UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 77300/ March 7, 2016

ADMINISTRATIVE PROCEEDING

File No. 3-17154

In the Matter of

FIRST SOUTHWEST COMPANY, LLC

Respondent.

ORDER INSTITUTING ADMINISTRATIVE 

AND CEASE-AND-DESIST PROCEEDINGS,

PURSUANT TO SECTIONS 15(b), 15B(c)(2) 

AND 21C OF THE SECURITIES 

EXCHANGE ACT OF 1934, MAKING 

FINDINGS, AND IMPOSING REMEDIAL 

SANCTIONS AND A CEASE-AND-DESIST 

ORDER

I.

The Securities and Exchange Commission (“Commission”) deems it appropriate and in 

the public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Sections 15(b), 15B(c)(2) and 21C of the Securities Exchange Act of 1934 

(“Exchange Act”) against First Southwest Company, LLC (“First Southwest” or “Respondent”). 

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept. 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 it and the subject matter of these 

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting 

Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b), 15B(c)(2) and 21C 

of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and 

a Cease-and-Desist Order (“Order”), as set forth below. 

 

III.

On the basis of this Order and Respondent’s Offer, the Commission finds1that:

 

1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not 

binding on any other person or entity in this or any other proceeding.
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A. SUMMARY

1. These proceedings arise out of violations by First Southwest, a broker-dealer and 

municipal securities dealer, of the fair dealing and financial advisory agreement rules of the 

Municipal Securities Rulemaking Board (“MSRB”) in connection with financial advisory services 

rendered by First Southwest to its municipal client, the Rhode Island Economic Development 

Corporation (“RIEDC”) (now known as the Rhode Island Commerce Corporation), relating to a

private placement offering of municipal securities on October 22, 2010 (the “2010 bond

issuance”). 

2. From March 2010 to November 2010, First Southwest rendered financial advisory 

services to the RIEDC in connection with the 2010 bond issuance. First Southwest’s relationship 

with the RIEDC for the 2010 bond issuance, however, was not memorialized by a written 

agreement listing the specific services or tasks that First Southwest would provide in connection 

with the 2010 bond issuance until seven months into the financial advisory relationship. 

3. By rendering financial advisory services to the RIEDC for seven months without a 

written financial advisory agreement, First Southwest violated MSRB Rule G-17, MSRB G-23(c)

and Section 15B(c)(1) of the Exchange Act. 

B. RESPONDENT

4. First Southwest Company, LLC is a limited liability company headquartered in 

Dallas, Texas. First Southwest is a registered broker-dealer and municipal advisor. First 

Southwest is also a municipal securities dealer and municipal securities broker as defined in 

Sections 3(a)(30) and 3(a)(31) of the Exchange Act. 

C. FACTS

5. On November 2, 2010, the RIEDC sold $75 million of taxable revenue bonds to 

investors in a private placement. First Southwest acted as financial adviser to the RIEDC in 

connection with the bonds. The proceeds of the offering were used to make a loan to 38 Studios

LLC (“38 Studios”), a conduit borrower and start-up online gaming company, so that it could 

relocate to the State of Rhode Island and complete Project Copernicus, a new online game that 38 

Studios was creating. The financing was intended to spur economic development and job 

creation in Rhode Island, with the bond payments to be funded from 38 Studios’ anticipated 

repayment of the loan from the RIEDC. Pursuant to the terms of the offering, in the event of a 

default by 38 Studios, the State of Rhode Island agreed to repay the bonds from general tax 

revenues, subject to annual appropriation. 

6. First Southwest began providing financial advisory services to the RIEDC in 

connection with the offering in March 2010. These services included: (a) attending meetings 

concerning the bond issuance; (b) providing quantitative analysis to the RIEDC with respect to 

projected debt service schedules, budget proposals and structure alternatives; (c) providing 
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advice with respect to market conditions and structure; (d) assisting with the preparation and 

printing of the preliminary and final offering documents; (e) reviewing documents; (f) drafting 

rating agency and investor presentations; and (g) reviewing and analyzing the bond pricing 

process. The RIEDC paid $120,000 in advisory service fees to First Southwest in connection with 

the offering.

7. Between March 2010 and October 2010, First Southwest did not have a written

agreement with the RIEDC setting forth the basis of the compensation it would receive or 

describing the services it would render in connection with the 2010 bond issuance. As such, no 

written agreement set forth the scope of the services to be provided by First Southwest.

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8. In connection with work on the 2010 bond issuance, First Southwest did not review 

certain internal financial projections prepared by 38 Studios. First Southwest maintains that it was

not obligated to analyze 38 Studios’ ability to repay the loan to the RIEDC. 

9. In November 2010, 38 Studios received approximately $50 million in loan proceeds 

from the RIEDC. These loan proceeds were not sufficient for 38 Studios to continue its 

operations. 38 Studios thus became insolvent, defaulted on its loan to the RIEDC, and ultimately 

filed for bankruptcy in June 2012.

10. Section 15B(c)(1) of the Exchange Act prohibits a broker, dealer, or municipal 

securities dealer from using the mails or any means or instrumentality of interstate commerce to 

effect any transaction in, or to induce or attempt to induce the purchase or sale of, any municipal 

security in contravention of any rule of the MSRB. As a municipal securities dealer, First 

Southwest is subject to Section 15B(c)(1) of the Exchange Act and MSRB rules.

11. MSRB Rule G-23(c) requires each financial advisory relationship to be evidenced 

by a writing entered into prior to, upon or promptly after the inception of the financial advisory 

relationship, which sets forth, among other things, the basis of any compensation for the financial 

advisory services to be rendered. A financial advisory relationship exists when a broker, dealer, 

or municipal securities dealer renders financial advisory or consultant services to an issuer with 

respect to the issuance of municipal securities. MSRB Rule G-23(b). The provisions of Rule G23 are designed to assure that financial advisory agreements are in writing, and that the basis of 

compensation to the advisor is clearly disclosed to the governmental unit. See Exchange Act 

Release No. 13987 (Sept. 22, 1977). MSRB Rule G-23 applies to broker, dealers, and municipal 

securities dealers who render financial advisory services to an issuer, including states or local 

governments and their agencies, as well as municipal corporations. See MSRB Rule G-23 

Interpretive Notices (May 23, 1983). 

 

2 Between at least 2002 and 2010, First Southwest had a written contract with the State of 

Rhode Island to provide certain financial advisory services to the State. The RIEDC was not 

covered by this contract.
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12. During the time period of First Southwest’s conduct, MSRB Rule G-17 provided 

that, “[i]n the conduct of its municipal securities activities, each broker, dealer, and municipal 

securities dealer shall deal fairly with all persons and shall not engage in any deceptive, 

dishonest, or unfair practice.” MSRB Rule G-17 applies to a municipal securities dealer acting 

as a financial advisor. See Wheat, First Securities, Inc. f/k/a First Union Capital Markets Corp. 

and Teressa L. Cawley, Exchange Act Release No. 48378 (August 20, 2003). 

D. VIOLATIONS

13. As a result of the conduct described above, First Southwest willfully3violated 

MSRB Rule G-17 and MSRB Rule G-23(c). 

14. As a result of First Southwest’s willful violations of MSRB Rule G-17 and MSRB 

Rule G-23(c), First Southwest willfully violated Section 15B(c)(1) of the Exchange Act.

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), 15B(c)(2) and 21C of the Exchange Act, it is

hereby ORDERED that:

A. Respondent First Southwest shall cease and desist from committing or causing 

any violations and any future violations of Section 15B(c)(1) of the Exchange Act, MSRB Rule G17 and MSRB Rule G-23(c). 

B. Respondent First Southwest is censured.

C. Respondent First Southwest shall, within ten (10) days of the entry of this Order, 

pay disgorgement of $120,000 and prejudgment interest of $22,400 to the Securities and 

Exchange Commission. The Commission will hold funds paid pursuant to this paragraph in an 

account at the United States Treasury pending a decision whether the Commission, in its 

discretion, will seek to distribute funds or, transfer them to the general fund of the United States 

Treasury, subject to Section 21F(g)(3). If timely payment is not made, additional interest shall 

accrue pursuant to SEC Rule of Practice 600. Payment must be made in one of the following 

ways:

 

3 A willful violation of the securities laws means “‘that the person charged with the duty knows 

what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 

F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor “‘also be aware that he is 

violating one of the Rules or Acts.’” Id. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. 

Cir. 1965)).
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(1) Respondent may transmit payment electronically to the Commission, which will provide 

detailed ACH transfer/Fedwire instructions upon request; 

(2) Respondent may make direct payment from a bank account via Pay.gov through the 

SEC website at http://www.sec.gov/about/offices/ofm.htm; or 

(3) Respondent may pay by certified check, bank cashier’s check, or United States postal 

money order, made payable to the Securities and Exchange Commission and hand-delivered 

or mailed to: 

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying 

First Southwest Company, LLC as the Respondent in these proceedings, the file number of these 

proceedings, a copy of which cover letter and money order or check shall be sent to LeeAnn 

Ghazil Gaunt, Chief, Municipal Securities and Public Pensions Unit, Securities and Exchange 

Commission, Boston Regional Office, 33 Arch Street, 23rd Floor, Boston, MA 02110.

D. Respondent shall, within ten (10) days of the entry of this Order, pay a civil money 

penalty in the amount of $50,000 to the Securities and Exchange Commission, of which $25,000 

shall be transferred to the Municipal Securities Rulemaking Board in accordance with Section 

15B(c)(9)(A) of the Exchange Act. The Commission may distribute the remaining $25,000 of 

civil money penalties collected in this proceeding if, in its discretion, the Commission orders the 

establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley 

Act of 2002, as amended. The Commission will hold the remaining $25,000 paid pursuant to 

this paragraph in an account at the United States Treasury pending a decision whether the 

Commission, in its discretion, will seek to distribute funds or, subject to Exchange Act Section 

21F(g)(3), transfer them to the general fund of the United States Treasury. If timely payment is 

not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment must be made 

in one of the following ways:

(1) Respondent may transmit payment electronically to the Commission, which will provide 

detailed ACH transfer/Fedwire instructions upon request; 

(2) Respondent may make direct payment from a bank account via Pay.gov through the 

SEC website at http://www.sec.gov/about/offices/ofm.htm; or 

(3) Respondent may pay by certified check, bank cashier’s check, or United States postal 

money order, made payable to the Securities and Exchange Commission and hand-delivered 

or mailed to: 
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Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying

First Southwest Company, LLC as the Respondent in these proceedings, the file number of these

proceedings, a copy of which cover letter and money order or check shall be sent to LeeAnn 

Ghazil Gaunt, Chief, Municipal Securities and Public Pensions Unit, Securities and Exchange 

Commission, Boston Regional Office, 33 Arch Street, 23rd Floor, Boston, MA 02110.

By the Commission.

Brent J. Fields

Secretary