United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 2006 Decided November 28, 2006

No. 06-1001

IRA 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
3

“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 RENDERING

THE FEDERAL INCOME 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-anddesist 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
10

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 taxexempt. 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,
12

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 thirtythree 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.