UNITED STATES OF AMERICA Before The SECURITIES AND EXCHANGE COMMISSION Securities Act of 1933 Release No. 7616 / December 10, 1998 Securities Exchange Act of 1934 Release No. 40770 / December 10, 1998 Administrative Proceedings File No. 3-9724 _______________________________ : In the Matter of : : ORDER MAKING FINDINGS AND City of Moorhead, Mississippi : IMPOSING CEASE-AND-DESIST : ORDER Respondent. : I. On September 24, 1998, the Commission instituted public cease- and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against the City of Moorhead, Mississippi ("Moorhead" or "Respondent") to determine whether Moorhead committed or caused violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, the Respondent, without admitting or denying the findings set forth herein, except as contained in Section II.1., below, and as to the jurisdiction of the Commission over the Respondent and over the subject matter of these proceedings, which are admitted, consents to the entry of this Order Making Findings And Imposing Cease-And-Desist Order ("Order"). II. Based on this Order, the Order Instituting Public Cease-and-Desist Proceedings and the Respondent's Offer, the Commission finds[1] the following: 1. The City of Moorhead, Mississippi is a political and legal subdivision of the State of Mississippi and a body corporate and politic. 2. On or about November 8, 1995, Moorhead issued and sold urban renewal revenue notes ("notes") to the public in the face amount of $4.5 million. 3. The notes were issued pursuant to the Mississippi Urban Renewal Law, Miss. Code Ann. Section 43-35-21, and were sold based upon a representation that bond counsel had concluded that interest on the notes would be excludable from gross income for federal income tax purposes. The disclosure documents used in connection with the note offering represented that the note proceeds would be utilized within three years on various public projects. In fact, Moorhead had no intention of spending more than $45,000 on public projects. The $45,000 was received by the Respondent as a "premium" or "fee" for issuing the notes. The remaining proceeds were invested in a guaranteed investment contract ("GIC") yielding a higher rate of return than the notes. The GIC provided the cash flows to pay the debt service required by the notes. This financing structure resulted in a significant and undisclosed risk to the tax exempt status of interest on the notes. 4. Internal Revenue Code ("IRC") Section 103(b) provides that gross income includes interest on any state or local bond which is an "arbitrage bond" as that term is defined by IRC Section 148. IRC Section 148 (a) defines an arbitrage bond as "any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly (1) to acquire higher yielding investments...." 5. IRC Section 148(c)(1) allows the proceeds of certain issues to be invested in higher yielding investments for a reasonable temporary period until such proceeds are needed for the purpose for which the bonds were issued. This provision is known as the "temporary period exception." It provides that the bonds will not be treated as taxable arbitrage bonds if the net sale proceeds and investment proceeds of an issue are reasonably expected to be allocated to expenditures for capital projects within specified time periods. Treas. Reg. Sec. 1.148-2(b)(1) and 2(e)(2)(i)(1993); Treas. Reg. Sec. 1.103-13(a)(2) (1979). When statements regarding reasonable expectations with respect to the amount and use of the proceeds are not made in good faith, the notes are deemed to be taxable arbitrage bonds. Revenue Ruling 85-182, 1985-2 C.B. 39. 6. Although the note offering issued by Moorhead was purportedly structured to comply with the requirements of the temporary period exception, at the time of the offering, Moorhead did not have the resources, intent or expectation to utilize any proceeds from the offering, other than the $45,000 premium or fee, for capital projects. Subsequent to the offering, Moorhead did not utilize any of the offering proceeds, other than the $45,000 premium or fee, for any capital project. The lack of a reasonable expectation to utilize more than a small portion of the proceeds for capital projects would violate the reasonable expectation requirements of IRC Section 148(c)(1) and Treas. Reg. 1.148-2(e)(2). Therefore, a substantial risk existed that the issuer would not be able to rely on the temporary period exception, making the structure of this transaction a prohibited arbitrage device in violation of IRC Sections 103(b) and 148(a)(1). The violation of these sections could cause the IRS to declare interest on the notes subject to the federal income tax. 7. The substantial risk to the tax exempt status of interest on the notes was not disclosed to investors or prospective investors in the offering. The official statement and arbitrage certificate, among other documents, without exception, represented that Moorhead intended to spend the full amount of the offering proceeds within three years on various capital projects. The official statement also represented that the respondent was negotiating with a specified firm for "architectural services." These statements were not true. An official of the City of Moorhead, with the approval of the city council, reviewed and signed the documents. 8. Based on the foregoing, in November 1995, Moorhead violated Section 17(a)(1) of the Securities Act by, directly and indirectly, using the means and instruments of transportation and communication in interstate commerce and the mails to employ devices, schemes, and artifices to defraud purchasers in the offer and sale of securities. 9. Based on the foregoing, in November 1995, Moorhead violated Sections 17(a)(2) and 17(a)(3) of the Securities Act by, directly and indirectly, using the means and instruments of transportation and communication in interstate commerce and the mails to obtain money and property by means of untrue statements of material facts and omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and to engage in transactions, practices, and a course of business which operated or would have operated as a fraud and deceit upon purchasers, in the offer and sale of securities. 10. Based on the foregoing, in November 1995, Moorhead violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by, directly and indirectly, using the means and instrumentalities of interstate commerce and the mails: (1) to employ devices, schemes and artifices to defraud, (2) to make untrue statements of material facts and to omit to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and (3) to engage in acts, practices, and a course of business which operated or would have operated as a fraud and deceit upon persons, in connection with the purchase and sale of securities. III. In view of the foregoing, the Commission deems it appropriate in the public interest to impose the sanctions set forth in Moorhead's Offer of Settlement. **FOOTNOTES** [1]: The findings herein are made pursuant to the Offer of Settlement of the Respondent and are not binding on any other person or entity in this or any other proceeding. ACCORDINGLY, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act that the Respondent cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. For the Commission, by its Secretary, pursuant to delegated authority. ___________________ Jonathan G. Katz Secretary