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We have suspended the blog while proceedings are continuing with the SEC and the US Attorney's Office.

Welcome to Devon

Devon Capital Management was the premiere advisory firm specializing in the application of structured financial and derivative products within the regulatory confines of the Internal Revenue Service's Arbitrage Regulations. Devon was able to capture in excess of $1 billion of arbitrage profits for its customers through such products as the Collateralized Investment Agreement (CIA), forward advance refundings and optional bond sales. Many of the structures devised by Devon are still in use today by some of the major investment banks in the country.

On September 26, 1997, the Securities Exchange Commission (SEC) filed an ex parte complaint against Devon Capital Management, Financial Management Sciences (“FMS”) and John Gardner Black. The complaint alleged that a single security, which had not traded in almost two years, was not valued at liquidation value but was valued pursuant to a mathematical model, now called mark-to- model valuation. Judge William Standish, after consultation with Judge D. Brooks Smith, granted the SEC’s complaint without notification to Devon, FMS or Black. The transcript of that hearing does not show that any valuation of any security was presented.

On May 26, 2009, following the April 2 Financial Accounting Standards Board (“FASB”) interpretive guidelines for Rule 157, Mr. Black filed a petition with the SEC. He requested that his lifetime industry bar be removed and Devon’s registration be reinstated. The text of the petition is here.

 On June 9, 2009, Black sent to Mary Beth Buchanan, the US Attorney for the Western District of Pennsylvania, a letter requesting that her office move the district court to set aside Black's indictment. The letter can be accessed here. The government admitted in 2005 that it never valued the CIA only a single investment on a liquidation basis. However, since April 2, 2009 and the FASB interpretive guidelines, there is no dispute that the valuation method employed at Devon in 1997 was accurate and now in full compliance with regulations.

As expected, the SEC’s Division of Enforcement responded to Black’s request on June 29, 2009 and opposed rescinding the industry ban against Black and the reinstatement of Devon. Less than 90 days after the SEC and FASB restated Rule 157, the Division of Enforcement claimed that the new interpretation should be ignored in this case. While not stated, the Division probably feels that advisors to municipalities who invest municipal bond proceeds should not be afforded the same interpretation of the laws as other financial institutions. Their response is here.

Black filed his response to the Division on July 23, 2009. His response may be interesting reading for all those involved in municipal finance, especially those who advise on investing municipal bond proceeds. The response is here.