WCCUSD CBOC November 12, 2015 Piper Jaffray & Co. WCCUSD Bond Underwriter

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1 Executive Summary Purpose WCCUSD Board Policy defines the Citizen Bond Oversights Committee s composition and purview. Section 3 of Board Policy , "Committee Operations," states: "The Committee shall not have the authority to a) participate in the bond sale and issuance process or make decisions concerning the timing, terms, or structure of a bond issue, except that the Committee may review the district's plans for any bond sale and may review bond issuance documents upon the conclusion of a bond sale if desired; (bold added for emphasis.) The purpose of this paper is to perform a due diligence review of who is the current senior bond underwriter. This paper seeks an answer to the question: Should Piper Jaffray continue as the WCCUSD bond underwriter for future negotiated bond sales? Also to make recommendations to the CBOC regarding the next bond sale and future activities of the CBOC as they relate to bond sales. 1 Piper Jaffray Due Diligence Review The authors made a due diligence review of records including the following: WCCUSD Official Statements 1994 to 2015; Form MA Applicant s Information filed with the United States Securities and Exchange Commission (SEC), dated August 8, 2015; BrokerCheck Report published online by the Financial Industry Regulatory Authority (FINRA); SEC Order dated June 18, 2015; Piper Jaffray Form 10-Q filed with the SEC for the quarter ended September 30, 2015; and Sheri Gamba s Bond Financial Information report to the Board of Education in the September 4, 2015 Superintendent s Friday Memo. Based on Piper Jaffray s MA Applicants Information filing with the SEC they have disclosed: violations of SEC regulations or statutes, been subject to SEC orders, been levied SEC money penalties, been subject to SEC cease and desist orders from various activities, other government agencies have found them in violation, other government agencies have issued orders against them, made false statements or omission to self-regulatory organization, been in violation of its own rules, had members expelled or suspended, been enjoined by domestic or foreign courts and found courts in violation of statues or regulations. A review of the above documents revealed 191 violations by Piper Jaffray of securities statutes and regulations during the period 1972 to 2015 as displayed below: 1 Board Policy BP provides that the CBOC may review the District s plans for any bond sale. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 1 of 17

2 Executive Summary (continued) Conclusion Event Description Number of Amount Penalty Events Rounded 2 Regulatory/Civil ,715,000 Arbitrations 55 14,146,000 Antitrust Litigation Settlement 1 9,800,000 MCDC 3 Agreed Settlement 1 500,000 Total ,161,000 should be dismissed as the District s bond underwriter for any negotiated sales. Going forward all bond sales should be by competitive bid. The CBOC, working with the California League of Bond Oversight Committees, should support the recommended California Policy Center California legislative and executive reforms. Recommendations 1. Dismiss as the WCCUSD bond underwriter for any negotiated sales. 2. Sell future bonds through competitive bids. 3. CBOC work with the California League of Bond Oversight Committees to support legislation and executive actions to implement the California Policy Center recommendations. Prepared by: Disclaimer: The authors of this document are members of the WCCUSD Citizens Bond Oversight Committee (CBOC). However, the views expressed in this document are those of the authors and not of the CBOC The amount of penalty includes money penalties, giving up commissions, required donation to charities, restitutions to clients, and procurement of independent research. 3 MCDC is abbreviation for Municipalities Continuing Disclosure Cooperation, a SEC self-reporting initiative. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 2 of 17

3 Information Supporting the Executive Summary A detailed description of the material considered in the due diligence review attempts to answer the question: Should Piper Jaffray continue as the WCCUSD bond underwriter for future negotiated bond sales? Piper Jaffray in General Piper Jaffray is a leading full-service investment bank and asset management firm serving clients in the U.S. and internationally. Our proven advisory teams combine deep product and sector expertise with ready access to global capital. 4 In the education sector Piper Jaffray serve primary and secondary schools as both a bond underwriter and a financial advisor. In 2013, our team underwrote or was financial advisor on 407 bond issues for primary and secondary school needs nationwide, providing $11.94 billion in financing. 5 The underwriter s job is to set the interest rates of a new GO bond and purchase those bonds from the district for resale to investors. This can be done by working directly with the district in a negotiated sale or acquiring the bonds through a competitive bid. 6 Piper Jaffray shareholders equity at December 31, 2014 was $969,460, Their 2014 net income was $58,141, Net income for the period January to September 2015 was $38,802, The number of full time employees as of September 30, 2015 was 1, Piper Jaffray website, About Us. 5 Ibid., Education 6 Dale Scott, Win Win: An Insider s Guide to School Bonds, Improve Your Schools and Protect Local Taxpayers, 2013, DS&C Publishing, page Annual Report Form 10-K for 2014 files with the United States Securities and Exchange Commission. 8 Ibid. 9 Piper Jaffray press release, October 29, Ibid. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 3 of 17

4 Piper Jaffray Role as The authors reviewed all of the thirty-two Official Statements issued by WCCUSD for the years 1994 to See attachment 1. Based on that review, the five tables shown below were prepared. Piper Jaffray was the senior underwriter on 93% of the District s negotiated bond sales based on the amount of bonds sold as shown below: Table 1 Negotiated Bond Sales by Senior Underwriters 1994 to 2015 Senior Underwriter Number of Issues Amount of Sales Rounded Percent of Total Piper Jaffray ( ) ,495, Kinsell et. al. (2001) 2 38,865,000 5 Stone & Youngberg (1994) 1 11,150,000 1 De La Rosa (2005) 1 10,600,000 1 Total ,110, Of the fourteen bond sales for which Piper Jaffray was the senior underwriter, all were negotiated bond sales. None of the Piper Jaffray bond sales were bid. Of the thirty-two bond sales, fourteen were bid (44%) and eighteen were negotiated (56%) Type of Sale Table 2 Bond Sales by Negotiated vs. Bid 1994 to 2015 Number of Issues Amount of Sales Rounded Percent of Total Bid ,997, Negotiated ,110, Total 32 1,552,107, H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 4 of 17

5 The District s finances were under the control of a State Appointed Trustee 11 for about twenty-one years (1991 to 2012). During this period there were twentyseven bond sales of which fourteen were bid and thirteen were negotiated. Prior to the first bond sales by Piper Jaffray in September 2009 of the eighteen sales fourteen were bid and four were negotiated. This demonstrates that most of the bond sales during the period of the State Appointee Trustee, a period when the District s finances were considered shaky, were bid sales and were not negotiated sales. Bond sales by year are displayed below: Table 3 Bond Sales by Year of Sale 1994 to 2015 Year of Sale Number of Issues Amount of Sales Rounded Bid or Negotiated State Appointed Trustee ,000,000 negotiated No ,460,000 negotiated No ,000,000 negotiated No ,200,000 negotiated Yes ,565,000 negotiated Yes ,500,000 negotiated Yes ,770,000 negotiated Yes ,000,000 bid Yes ,000,000 bid Yes ,998,000 bid Yes ,600,000 negotiated Yes ,999,000 bid Yes ,000,000 bid Yes 11 See note below. 12 The Richmond Unified School District (RUSD), later to be known as the West Contra Costa Unified School District (WCCUSD), received an emergency State Loan in 1991 due to its inability to pay its current obligations, almost resulting in a District-wide closure of the educational program. (Vavrinek, Trine, Day & Co., LLP Operational Assessment, December 16, 2011, page 1.) On June 1, 2012 WCCUSD was able to pay off its $47 million state loan. The purpose of this column is to display by year when the State Appointed Trustee was in control of the District s finances. 13 State Appointed Trustee ended her service on June 1, H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 5 of 17

6 Year of Sale Number of Issues Amount of Sales Rounded Bid or Negotiated State Appointed Trustee ,000,000 bid Yes ,865,000 negotiated Yes ,000,000 bid Yes ,000,000 bid Yes ,000,000 bid Yes ,150,000 negotiated Yes Total 32 1,552,107,000 A classification of bond sales by type is shown below: Table 4 Bond Sales by Type of Issue 1994 to 2015 Type of Issue Number of Issues Amount Rounded New Issues 24 1,172,407,000 Refunding Issues 6 357,950,000 Certificates of Participation 2 21,750,000 Total Bond Sales 32 1,552,107,000 The table below reconciles that total amount of bond sales to the total amount of bonds issued by subtracting refunding bond issues and certificate of participation issues: Table 5 Reconciliation of Bond Sales to Bonds Issued 1994 to 2015 Description Amount of Sales Rounded Total Bond Sales per (table 4 above) 1,552,107,000 Less: Refunding Issues (table 4 above) (357,950,000) Less: Certificates of Participation (table 4 above) (21,750,000) Total Bonds Issued 1,172,407, Bonds KPI Summary September 30, 2015, prepared by the District, shows the total bonds issued as $1,171,922,613 or $484,000 less than the amounts reported in the Official Bond Statements. Measure D-2010 is understated $181,000 and Measure E-2012 is understated by $303,000 for a total understatement of $484,000. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 6 of 17

7 Tables 1-5 above are based on the detailed analysis of thirty-two (32) bond Official Statements for the years 1994 to 2015 as shown in attachment 1. The source for the WCCUSD Official Bond Statements is the online Electronic Municipal Market Access (EMMA) administered by the Municipal Securities Rulemaking Board (MSRB) ( Piper Jaffray Disclosure Review This due diligence review of records included the following: WCCUSD Official Statements 1994 to 2015 Form MA Applicant s Information filed with the United States Securities and Exchange Commission, dated August 8, BrokerCheck Report published online by the Financial Industry Regulatory Authority (FINRA). The FINRA is the largest independent regulator for all securities firms doing business in the United States. FINRA s mission is to protect investors by making sure the United States securities industry operates fairly and honestly. 15 The authors reviewed the 314 page report for 16 Disclosure Events: All firms registered to sell securities or provide investment advice are required to disclose regulatory actions, criminal or civil judicial proceedings, and certain financial matters in which the firm or one of its controlled affiliates has been involved. 17 See attachment 2 for an example of one regulatory entry in this report. SEC Order dated June 18, Piper Jaffray Form 10-Q filed with the United States Securities and Exchange Commission for the quarter ended September 30, Wikipedia, the free encyclopedia 16 Report # , data current as of Monday, November 2, 2015, CRD# Piper Jaffrey & Co. BrokerCheck Report, page 22. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 7 of 17

8 Sheri Gamba s Bond Finance Information report to the Board of Education in the September 4, 2015 Superintendent s Friday Memo. See attachment 4. A review of the Form MA Applicant s Information filed on August 8, 2015 with the United States Securities and Exchange Commission (SEC) revealed that Piper Jaffray & Co. answered yes to the following questions: Has the SEC or the CFTC 18 ever: found the applicant or any associated person to have been involved in a violation of any SEC or CFTC regulation or statute? YES entered an order against the applicant or any associated person in connection with municipal advisor-related or investment-related activity? YES imposed a civil money penalty on the applicant or any associated person, or ordered the applicant or any associated person to cease and desist from any activity? YES Has any other federal regulatory agency, any state regulatory agency, or and foreign financial regulatory authority ever: found the applicant or any associated person to have been involved in a violation of municipal advisor-related or investment-related regulation or statutes? YES entered an order against the applicant or any associated person in connection with a municipal advisor-related or investment-related activity? YES 18 U.S. Commodity Futures Trading Commission H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 8 of 17

9 Has any self-regulatory organization or commodities exchange ever: found the applicant or any associated person to have made a false statement or omission? YES found the applicant or any associated person to have been involved in a violation of its rules (other than a violation designated as a minor rule violation under a plan approved by the SEC)? YES disciplined the applicant or any associated person by expelling or suspending the applicant or the associated person from membership, barring or suspending the applicant or the associated person from association with other members, or by otherwise restricting the activities of the applicant or the associated person? YES Has any domestic or foreign court ever: enjoined the applicant or any associated person in connection with any municipal-related or investment-related activity? YES found that applicant or any associated person was involved in a violation of any municipal advisory-related or investment-related statute(s) or regulation(s)? YES Based on Piper Jaffray s MA Applicants Information filing with the SEC they have disclosed that: They made violations of SEC regulations or statutes Been subject to SEC orders Been levied SEC money penalties Been subject to SEC cease and desist orders from various activities Other government agencies have found them in violation Other government agencies have issued orders against them Made false statements or omission to self-regulatory organization Been in violation of its own rules Had members expelled or suspended H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 9 of 17

10 Been enjoined by domestic or foreign court Been found by a court to be in violation of statues or regulations As noted above part of this review included an analysis of the BrokerCheck Report published by the Financial Industry Regulatory Authority (FINRA), SEC Form 10- Q (September 30, 2015) and SEC Order date June 18, A review of these documents revealed 191 violations as displayed below: Table 6 Summary Regulatory Events 1972 to 2015 Event Description Number of Events Amount Penalty Rounded 19 Source Regulatory/Civil ,715,000 A Arbitrations 55 14,146,000 B Antitrust Litigation Settlement 1 9,800,000 C MCDC Agreed Settlement 1 500,000 D Total ,161,000 Source A: BrokerCheck Online Report published Financial Industry Regulatory Authority (FINRA). The Piper Jaffray report # CRD# 665 is 314 pages and is current as of November 2, See attachment 2 for an example of one regulatory entry in this report. The authors have the full 314-page report available for review. Regulatory events reported above include only final events and do not include pending events. Source B: BrokerCheck Online Report cited in Source A above. These are final arbitration awards/judgments. Brokerage firms are not required to report arbitration claims filed against them by customers; however, BrokerCheck provides summary information regarding FINRA arbitration awards involving 19 The amount of penalty includes money penalties, giving up commissions, required donation to charities, restitutions to clients, and procurement of independent research. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 10 of 17

11 securities and commodities disputes between public customers and registered securities firms in this section of the report. 20 Source C: Piper Jaffray Form 10-Q for the quarter ended September 30, 2015 dated with the SEC on October 30, See attachment 3. Source D: SEC Order Piper Jaffray file no , June 18, See attachment 5. Piper Jaffray has acknowledged in their SEC filing that the securities industry is highly regulated. The securities industry is highly regulated, and the regulatory scrutiny applied to securities firms is intense, resulting in a significant number of regulatory investigations, and enforcement actions and uncertainty regarding the likely outcome of these matters. 21 Every year since 1989 Piper Jaffray has had one or more regulatory violation. See the table below: Table 7 Regulatory Events by Year Year the Matter was Resolved Number of Events Amount Penalty Rounded , , , , , , , , , , ,004, Piper Jaffray FINRA report, page Piper Jaffray SEC Form 10-K, December 31, 2014, Item 3, Legal Proceedings 22 Sources are the same as for table 6 shown above. 23 The amount of penalty includes money penalties, giving up commissions, required donation to charities, restitutions to clients, and procurement of independent research. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 11 of 17

12 Year the Matter was Resolved Number of Events Amount Penalty Rounded ,130, ,991, ,603, , , ,186, , ,338, ,249, ,767, ,937, ,068, , , , , , , , , ,815,000 Total ,161,000 The SEC in 2014 offered underwriters (Piper Jaffray) and issuers of municipal securities (WCCUSD) a one-time opportunity to report any past possible violations of federal securities laws. This initiative by the SEC was known as Municipalities Continuing Disclosure Cooperation (MCDC). WCCUSD made a MCDC filing in November 2014 and did not pay a penalty. See attachment 4. Piper Jaffray also made a MCDC filing. This matter was resolved by the SEC on June 18, 2015 and Piper Jaffray paid a civil money penalty of $500,000, the maximum under the program. The SEC order summarized the complaints as follows: conducted inadequate due diligence in certain offerings and as a result, failed to form a reasonable basis for believing the truthfulness of certain H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 12 of 17

13 material representations in official statements issued in connection with those offerings. 24 See attachment 5. As part of the 2015 SEC order Piper Jaffray was required to retain an independent consultant to conduct a review of Piper Jaffray s policies and procedures as they relate to municipal securities underwriting due diligence. 25 Selection in 2009 of as Senior Underwriter Piper Jaffray was selected on July 8, 2009 by the Board of Education as the Senior Underwriter for the $160,279,976 September 3, 2009 bond sale. The District solicited eleven responses to its request for underwriter proposals of which five firms were interviewed. The staff recommended Morgan Stanley as the senior underwriter for this issue. The Board of Education did not follow the staff s recommendation and selected Piper Jaffray. In 2010 Piper Jaffray contributed $50,000 to the For the Children of West County, a political action committee that supports WCCUSD bond elections. Folsom Cordova Unified School District has a policy that states, that no future contracts will be awarded to architects, general contractors, or persons or firms involved in issuance of debt who have contributed to any future bond campaign, except for contracts awarded on a lowest qualified bid process. 26 Negotiated vs. Bid Bond Sales All WCCUSD bond sales since 2009 have been negotiated sales. Piper Jaffray has done fourteen WCCUSD negotiated bond sales since their selection in 2009 as senior underwriter. Prior to 2009 there were eighteen bond sales of which fourteen were bid and four were negotiated. See table 3 above. The advantages of negotiated bond sales or competitive bond sales are discussed in an extract of Dale Scott school bonds book. See attachment 6. The CBOC recommends doing a competitive bid for the following reasons: 24 SEC Order File No , June 18, 2015, page 2 25 Ibid., page 5 26 Folsom Cordova Unified School District Resolution No approved September 18, H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 13 of 17

14 KNN noted in its 3/17/15 presentation The 2015 Bonds generally priced favorably (with lower spreads) compared to the prior transactions. This indicates that the district has significant borrowing experience and is wellknown in the market. KNN has noted that the District has a good credit rating (the 2015 Bonds were rated "Aa3" by Moody's, "A+" by Standard & Poors, and "A+" by Fitch.) The Bond market is relatively stable and while there is upward pressure on interest rates the environment is not volatile. The upward interest rate pressure would affect both a competitive and a negotiated sale. The local economy is in good shape and the tax base is rising. The bonds are expected to be structured in a conventional manner and not include any complex or innovative features. The District s credit characteristics are easily understood from published documents and official statement. All the underwriters who choose to bid on the bonds have plenty of time to evaluate the expected market demand and potential interest rate environment. A competitive sale is completely transparent while a negotiated sale is the opposite. California Policy Center for the Kids Report California Policy Center (CPC) in July 2015 published their research report titled, For the Kids: California Voters Must Become Wary of Borrowing Billions More From Wealthy Investors for Education Construction, authored by Kevin Dayton. See attachment 7. The California Policy Center rejects the idea that additional oversight and accountability isn t needed or desirable. Some legislative reforms and educational programs (both public and private) can overcome voter cynicism, frustration, apathy, and ignorance. The following charts provide 23 recommendations for adoption by the California legislature, California executive branch agencies, and California local officials such as county treasurers California Policy Center, For the Kids research report, July 2015, page 77. See attachment 7. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 14 of 17

15 The CBOC should consider supporting several of the CPC recommendation as follows: Expand the statutory responsibilities of the Citizens Bond Oversight Committee to include an annual review of the district s arrangements for issuing and repaying bonds. 28 Require districts to obtain reasonable and informed projections of assessed property valuation from an independent source (NOT from their bond advisors and consultants) before placing a bond measure on the ballot. 29 Assign and provide funding to a state agency or agencies for the following activities: 1. Ensure that every school or college district that administers a bond measure approved under Proposition 39 complies with legal requirements for a bond oversight committee, bond program performance audits, and bond program financial audits, including posting of required information on the district website. 2. Establish and maintain a centralized web-based database of California bond program performance audits and bond program financial audits for all districts. 3. Promote bond oversight committees to the public, educate and train bond oversight committee members and relevant district administrators, and provide resources and assistance to school and college districts to fill vacancies on the committees. 30 Give a state agency or county official specific authority to block educational districts from selling bonds when their Independent Citizens 28 See attachment 7, Page Ibid. 30 Ibid, H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 15 of 17

16 Oversight Committees are dormant or otherwise not complaint with state law. 31 Conclusion should be dismissed as the District s bond underwriter for any negotiated sales. Going forward all bond sales should be by competitive bid. The CBOC, working with the California League of Bond Oversight Committees, should support the recommended California Policy Center California legislative and executive reforms. Recommendations 1 Dismiss as the WCCUSD bond underwriter for and negotiated sales. 2 Sell future bonds through competitive bids. 3. CBOC work with the California League of Bond Oversight Committees to support legislation and executive actions to implement the California Policy Center recommendations. Prepared by: Disclaimer: The authors of this document are members of the WCCUSD Citizens Bond Oversight Committee (CBOC). However, the views expressed in this document are those of the authors and not of the CBOC Ibid, page 2. H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 16 of 17

17 Attachments 1. WCCUSD Bond and Certificate of Participation Sales, 1994 to Financial Industry Regulatory Authority (FINRA) Report,, pages Piper Jaffray & Co, Form 10-Q, September 30, 2015, Item 1 Legal Proceedings 4. Bond Financial Information, Sheri Gamba, September 4, SEC Order, file no , June 18, Competitive or Negotiated Bond Sales, Dale Scott 7. California Policy Center, Research Report, For the Kids, July 2015, Recommendations for reform H:\CBOC Meetings\ \ Audit Subcommittee Meeting\ aj.docx Page 17 of 17