WASHINGTON - The Securities and Exchange Commission has censured Donaldson, Lufkin & Jenrette Securities Corp. for failing to disclose in the initial public stock offering for Matthews & Wright Group Inc. in 1986 that the firm had conducted bogus closings of municipal bond offerings.
The action, announced yesterday as part of a settlement in which Donaldson Lufkin neither admitted nor denied guilt, was based on charges that the firm was "reckless" in not knowing about the fraudulent and cashless bond closings.
The SEC order, the latest fallout from the fraudulent escrow bond underwriting saga of Matthews & Wright in the mid-1980s, requires Donaldson Lufkin to cease and desist from future violations of the federal securities laws, but imposes no fines.
Matthews & Wright on Aug. 14, 1986, offered 1.5 million shares of common stock to the public at $11 per share, using Donaldson Lufkin as underwriter. The registration statement filed with the SEC did not disclose millions of dollars of questionable closing arrangements used by Matthews & Wright in December 1985 and August 1986 to close over $2.24 billion of offerings, the SEC complaint charged.
The SEC said it had no "reasonable basis" to believe that some of the representations in the registration statement of the transactions were accurate and complete, the SEC charged. "Given its vital role and responsibilities in the transaction as underwriter for the offering, DLJ was reckless in not knowing that the registration statement would fail to state material facts about the transactions closed by Matthews & Wright in December of 1985 and again in August of 1986."
"Accordingly, we find that DLJ willfully violated" the antifraud provisions of the federal securities laws, the SEC said.
The agency said that during the course of Donaldson Lufkin's work on the underwriting of Matthews & Wright's initial public offering, the firm learned some of the details of the closing arrangement used by Matthews & Wright on Dec. 31, 1985.
In an effort to beat tax deadlines, Matthews & Wright sold bonds to a shell bank in the Northern Mariana Islands and wrote checks against a credit union with insufficient funds, all without disclosing the activities to investors, the SEC said.
A senior vice president at Donaldson Lufkin pitched a variation of the closing with less questionable features to officials at his firm in the waning hours of 1985, but Donaldson Lufkin officials themselves refused the deals, the SEC said. The official then contacted Matthews & Wright, whose senior vice president, Arthur Abba Goldberg, agreed to take the offerings, which at this stage involved the use of the worthless credit union checks and the investment agreements provided by the Commercial Bank of the Americas, the agency said.
"Although the [Donaldson Lufkin] executive did not say that the checks used at the closings were worthless or that the Commercial Bank of the Americas was an unlicensed shell, he did inform DLJ of the circular path of the bond proceeds during the closings, and of other facts which raised questions about the closings," the SEC charged.
Despite learning of this unusual closing arrangement and knowing that it had been used to close a substantial portion of Matthews & Wright's offerings for 1985, the period just prior to the initial public offering, the DLJ IPO team failed to undertake any evaluation or review of the arrangement or to disclose its existence in the registration statement," the SEC said.
"The DLJ team also failed to review any of the documents used at the closings for the offerings." And DLJ's IPO team "learned of some of the circumstances of the decision by Matthews & Wright to take the offerings from DLJ in late December of 1985 and close those offerings before the end of the year." And articles began appearing in the press at the time Donaldson Lufkin was retained as underwriter for the IPO, raising questions about bond offerings underwritten by Matthews & Wright, the SEC said.
The complaint does not name the Donaldson Lufkin senior vice president, but a former Donaldson Lufkin senior vice president, Ira A. McCown Jr., was sentenced by a federal judge in June 1991 to five years probation and 100 hours of community service in connection with a federal tax charge arising out of an investigation into a number of so-called black box deals. Sixteen of those deals were underwritten by Matthews & Wright.
Securities and Exchange Commissioner Richard Roberts said yesterday's announcement, combined with other recent commission enforcement actions in municipals, shows "a clear pattern" of increased attention by the agency's enforcement division on the municipal securities market.
"Municipal securities participants, if they were not already, should be aware of this increased enforcement attention and should tailor their behavior accordingly," said Mr. Roberts.
"Securities law violations in the municipal area, when uncovered, will be pursued diligently by the commission - and the commission is exercising extra effort to discover such violations," Mr. Roberts said.
A spokeswoman for Donaldson Lufkin said, "The SEC has maintained in its finding that even though DLJ did not know that Matthews & Wright was involved in deliberate fraud and deception, that we should have discovered that they had conducted fraudulent and cashless closing of municipal bond offerings in 1985 and 1986."
Nevertheless." said Catherine Conroy, senior vice president for Donaldson Lufkin, "nothing in the findings contradicts the fact that Matthews & Wright's senior management and attorneys were involved in a concerned effort to deceive us and defraud the public.
"The SEC has advised us that this concludes its review of DLJ and that there will be no SEC action regarding DLJ's municipal underwritings" arising from this investigation, she said.
Last year, the SEC took enforcement action against Bernard Althoff, the outside attorney who advised Matthews & Wright in its preparation of the registration statement for its 1986 IPO.