In the Matter of
Respondent.
ORDER MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS PURSUANT TO SECTIONS 15(b) AND 15B(c) OF THE SECURITIES EXCHANGE ACT OF 1934, AND SECTION 9(b) OF THE INVESTMENT COMPANY ACT OF 1940
I.
On
II. Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept to resolve these additional proceedings. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these additional proceedings, which are admitted, and except as provided herein in Section V, Respondent consents to the entry of this Order Making Findings and Imposing Remedial Sanctions Pursuant to Sections 15(b) and 15B(c) of the Exchange Act, and Section 9(b) of the Investment Company Act ("Order"), as set forth below.1
III. On the basis of this Order and Respondent's Offer, the Commission finds2 that:
Summary
1. From at least
2. In the Brogdon Bond Offerings, which were unrated, the proceeds from the sale of the bonds were to be used to undertake a particular project-the construction, acquisition, or renovation of a facility-for the benefit of a borrower controlled by Brogdon, and the borrower would undertake to provide certain continuing disclosures.
3. In connection with the Brogdon Bond Offerings, Brogdon rarely caused the borrower to provide to the
4. Lynch conducted only a cursory inquiry into the information provided by Brogdon, his representatives, and other parties to the financing despite being aware of numerous red flags. This lack of due diligence deprived both initial purchasers and buyers and sellers in secondary market transactions of material information related to the offerings and allowed Brogdon to perpetuate his fraud.
5. Lynch also failed to obtain a written continuing disclosure undertaking from Brogdon for an
6. Lynch was listed as underwriter's counsel in the official statements of the Brogdon Bond Offerings and received compensation for his work as underwriter's counsel from bond offering proceeds in addition to a salary from LFC. Lynch, however, was not permitted or qualified to serve as LFC's underwriter's counsel because he was an inactive member of the
Respondent
7. Lynch, age 69, resides in
Other Relevant Individual and Entities
8. LFC is a broker-dealer headquartered in
9. Brogdon, age 69, resides in
10.
Lynch Failed to Conduct Reasonable Due Diligence and Ignored Red Flags Related to the Brogdon Bond Offerings
11. Lynch and LFC's CEO were responsible for underwriting due diligence at LFC for the Brogdon Bond Offerings. Lynch served as an LFC investment banker and as underwriter's counsel for the Brogdon Bond Offerings.
12. Even though Brogdon set up several different entities to act as borrowers in the Brogdon Bond Offerings, Lynch knew that Brogdon was behind each borrowing entity and was the borrower-in-fact for each offering. During the Relevant Period, Brogdon and his representatives served as the primary point of contact for Lynch on behalf of the Brogdon-controlled borrowers, and Lynch regularly corresponded with Brogdon and his representatives regarding the Brogdon Bond Offerings.
13. In 2010, LFC underwrote two Brogdon Bond Offerings. As required by Exchange Act Rule 15c2-12, Brogdon signed continuing disclosure agreements ("CDAs") on behalf of the Brogdon-controlled borrowers in each offering.3 Lynch assisted in preparing the draft official statements and CDAs, conducted due diligence, and reviewed drafts of both the preliminary and final official statements. The final official statements included a summary description of the provisions of the CDAs for each offering. After the closing of each offering, LFC sold the bonds and disseminated the official statements to its customers.
14. In the CDAs for the two 2010 Brogdon Bond Offerings, the Brogdon- controlled borrower covenanted and agreed to, among other things, provide to on EMMA: (a) annual financial information; (b) audited financial statements, if any; and (c) event notices.4
15. The Brogdon-controlled borrowers failed to comply with their respective undertakings in the CDAs for the 2010 Brogdon Bond Offerings in all material respects. For example, for 2010, no annual financial information was filed on EMMA for one of the offerings and only partial information was filed late for the other offering. For 2011, only partial annual financial information was filed late for both offerings.
16. In 2012, LFC underwrote an additional five Brogdon Bond Offerings. Lynch assisted in compiling the draft official statements, conducted due diligence, and reviewed drafts of both the preliminary and final official statements. For each of these offerings, Brogdon or his representatives were Lynch's principal point of contact on behalf of the borrower, and Brogdon signed each of the CDAs on behalf of the Brogdon- controlled borrower.
17. Each of the final official statements for the 2012 Brogdon Bond Offerings includes a section titled, "Continuing Disclosure Obligation." In each "Continuing Disclosure Obligation" section, there is a representation that: "The [Brogdon-controlled borrower] has not failed to comply with any prior Undertaking under [Exchange Act Rule 15c2-12]."5
18. Brogdon's assertion of the Brogdon-controlled borrower's compliance with previous undertakings in CDAs in the official statements for the five 2012 Brogdon Bond Offerings was materially misleading. Specifically, Brogdon's representations omitted material facts investors would need to know in order to evaluate the likelihood that a particular Brogdon-controlled entity would comply with its CDA. At the time of each of the offerings, Brogdon had not filed on EMMA all of the required annual financial information pursuant to the CDAs for the two 2010 Brogdon Bond Offerings, both of which were underwritten by LFC and for which Lynch served as an investment banker and underwriter's counsel.
19. On numerous occasions throughout 2013, Lynch was made aware that Brogdon was causing certain Brogdon-controlled entities to fail to comply with respect to their CDA undertakings. For example:
a. In
b. In
c. Also in
20. Nevertheless, in 2013, LFC underwrote an additional five Brogdon Bond Offerings. Lynch again served as an investment banker and underwriter's counsel and in that capacity assisted in preparing the draft official statements, conducted due diligence, and reviewed drafts of both the preliminary and final official statements. For each of the 2013 Brogdon Bond Offerings, Brogdon or his representatives were Lynch's principal point of contact on behalf of the Brogdon-controlled borrower.
21. Each of the final official statements for the 2013 Brogdon Bond Offerings includes a section titled "Continuing Disclosure Obligation." In each "Continuing Disclosure Obligation" section, there is a representation that: "The [Brogdon-controlled borrower] has not failed to comply with any prior Undertaking under [Exchange Act Rule 15c2-12]."
22. As with the 2012 Brogdon Bond Offerings, Brogdon's assertion of the Brogdon-controlled borrower's compliance with prior continuing disclosure undertakings in the official statements for the 2013 Brogdon Bond Offerings was materially misleading. At the time of each of the 2013 Brogdon Bond Offerings, certain Brogdon-controlled borrowers had failed to provide to EMMA the required annual financial information for certain of the 2010 and 2012 Brogdon Bond Offerings that LFC had underwritten and for which Lynch served as an investment banker and underwriter's counsel.
23. LFC's written supervisory procedures required that the
24. Lynch did not conduct or cause to be conducted a review of EMMA of any of the Brogdon-controlled borrowers in connection with these underwritings, despite the numerous red flags associated with the Brogdon Bond Offerings. Instead, Lynch relied solely on the representations of Brogdon, his representatives, BOKF, and other parties to the transactions.
25. Where Brogdon did cause the Brogdon-controlled borrower to provide required annual financial information to EMMA for the Brogdon Bond Offerings, he typically failed to provide audited financial statements and the information was provided after the dates required by the related CDA. Brogdon also did not include other required annual financial information, including the census and payor mix for the Facilities or the certificate from the Chief Operating Officer regarding compliance with the lease agreement.
Lynch Willfully Aided and Abetted and Caused LFC's Violation of Section 15(c) of the Exchange Act and Rule 15c2-12 in Connection with Underwriting the Clayton V Offering
26. In
27. Lynch served as an investment banker and as underwriter's counsel on the Clayton V Offering. During the drafting process of the official statement for the Clayton V Offering, the parties to the transaction provided written comments and the draft was discussed with Brogdon and other members of the financing team on numerous conference calls in which Lynch participated.
28. Though the official statement for the Clayton V Offering represents that "[c]ertain legal matters will be passed upon" for LFC by Lynch in his capacity as underwriter's counsel, Lynch did not prepare or deliver an underwriter's counsel legal opinion letter for the Clayton V Offering.
29. According to the official statement, the debt service payments for the certificate of participation bonds were to be paid, in part, from revenues generated by Facilities owned by two additional Brogdon-controlled entities. The official statement lists each of these Brogdon-controlled entities as an "obligated party" for the Clayton V Offering.
30. In the "Continuing Disclosure Obligation" section of the official statement for the Clayton V Offering, it is represented that these Brogdon-controlled entities "covenanted in the Continuing Disclosure Agreement to provide certain financial information and other operating data" to EMMA. Among other things, the official statement represents: (a) the obligors agreed to file annual financial information and other operating data to EMMA not more than 180 days after the end of each fiscal year; (b) if a "material event" occurs while the bonds were outstanding, the obligors agreed to file a material event notice on EMMA; and (c) neither obligor had failed to comply with any prior undertaking under the Exchange Act Rule 15c2-12.
31. The representation that a CDA had been executed for the Clayton V Offering was false. In fact, no CDA was executed. Neither Brogdon-controlled entity had covenanted to file annual financial information and other operating data on EMMA or to file material event notices on EMMA upon the occurrence of a material event in connection with the Clayton V Offering.
32. The official statement also contains sections that describe the obligated parties for the Clayton V Offering, including the Brogdon-controlled
33. This statement was false. In fact, the 82-bed and 68-bed Facilities in
34. Had Lynch actually conducted due diligence on the material representations contained in the official statement, including conducting EMMA checks, Lynch would have detected that no required annual financial information had been filed for the 82-bed and 68-bed Facilities in
Lynch Misrepresented to Investors, LFC, and Other Members of the Financing Team that He Was Qualified and Permitted to Serve as LFC's Underwriter's Counsel
35. For the 12 Brogdon Bond Offerings where Lynch served as underwriter's counsel, Lynch received a total of
36. As LFC's underwriter's counsel, Lynch was responsible for helping to draft the official statements for the offerings, among other documents, and for preparing an underwriter's counsel legal opinion letter or a Blue Sky survey letter.7 These letters represented that Lynch was an "Attorney at Law" based in
37. The official statements for all of the Brogdon Bond Offerings list "
38. Lynch was not authorized to practice law in the
39. Lynch is currently listed as an inactive member on the website of the Disciplinary Board of the
40. According to the Pennsylvania Rules of Disciplinary Enforcement, Rule 217, an inactive attorney is prohibited from, among other things, "representing himself or herself as a lawyer or person of similar status." Rule 217(j)(4)(iv).
Violations
41. As a result of the conduct described above, Lynch willfully violated Sections 17(a)(2) and (3) of the Securities Act, Section 1O(b) of the Exchange Act and Rule 1Ob-5(b) thereunder, which prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities, and Lynch willfully aided and abetted and caused LFC's violation of Section 15(c) of the Exchange Act and Rule 15c2-12 thereunder related to the failure to obtain a CDA for the Clayton V Offering.
IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions agreed to in Respondent's Offer.
Accordingly, pursuant to Sections 15(b) and 15B(c) of the Exchange Act and Section 9(b) of the Investment Company Act, it is hereby ORDERED that:
A. Lynch be, and hereby is:
i. barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and
ii. prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter;
with the right to apply for reentry after one (1) year to the appropriate self- regulatory organization, or if there is none, to the Commission.
B. Any reapplication for association by Lynch will be subject to the applicable laws and regulations governing the reentry process, and reentry may be conditioned upon a number of factors, including, but not limited to, the satisfaction of any or all of the following: (i) any disgorgement ordered against Lynch, whether or not the Commission has fully or partially waived payment of such disgorgement; (ii) any arbitration award related to the conduct that served as the basis for the Commission order; (iii) any self- regulatory organization arbitration award to a customer, whether or not related to the conduct that served as the basis for the Commission order; and (iv) any restitution order by a self-regulatory organization, whether or not related to the conduct that served as the basis for the Commission order.
V. It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. Section 523, the findings in this Order are true and admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Respondent under this Order or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Respondent of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. Section 523(a)(19).
By the Commission.
Secretary.
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