UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES ACT OF 1933 Release No. 7501 / January 30, 1998 SECURITIES EXCHANGE ACT OF 1934 Release No. 39600 / January 30, 1998 ADMINISTRATIVE PROCEEDING File No. 3-9539 : : ORDER INSTITUTING PUBLIC In the Matter of : ADMINISTRATIVE PROCEEDINGS : PURSUANT TO SECTION 8A OF : OF THE SECURITIES ACT OF PACIFIC MATRIX FINANCIAL : 1933 AND SECTION 21C OF THE GROUP, INC., : SECURITIES EXCHANGE ACT OF 1934, : MAKING FINDINGS, AND IMPOSING A : CEASE-AND-DESIST ORDER Respondent. : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be, and hereby is, instituted 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 Pacific Matrix Financial Group, Inc. ("Pacific Matrix"). II. In anticipation of the institution of this proceeding, Pacific Matrix has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding, and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, Pacific Matrix, without admitting or denying the findings contained in this Order Instituting a Public Proceeding Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and- Desist Order ("Order"), except that Pacific Matrix admits that the Commission has jurisdiction over it and over the subject matter of this proceeding, consents to the entry of this Order. ======END OF PAGE 1====== III. On the basis of this Order and the Offers, the Commission finds that:<(1)> A. FACTS 1. Respondent Pacific Matrix is a private corporation headquartered in Sherman Oaks, California. During all relevant times, Pacific Matrix acted as a finder of investments for municipal bond proceeds. 2. Other Relevant Entity Stifel, Nicolaus & Company, Inc. ("Stifel") is a broker-dealer headquartered in St. Louis, Missouri. 3. Pacific Matrix Provided a Last Look in the 1989 Oklahoma Turnpike Authority Transaction In February 1989, the Oklahoma Turnpike Authority ("OTA") issued $568 million in revenue bonds. Stifel was a member of the underwriting syndicate. A portion of the bond proceeds was to be invested in a Guaranteed Investment Contract ("GIC").<(2)> Although bond counsel and the OTA required the GIC to be competitively bid, a vice president of Pacific Matrix at that time ( Vice President ), on behalf of Pacific Matrix, assisted Stifel in ensuring that American International Group ("AIG") won the bidding. Prior to the bidding, Robert Cochran, Stifel's executive vice president in charge of its Oklahoma Public Finance Office, contacted the Vice President at Pacific Matrix and suggested a scheme whereby Pacific Matrix and Cochran would bring in the winning GIC provider and split the fee paid by the provider. The Vice President, on behalf of Pacific Matrix, and Cochran, on behalf of Stifel, contacted AIG and proposed a plan whereby Pacific Matrix and Stifel would provide AIG with a "last look." <(3)> Cochran had prearranged with the Vice President to call Pacific Matrix's office once he had learned what the highest submitted bid was and ask for "Wayne," the name of Cochran's supervisor. The Vice President, in turn, had prearranged with Pacific Matrix's secretary to forward any calls for Wayne to him and his supervisor. By asking for Wayne, Cochran was able to contact the Vice President at Pacific Matrix without raising the suspicions of others. Cochran communicated to the Vice President what AIG needed to bid in order to win. The Vice President relayed this information to AIG which then submitted the winning bid. In return for receiving the last look which enabled it to submit the winning bid, AIG agreed to pay $300,000 to Pacific Matrix, which Pacific Matrix and the Vice President agreed to split with Stifel. However, the Vice President provided <(1)> The findings in this Order are made pursuant to Pacific Matrix's Offer and are not binding on any other person or entity in this or any other proceeding. <(2)> Generally, with respect to municipal securities offerings, a GIC is an agreement to deposit money with a financial institution. The terms of the GIC, including the interest rate, withdrawal limitations, termination and collateralization are specifically negotiated and tailored to address the specific needs of the issuer. GICs typically are used to temporarily invest funds prior to their application to the costs of a particular project, or to satisfy debts that accrued prior to the receipt of anticipated revenues. <(3)> A "last look" occurs when a bidder is told the bid levels of its competitors or is otherwise given information sufficient to allow it to decide whether it wishes to submit the highest bid. ======END OF PAGE 2====== written assurance to the Oklahoma State Bond Advisor that Pacific Matrix would not share its payment from AIG with any other firm. Despite this written representation, Cochran insisted that Pacific Matrix pay $150,000 to Stifel. In order to pay a portion of the $150,000 to Stifel, Pacific Matrix entered into a sham consulting agreement with Stifel whereby Stifel would educate Pacific Matrix about how to use forward purchase agreements ("forwards").<(4)> Although Stifel did not provide any services to Pacific Matrix pursuant to this agreement, Pacific Matrix paid $110,000 to Stifel. During a subsequent transaction, the Vice President arranged for Pacific Matrix to pay the remaining $40,000 to Stifel. Stifel did not disclose to the OTA its receipt of the $150,000 in connection with the GIC. 4. Pacific Matrix Obtained Non-Competitive Bids In the 1992 Oklahoma Turnpike Authority Transaction In May 1992, the OTA issued approximately $608 million in revenue refunding bonds to advance refund most of its outstanding bonds and to fund proposed turnpike projects. Stifel was a co-bookrunning senior manager of the bond issue. Stifel recommended that the OTA purchase a forward, and Cochran intended for Sakura Global Capital, Inc. ("Sakura") to provide the forward. Bond counsel required that the OTA obtain at least three competitive bids for the forward. Contrary to bond counsel's instructions, Cochran, with the assistance of the Vice President, rigged the bidding to ensure Sakura's selection as the provider. At about 3:00 a.m. Pacific time on the morning of the bidding, Cochran and Jim Pannone, a member of Stifel's Oklahoma Public Finance Office, contacted the Vice President and asked the Vice President to provide them with names of firms that would be willing to receive bid forms for the forward directly from Stifel later that morning. They informed the Vice President that Sakura already was working with Stifel. They also directed the Vice President not to contact any broker-dealers, thereby preventing him from contacting any "first-tier players." The Vice President instructed Cochran and Pannone to send bid forms to three firms which were not active in the forward market. In addition, the Vice President communicated to the bidders, other than Sakura, a number he obtained from Stifel below which the bidders could bid and be assured of not being selected as the provider. In this way, Pacific Matrix and the Vice President rigged the bidding in order to ensure Sakura's selection as the forward provider. For the Vice President s services, Stifel and Sakura each paid $50,000 to Pacific Matrix. Sakura also paid an undisclosed brokerage fee of $6.593 million to Stifel in connection with the forward. 5. Pacific Matrix Obtained Non-Competitive Bids In the 1992 Sisters of St. Mary's Transaction In November 1992, the Sisters of St. Mary's Health Care Obligated Group ("SSM") was the beneficiary of four simultaneous issues of conduit bonds by four separate issuers: the Illinois Health Facilities Authority; the Health and Educational Facilities Authority of the State of Missouri; Dillon County, South Carolina; and the Wisconsin Health and Educational Facilities Authority. <(5)> The aggregate principal amount of bonds issued was approximately $265 million. <(4)> In a forward, a financial institution ("forward provider") and the escrow trustee under the escrow deposit agreement for the refunded municipal securities enter into an agreement that gives the forward provider the option of providing Treasury securities at certain future dates to the escrow trustee in exchange for monies then on deposit and available in the escrow account. The Treasury securities that are delivered must not have a maturity value less than the amount needed to pay principal and interest on the refunded bonds and must not have a maturity date which is later than the payment date for the principal or interest on the refunded municipal bonds. In exchange for the issuer directing the escrow trustee to enter into the forward, the forward provider will make a payment to the issuer, frequently in the form of an up- front payment. <(5)> A conduit bond is a municipal security issued by a municipal issuer for the benefit of a private corporation or other entity that ultimately is obligated to repay the bonds. ======END OF PAGE 3====== Stifel was a co-managing underwriter for the transaction. Stifel recommended that SSM purchase a forward. Although bond counsel required that SSM obtain three competitive bids for the forward, Pacific Matrix and the Vice President assisted Stifel in ensuring Sakura's selection as the provider by obtaining two non-competitive bids while Sakura submitted its winning bid directly to Stifel. Sakura paid an undisclosed brokerage fee of $100,000 to Stifel in connection with the forward. B. LEGAL DISCUSSION Section 8A of the Securities Act and Section 21C of the Exchange Act authorize the Commission to enter a cease-and- desist order against an individual or an entity that the Commission finds caused a violation of the federal securities laws due to an act or omission the person or entity knew or should have known would contribute to such violation. Stifel's bid- rigging and failure to disclose to the issuers the payments from Pacific Matrix and Sakura jeopardized the tax-exempt status of the bonds. Therefore, Stifel violated Section 17(a) of the Securities Act, Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5 thereunder and Rule G-17 of the Municipal Securities Rulemaking Board ("MSRB"). Pacific Matrix and the Vice President caused Stifel's violations by providing Stifel with non-competitive bids for the forwards in the 1992 OTA and SSM transactions and a last look in the 1989 OTA transaction, and by using a sham consulting agreement to disguise payments to Stifel. By engaging in such deceptive conduct, Pacific Matrix and the Vice President undermined the integrity of the municipal bond transactions at issue and created an uneven playing field which jeopardized the tax-exempt status of the bonds. This conduct corrupted the municipal bond marketplace and inhibited the prospective bond purchasers ability to make a reasoned and fully informed investment decision. IV. FINDINGS A. Based on the foregoing, the Commission finds that Pacific Matrix caused Stifel's violations of Section 17(a) of the Securities Act, Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5 thereunder and Rule G-17 of the MSRB. B. Pacific Matrix has submitted a sworn financial statement and other evidence and has asserted its financial inability to pay disgorgement in excess of $50,000. The Commission has reviewed the sworn financial statement and other evidence provided by Pacific Matrix and has determined that Pacific Matrix does not have the ability to pay disgorgement in excess of $50,000. V. ORDER ACCORDINGLY, IT IS HEREBY ORDERED that: A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Pacific Matrix cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Sections 10(b) and 15B(c)(1) of the Exchange Act and Rule 10b-5 thereunder and Rule G-17 of the MSRB; B. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Pacific Matrix shall pay disgorgement of $164,250, plus prejudgment interest, but that payment of that amount, except for $50,000, be waived based upon Pacific Matrix's demonstrated financial inability to pay. Thus, within ten days of the entry of this Order, Pacific Matrix shall pay disgorgement of $50,000 to the United States Treasury. Such payment shall be: (i) made by United States postal money order, certified check, bank cashier's check or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (iv) submitted under cover letter which identifies Pacific Matrix as a respondent in this proceeding and the file number of this proceeding, a copy of which cover letter and money order or check ======END OF PAGE 4====== shall be sent to Kevin Harnisch, staff attorney, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Stop 7-2, Washington, D.C. 20549; and C. If at any time following the entry of this Order the Commission obtains information indicating that Pacific Matrix's representations to the Commission concerning its assets, income, liabilities, or net worth were fraudulent, misleading, inaccurate or incomplete in any material respect as of the time such representations were made, the Division of Enforcement may petition the Commission to: (i) reopen this matter to consider whether Pacific Matrix provided accurate and complete financial information at the time such representations were made; and (ii) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Pacific Matrix's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Pacific Matrix was fraudulent, misleading, inaccurate or incomplete in any material respect and whether any additional remedies should be imposed. Pacific Matrix may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission. Jonathan G. Katz Secretary ======END OF PAGE 5======