WASHINGTON -- It's about time!

Just when it seemed the Securities and Exchange Commission had allowed its long-running probe into abusive black box housing bond deals to fade into oblivion, there was a sign last week that the agency may not have given up on trying to clean up more of the still-festering escrow bond mess.

Municipal industry sources reported last week that the SEC in recent months has subpoenaed trustee banks for documents pertaining to several unidentified black box deals.

The SEC's action comes after it appeared the agency had stopped trying to go after the perpetrators of abusive black box and escrow deals other than those done by Matthews & Wright Inc., and its top officers -- the leading and worst perpetrators of tax-exempt bond deals that were rushed to market in the mid-1980s to beat the new tax law curbs on arbitrage.

Matthews and Wright did at least 26 sham deals totaling $1.3 billion that produced nothing but arbitrage profits and fees for the participants, and the SEC has been fairly dogged in going after both the firm and some of the participants in the deals.

But the agency has taken no public action against either other participants in the Matthews & Wright deals or the several other underwriting firms and participants that were involved in at least another 60 questionable escrow and black box deals totaling another $1.2 billion.

While it is not known which firms and individuals the SEC may be investigating, it appears they may include several of the firms and participants mentioned in the SEC's internal memorandum of Aug. 28, 1988, which showed that the agency's investigation of questionable practices involving black box and escrow deals extended well beyond Matthews & Wright.

The contents of that memo, detailed in an extensive report in the Sept. 18, 1989, edition of The Bond Buyer, implicated other firms, such as Howard, Weil, Labouisse, Friedrichs Inc., and Donaldson, Lufkin & Jenrette Securities Corp.

The memo also described the activities of James J. Keefe and Gary W. Davis, participants in many of the black box deals who set up shell entities meant to provide credit enhancements and mortgages for the projects. Instead, the bond proceeds were invested in guaranteed investment contracts and were never available for the housing projects.

Even though the memo showed abuses similar to those committed by Matthews & Wright, the SEC has never taken any action against the others.

This columnist has criticized the SEC on several occasions for only going after the worst perpetrators of abusive black box and escrow deals, and for not not being aggressive enough in scrutinizing participants who worked behind the scenes or who climbed on the abuse bandwagon later.

If the SEC is now going after those participants, it deserves praise for sending a needed message to the municipal market: Participants in securities scams will eventually be brought to justice and that justice won't be limited to only the worst abusers.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.