In “A Streetcar Named Desire,” Blanche DuBois uttered the famous line that she always “depended on the kindness of strangers.” The U.S. Securities and Exchange Commission recently reminded underwriters that they cannot depend on the representations of strangers. With In the Matter of Piper Jaffray & Co. and Jane Towery, Securities Act Release No. 9472 (November 5, 2013), the SEC sent the clear message that an underwriter is responsible for conducting due diligence into all material statements in an offering memorandum, and cannot rely on the due diligence or representations of others. The action also marked the first time that the SEC imposed a financial penalty against an issuer of municipal securities based on materially false and misleading statements in an official offering statement.

As described by the SEC, the events unfolded as follows: In 2006, the City of Wenatchee, Wash. (the City), and eight neighboring municipalities and counties formed the Greater Wenatchee Regional Events Center Public Facilities District (District) for the purpose of funding a multi-use arena and ice hockey rink, referred to as the Regional Center. The District entered into a contract with Global Entertainment Corp. as the developer and operator of the Regional Center. Because the City assumed responsibility for managing the development and construction of the Regional Center, the City Council requested that an independent consultant review the Center’s financial projections. In August 2006, the consultant indicated that the Regional Center could have an operating deficit and that Global may have overstated projected net operating income by 16 percent to 25 percent in the initial year.

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