Ira Weiss v. Securities and Exchange Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 16, 2006 Decided November 28, 2006
No. 06-1001
I RA WEISS ,
PETITIONER
v.
SECURITIES AND EXCHANGE COMMISSION ,
RESPONDENT
On Petition for Review of an Order of the
Securities and Exchange Commission
David J. Hickton argued the cause for petitioner. With him
on the briefs were Ira L. Podheiser, Richard D. Bernstein, and
Stephen B. Kinnaird.
John W. Avery, Special Counsel, Securities and Exchange
Commission, argued the cause for respondent. With him on the
brief were Brian G. Cartwright, General Counsel, Jacob H.
Stillman, Solicitor, and Mark Pennington, Assistant General
Counsel.
Before: HENDERSON , RANDOLPH and GRIFFITH , Circuit
Judges.
Opinion for the Court filed by Circuit Judge RANDOLPH .

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RANDOLPH , Circuit Judge: The Securities and Exchange
Commission imposed sanctions on Ira Weiss after finding that
he had violated securities laws. At the time of the violations,
Weiss was serving as bond counsel for a school district. The
issue in Weiss’s petition for judicial review is whether
substantial evidence supports the SEC’s decision.
I.
The Internal Revenue Code excludes interest on local
government bonds from the gross income of bond purchasers.
26 U.S.C. § 103(a). This federal tax exemption makes it
possible to sell municipal bonds at a lower interest rate than
other bonds. It also presents issuers with arbitrage
opportunities. A local government entity might be tempted to
issue tax-exempt bonds with an interest rate of, say, four
percent, and then invest the proceeds in Treasury bonds earning
five percent. If the entity invests the proceeds in appropriately
structured derivatives, such as Treasury STRIPS, it can earn an
instant, risk-free profit on the transaction.
Statutory and regulatory restrictions are designed to
“minimize the arbitrage benefits from investing gross proceeds
of tax-exempt bonds in higher yielding investments and to
remove the arbitrage incentives . . . to issue bonds earlier . . .
than is otherwise reasonably necessary to accomplish the
governmental purposes for which the bonds were issued.” 26
C.F.R. § 1.148-0(a). An issuer’s failure to abide by the
restrictions renders the bonds “arbitrage bonds,” the interest on
which is not tax-exempt. 26 U.S.C. §§ 103(b)(2), 148.
Although investing bond proceeds in higher yielding
investments normally causes the bonds to become arbitrage
bonds, Treasury Department regulations contain an exception.
Up to $10 million of bonds may remain tax-exempt and the
issuer may retain any profits earned during a three-year

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“temporary period” after the issue date if the issuer “reasonably
expects” to satisfy three tests: the expenditure test, the time test,
and the due diligence test. 26 C.F.R. § 1.148-2(e)(2). The
expenditure test requires the issuer to spend “at least 85 percent”
of the bond proceeds on “capital projects” within three years.
Id. § 1.148-2(e)(2)(A). The time test requires that the issuer
incur “within 6 months of the issue date a substantial binding
obligation” to spend “at least 5 percent” of the bond proceeds on
“capital projects.” Id. § 1.148-2(e)(2)(B). The due diligence
test requires that “completion of the capital projects and the
allocation of the [funds] . . . to expenditures proceed with due
diligence.” Id. § 1.148-2(e)(2)(C).
Because the Treasury regulations look to whether the
issuer reasonably expected to satisfy the three tests “as of the
issue date,” id. § 1.148-2(b), not to whether it actually satisfied
them later, there is potential for abuse. To assuage the concerns
of investors, issuers retain bond counsel to provide an
unqualified legal opinion that the interest on the bonds will be
exempt from federal taxation. According to the National
Association of Bond Lawyers, the purpose of an unqualified
bond opinion is to “assure[] investors that . . . there is no
reasonable risk of . . . taxability that the investors should take
into account in making an investment decision, except for risks
disclosed in the opinion.” Nat’l Ass’n of Bond Lawyers,
STATEMENT CONCERNING STANDARD APPLIED IN R ENDERING
THE F EDERAL I NCOME TAX PORTION OF BOND OPINIONS 4
(1993) (“NABL STATEMENT ”). Because investors rely so
heavily on unqualified bond opinions, bond counsel must “apply
a high standard of professional conduct.” Id. at 2. In particular,
a bond opinion “should be based upon a reasonably sufficient
examination of material legal and factual sources and reasonable
certainty as to the subjects addressed therein.” Id. at 9. Both
parties in this case agree that the Association has articulated the
applicable standard for rendering unqualified bond opinions.

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II.
The Neshannock Township School District of Lawrence
County, Pennsylvania, operates an elementary school and a
junior and senior high school. In early 1999, the School District
recognized that the elementary school building was in need of
substantial renovations and repairs. The nine-member School
Board also considered building a separate middle school for
students in grades six through eight. By February 2000, the
Board had compiled a “wish list” of projects, but there was no
consensus among Board members about which projects should
be undertaken. In April 2000, in response to the concerns of
some residents about the middle school concept, the Board
announced that it would hold public hearings before making any
final decisions on projects.
In May 2000, L. Andrew Shupe II read in a newspaper
that the School District was contemplating some capital projects.
Shupe was president of Quaestor Municipal Group, Inc., an
investment banking firm in the business of arranging municipal
financings. Shupe called Ronald Mento, the superintendent of
the School District, and arranged to make a presentation before
the Board to propose a bond transaction.
Shupe also called his friend Ira Weiss, a Pittsburgh
attorney, to ask if Weiss would be interested in acting as bond
counsel and writing the bond opinion. Weiss had worked with
Shupe on about twenty bond deals prior to the Neshannock
transaction. Shupe offered Weiss the deal, but also told Weiss
that he “could get it done elsewhere” if Weiss “wasn’t
comfortable” writing the opinion. Weiss called superintendent
Mento to find out what capital projects the School District was
planning. Mento told Weiss that the School District “needed [to
do] some smaller projects” and was “committed to doing a
larger project, renovation of the high school.” After this
conversation, Weiss told Shupe that he felt “comfortable . . .

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writ[ing] the opinion.”
On May 8, 2000, Shupe and Weiss attended a Board
meeting at which Shupe proposed that the School District issue
$9.6 million in three-year bonds. Shupe distributed a written
proposal stating: “In current market conditions, School Districts
have and are borrowing in advance of projects just to invest the
proceeds for three years and legally keep the positive investment
earnings.” This arbitrage concept was the main topic of
conversation during Shupe’s presentation. Shupe’s written
proposal – which refers to bonds as “notes” – illustrated the
concept as follows:
A School District borrows $9.6 million for three years
on a tax-exempt basis and pays an annual interest rate
of 5.10%.
The School District invests the net proceeds from the
Note Issue in U.S. Treasury securities over the same
three-year period and the securities yield 6.56%.
The excess earnings, less any costs of issuance, will be
available to the School District on the day of closing
the Note Issue.
(Estimated at $225,000 on June 20, 2000)
Weiss advised the Board that this concept “wasn’t
exactly the case.” Weiss “told the School Board . . . that they
had to have projects; they had to reasonably expect to proceed
with them and do them within three years.” Weiss said that if
this was not the case, then he “shouldn’t be there.” Weiss never
explained with any specificity two of the three tests – the time
test and the due diligence test – that Treasury regulations require
issuers to have a reasonable expectation of satisfying.
According to Richard Flannery, the School District’s lawyer, if
Weiss had mentioned the time test, it “would have raised a lot of

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flags” because of concerns that the Board had not reached any
agreement about capital projects.
According to Board member Gina Hennon, others
attending the meeting expressed “incredulity” and “skepticism”
about the arbitrage opportunity and wondered whether it was
“too good to be true.” Weiss responded, “absolutely, it was
legal . . . it was an opportunity not to be missed.” One of the
Board members asked about the potential ramifications if the
School District failed to spend the bond proceeds. Hennon
recalls being concerned because she “was not ready to commit
to a building project” and “didn’t want to tacitly be voting for a
building project that [she] was not ready to vote for.” Weiss
advised the Board that there would be no problem “so long as
you intend to do the projects.” According to Harry Flannery, the
Board president, “we were advised that we just needed to have
the intent to do the projects . . . even if we didn’t follow through
with the projects.” Weiss gave the impression that “there was
no need to proceed” and that the projects “didn’t even have to
occur.”
According to Weiss, Board members discussed various
projects at the meeting and “all nodded they were going to do
them.” Weiss asked whether there was an architect “on board”
for the projects, and “there were nods of assent that there was an
architect in place.” In fact, although the School District had a
“longstanding” relationship with Eckles Architecture and had
received a proposal for a construction project at Neshannock
Elementary School in July 1999, the Board did not hire an
architect until October 2001. Weiss knew that the Board had
neither contracted for projects nor even authorized advertising
for bids. Nevertheless, he made no further attempt to confirm
whether the Board actually had hired an architect – for example,
by calling the architect or asking to see a contract.
The Board approved the bond proposal at another

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meeting on May 31, 2000. The next day, Weiss asked Mento,
the superintendent, to prepare a letter for the Board to certify.
Weiss provided a proposed form for this letter, which called for
a list of “capital projects which the District is contemplating
undertaking in the next three years to utilize the proceeds of the
Note issue.” Weiss used the word “contemplating” because he
understood that there might be disagreement among the Board
members and administrators about which projects to perform.
The form called for a list of the “projects and their anticipated
estimated costs.” On June 15, 2000, Mento replied with a
certificate – which the Board authorized – utilizing the same
language Weiss proposed and listing thirty-three projects that
“the District is contemplating undertaking,” but did not provide
cost estimates. Weiss was upset that Mento had omitted the cost
estimates and asked Mento to provide them. Mento never did,
and Weiss never obtained cost estimates from anyone else. This
project list certificate was the only School District document
Weiss reviewed before issuing his bond opinion.
Treasury regulations require that an officer of the issuer
certify the issuer’s expectations, as of the issue date, regarding
the expenditure, time, and due diligence tests. 26 C.F.R.
§ 1.148-2(b)(2)(i). Weiss prepared this document, known as a
nonarbitrage certificate, by adapting a form he had used in prior
transactions. The certificate, dated June 28, 2000, addresses
each of the three tests in a wholly conclusory manner. As to the
expenditure test, the certificate states: “The Issuer reasonably
expects that at least eighty-five (85%) percent of the proceeds of
the Notes . . . will have been expended prior to the date that is
three years from the Closing Date.” As to the time test, the
certificate states: “The Issuer reasonably expects that prior to the
expiration of six months . . ., there will be binding obligations to
expend in the aggregate at least five (5%) percent of the
proceeds of the Notes.” As to the due diligence test, the
certificate states: “The Issuer reasonably expects that the Project
will proceed with due diligence to completion.” The certificate

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includes no discussion of the basis for these conclusions, and
does not define “the Project” or reveal what the term involves.
In Weiss’s judgment, referring to “the Project” in this manner
was “adequate.”
Aside from Weiss, no one with an understanding of the
three tests reviewed the nonarbitrage certificate before the
closing. Weiss gave the School District’s lawyer, Richard
Flannery, a draft of the certificate. Flannery read it and assumed
it was “in order . . . based on the fact [that] I received it from our
bond counsel.” At closing, Carol Robinson, the School
District’s business manager, signed the document on behalf of
the School District, but had no understanding of its contents.
Shupe drafted the official statement – also known as a
bond prospectus – that the School District distributed in
connection with the bond offering. Weiss reviewed Shupe’s
draft. The official statement, dated June 28, 2000, states that the
proceeds from the offering “will be used to provide funds for
Capital Improvement Projects of the School District and to pay
all costs and expenses related to the issuance.” The statement
lists Weiss as “Note Counsel” and states: “In the opinion of
Note Counsel, under existing laws and assuming continuing
compliance by the School District with certain covenants related
to the Code, interest on . . . the Notes [is] excluded from gross
income for Federal income tax purposes.”
Weiss also prepared two documents addressed “To the
purchasers of the . . . Bonds.” The first document was an
opinion letter dated June 28, 2000, in which Weiss represented
that his opinions were based on his examination of “certain
statements, certifications, reports, affidavits, documents and
agreements pertaining to the issuance and sale of the Notes.”
Weiss then stated: “Under existing statutes, regulations and
decisions, interest on the Notes . . . is excluded from gross
income for purposes of Federal income taxation . . ..

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Furthermore, the Notes are not ‘arbitrage bonds.’” Because
Weiss did not mention any risk that interest on the bonds might
be taxable, his bond opinion was “unqualified.” The second
document was a supplemental opinion letter also dated June 28,
2000. In this letter, Weiss stated: “Nothing has come to my
attention in the course of my professional engagement in
connection with the Notes which has led me to believe that the
Official Statement contains any untrue statements [or omissions]
of a material fact.”
When the bond transaction closed on June 28, 2000, the
Board had not held any public hearings on which projects to
undertake. Thereafter, the School District performed no work
on any construction project for more than a year. On
November 8, 2000, the Internal Revenue Service notified the
School District that it intended to examine the bond transaction.
The School District redeemed the bonds on May 15, 2001,
having earned about $150,000 in arbitrage profits in less than a
year. On September 25, 2001, the IRS notified the School
District of its preliminary determination that the School District
had issued the bonds without any reasonable expectation to use
the proceeds properly and had intended to earn profits from
arbitrage. In 2002, the School District and the IRS entered into
a settlement that preserved the tax-exempt status of the bonds
and required the School District to pay its arbitrage profits to the
federal government.
The SEC initiated an administrative proceeding against
Weiss and Shupe regarding this bond transaction. Shupe entered
into a settlement in which he agreed to the entry of a cease-and-
desist order and disgorgement of his profits. L. Andrew Shupe
II, Securities Act Release No. 8459, Exchange Act Release No.
50,235, 83 SEC Docket 2113 (Aug. 24, 2004). The SEC
charged Weiss with having violated, and having caused the
School District to violate, section 17(a) of the Securities Act of
1933, 15 U.S.C. § 77q(a); section 10(b) of the Securities

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Exchange Act of 1934, 15 U.S.C. § 78j(b); and Rule 10b-5
thereunder, 17 C.F.R. § 240.10b-5. After a four-day hearing, an
administrative law judge found in favor of Weiss. Ira Weiss,
Initial Decisions Release No. 275, 2005 SEC LEXIS 431
(Feb. 25, 2005).
In an opinion four Commissioners joined, with one
Commissioner dissenting, the SEC reversed. Ira Weiss,
Securities Act Release No. 8641, Exchange Act Release No.
52,875, 2005 SEC LEXIS 3107 (Dec. 2, 2005). The SEC found
that Weiss violated sections 17(a)(2) and 17(a)(3) of the
Securities Act because his opinions to prospective bond
purchasers misrepresented the risk that interest on the bonds
would be taxable. According to the SEC, “Weiss’s failure to
look for even minimal objective indicia of the School District’s
reasonable expectations to spend Note proceeds on projects was
at least negligent.”
III.
The Securities Act imposes liability for material
misrepresentations or deceit in connection with a securities
offering. Under section 17(a)(2), it is unlawful for any person
in the offer or sale of securities “to obtain money or property by
means of any untrue statement of a material fact or any
[material] omission.” 15 U.S.C. § 77q(a)(2). Under section
17(a)(3), it is unlawful for any person in the offer or sale of
securities “to engage in any transaction, practice, or course of
business which operates or would operate as a fraud or deceit
upon the purchaser.” 15 U.S.C. § 77q(a)(3). Proof of
negligence is sufficient to establish a violation of these
provisions. See Aaron v. SEC, 446 U.S. 680, 697, 701-02
(1980).
The SEC identifies three documents containing material
misrepresentations under section 17(a)(2) and representing

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deceitful acts under section 17(a)(3): the official statement,
Weiss’s opinion letter, and his supplemental opinion letter.
With respect to the official statement, Weiss believes
that he cannot be liable for the statement there attributed to him
because the president of the Board – not Weiss – signed the
document and the School District – not Weiss – distributed it.
But Weiss reviewed the official statement and approved the
portion of it containing his opinion that the bonds would be tax-
exempt. He knew his statement would reach potential investors.
Therefore Weiss could incur liability for his misrepresentations
even when he did not communicate them directly to investors.
See Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226 (10th
Cir. 1996); accord Wright v. Ernst & Young LLP, 152 F.3d 169,
175 (2d Cir. 1998); SEC v. Holschuh, 694 F.2d 130, 142 (7th
Cir. 1982). In any event, Weiss effectively adopted the relevant
portion of the official statement in his supplemental opinion
letter, in which he stated that he was unaware of any material
misrepresentation or omission in the official statement.
Weiss seems to think that the tax opinions he expressed
in his opinion letters were simply that – opinions containing no
statements of fact on which to predicate liability for
misrepresentation or deceit. Under the securities laws, a
statement of opinion includes an implied representation that the
speaker rendered the opinion in good faith and with a reasonable
basis. See Kowal v. MCI Commc’ns Corp., 16 F.3d 1271, 1277
(D.C. Cir. 1994). Good faith alone is not enough. An opinion
must have a reasonable basis, and there can be no reasonable
basis for an opinion without a reasonable investigation into the
facts underlying the opinion. Weiss thus implicitly represented
that he had conducted “a reasonably sufficient examination of
material legal and factual sources and [had] reasonable certainty
as to the subjects addressed therein.” NABL STATEMENT at 9.
Weiss’s opinion letter led investors to believe just that: he there
stated that he based his opinion on “certain statements,

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certifications, reports, affidavits, documents and agreements.”
Yet the only School District document Weiss examined was
Mento’s list of thirty-three projects, which contained no cost
estimates and no schedules. As the SEC found, this document
was nothing more than a “wish list” of projects the Board was
considering, not a list of the projects the Board had decided to
undertake.
Weiss also seeks to avoid liability on the basis that he
conducted a reasonably sufficient examination by relying on his
client’s certified representations that he had no reason to believe
were false. There is ample evidence to support the SEC’s
rejection of this defense on the ground that the representations
Weiss cites were too “vague” for him reasonably to rely upon
them. Consider the nonarbitrage certificate. Treasury
regulations require nonarbitrage certificates to “state the facts
and estimates that form the basis for the issuer’s expectations”
of meeting the three tests. 26 C.F.R. § 1.148-2(b)(2)(i). Yet the
School District’s certificate – which Weiss drafted – is wholly
conclusory, stating only that the issuer “reasonably expects” to
satisfy each of the three tests. No relevant facts or estimates are
recited. The certificate refers to “the Project” – capitalized as if
it were a defined term – but contains no description of what “the
Project” includes, doubtless because the Board had not made up
its mind. The other certified document – Mento’s list of thirty-
three projects – suffers from the same flaw, for the reasons
already mentioned. And Weiss certainly could not base an
unqualified tax opinion on the nods of Board members at the
only meeting he attended.
Weiss wrongly gave the Board the impression that it
merely had to “intend to do the projects,” rather than have a
reasonable need for the funds before issuing bonds. According
to Treasury regulations, issuers must not “issue bonds earlier .
. . than is otherwise reasonably necessary.” 26 C.F.R.
§ 1.148-0(a). Whether it is reasonably necessary to issue bonds

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depends on whether an issuer has a reasonable expectation of
using the proceeds for its capital projects, and this involves an
objective inquiry. See id. § 1.148-1(b) (defining “reasonable
expectations”). Therefore, the question is not whether the Board
intended to do projects, but whether a reasonable person would
have expected the Board to follow through on those projects in
a manner that would satisfy the three tests.
The bond transaction in this case was promoter-induced.
Shupe proposed the transaction after learning that the Board was
considering capital projects. Shupe used the prospect of
arbitrage to sell the transaction. Weiss was at the presentation.
Weiss knew that the Board had not contracted for any projects
or even sought bids. He could not have been unaware of the
substantial likelihood that the Board would fail to satisfy the
three tests. Yet Weiss never asked the Board to confirm that it
was committed to specific projects or was ready to proceed with
them. Substantial evidence thus supports the SEC’s conclusion
that “Weiss was responsible for misrepresentations and
omissions in the Official Statement and in his legal opinions,”
which failed to provide investors with “full information
concerning the substantial risk that the IRS would find the Notes
to be taxable.” The petition for judicial review is therefore
denied.
So ordered.

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