforcement division was expected to seek clearance by the agency's five commissioners to begin circulating subpoenas for information about the First Boston offering.

The Municipal Securities Rule-making Board in March 1991 issued a warning to broker-dealers that the Insider Trading and Securities Fraud Enforcement Act of 1988 requires them to write and enforce written policies and procedures to prevent misuse of nonpublic information.

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