DOB: Credit Suisse Securities - ARS Consent Order

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IN THE MATTER OF:

CREDIT SUISSE
SECURITIES (USA) LLC


(CRD No. 816)

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CONSENT ORDER

DOCKET NO. CO-10-7801-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
 
WHEREAS, Credit Suisse Securities (USA) LLC (“Credit Suisse”) is a broker-dealer registered under the Act with its principal office at 1 Madison Avenue, 9th Floor, New York, New York.  Credit Suisse, a limited liability company organized under the laws of the state of Delaware, is also registered as a securities broker-dealer under federal law and is registered as an investment adviser under the federal Investment Advisers Act of 1940.  Credit Suisse offers brokerage and investment products and services to investors across the United States of America;
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division (“Division”) of the Department of Banking, conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of the Credit Suisse to determine whether it had violated, was violating or was about to violate any provisions of the Act or Regulations (“Investigation”);
 
WHEREAS, coordinated investigations of the activities of Credit Suisse and its affiliates in connection with Credit Suisse’s marketing and sales practices for investment products generally known as “auction rate securities” have been conducted by a multistate task force composed of members of the North American Securities Administrators Association Inc. (“NASAA”);
 
WHEREAS, Credit Suisse has cooperated with regulators conducting the investigations by responding to inquiries, providing documentary evidence and other materials and providing regulators with access to facts relating to the investigations;
 
WHEREAS, Credit Suisse has advised regulators of its agreement to resolve the investigations relating to Credit Suisse’s marketing and sales practices to certain investors in auction rate securities;
 
WHEREAS, Section 36b-15(a) of the Act, authorizes the Commissioner to revoke any registration if, inter alia, the Commissioner finds that (1) the order is in the public interest, and (2) a basis exists under Sections 36b-15(a)(2)(H) and/or 36b-15(a)(2)(K) of the Act;
 
WHEREAS, Section 36b-27(a) of the Act authorizes the Commissioner to order any person who has violated, is violating or is about to violate any provision of the Act or any regulation, rule or order adopted or issued under the Act to cease and desist from such violation;
 
WHEREAS, Section 36b-27(d) of the Act authorizes the Commissioner to impose a fine of up to One Hundred Thousand Dollars ($100,000) per violation against any person who has violated any provision of the Act or any regulation, rule or order adopted or issued under the Act;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-33, inclusive”;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
 
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;

II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, Credit Suisse, through its execution of this Consent Order, voluntarily waives the following rights:

1.
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut;
2.
To present evidence and argument and to otherwise avail itself of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut;
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;

NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.

III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER

Credit Suisse admits the jurisdiction of the Commissioner, neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order, and consents to the entry of this Consent Order by the Commissioner.

IV. FINDINGS OF FACT

A. Definitions

 

For purposes of this Consent Order:

(a)
“Auction rate securities” are long-term debt or equity instruments that include auction rate preferred shares of closed-end funds, municipal auction rate bonds, and various asset-backed auction rate bonds.  Some auction rate securities products have maturity dates of 20 years or longer; auction rate preferred shares of certain closed-end funds have no maturity date whatsoever.  While auction rate securities are all long-term instruments, one significant feature of auction rate securities, which historically provided the potential for short-term liquidity, is that the variable interest rates reset through a bidding process known as a Dutch auction that occurred in varying increments, generally between seven (7) and forty-two (42) days.  At a Dutch auction, bidders generally state the number of auction rate securities they wish to purchase and the minimum interest rate they are willing to accept.  Bids are then ranked, from lowest to highest, according to the minimum interest rate each bidder is willing to accept.  The lowest interest rate required to sell all of the auction rate securities available at auction, known as the “clearing rate,” becomes the rate paid to all holders of that particular security until the next auction.  If an auction is successful, investors wishing to sell are able to exit the auction rate securities market on a short-term basis.  When there are not enough orders to purchase all of the auction rate securities being sold, a “failed” auction occurs.  If an auction fails, investors are required to hold all or some of their auction rate securities until the next successful auction in order to liquidate their funds, or they may attempt to sell those auction rate securities in a secondary market transaction, if such a secondary market even exists and is functioning.  Beginning in February 2008, the auction rate securities market experienced widespread and repeated failed auctions.
(b) 
“Individual Investor” means any natural person who purchased auction rate securities from or through a Credit Suisse account prior to February 14, 2008, and also includes:  (1) legal entities acting as an investment vehicle for family members, including but not limited to IRA accounts, Trusts, Family Limited Partnerships, and other legal entities performing a similar function; (2) charities and non-profits; and (3) small to medium sized businesses with up to $10 million in assets in accounts with Credit Suisse Securities (USA) LLC, any of which purchased auction rate securities from or through Credit Suisse prior to February 14, 2008.  Notwithstanding any other provision in this Consent Order, “Individual Investor” does not include broker-dealers, banks, registered investment advisers, other investment firms or investment institutions regardless of whether any of the foregoing were acting for their own account or as conduits for their customers.
(c) “Institutional Investor” means any other legal entity not meeting the definition of “Individual Investor” in paragraph (b) of Section IV.A. [Definitions] of this Consent Order, and which purchased auction rate securities from or through a Credit Suisse account.
(d) “Proceedings” include, but are not limited to, any meetings, interviews, depositions, hearings, trials, grand jury proceedings, or any other proceedings.
(e) “The representative specified by NASAA” is the North Carolina Secretary of State as Securities Administrator, or her lawfully authorized designee.
(f) All other words, terms, and phrases used in this Consent Order shall have the usual and ordinary meanings given to them in everyday speech, and are to be taken and understood in their plain, ordinary, and popular sense.

B. Events

1.

Credit Suisse was an underwriter of a limited number of offerings of auction rate securities.  Credit Suisse also acted as a manager for certain issues of auction rate securities.  When acting as a sole manager, Credit Suisse was the only firm that could submit bids into the auction on behalf of its clients and/or other broker-dealers who wanted to buy and/or sell any auction rate securities.  When acting as a co-lead manager, Credit Suisse and the other co-lead managers could directly submit orders into the auction, while other broker-dealers were able to submit orders on behalf of their clients and on their own behalf into the auction through a co-lead manager.  Credit Suisse received revenue in connection with auction rate securities, including underwriting fees representing a percentage of total issuance and a fee for managing the auctions.

2. From time to time over many years, Credit Suisse submitted support bids, or purchase orders, for some or all of an auction rate security issue for which it acted as the sole or lead manager.  Support bids were Credit Suisse’s proprietary orders that would be filled, in whole or in part, if there was otherwise insufficient demand in an auction.  When Credit Suisse purchased auction rate securities through support bids, those auction rate securities were then owned by Credit Suisse and were recorded on Credit Suisse’s balance sheet.
3. Because investors could not ascertain how much of an auction was filled through proprietary bids of Credit Suisse and other firms acting as sole or lead managers, they could not determine if auctions were clearing because of normal marketplace demand, or because Credit Suisse and other firms acting as lead managers were supporting the auctions through their own proprietary purchase orders.  Generally, investors also were not aware of the extent to which the auction rate securities market was dependent upon Credit Suisse’s and other broker-dealers’ use of support bids for its successful operation.  While Credit Suisse could track its own inventory as a measure of the supply and demand for auction rate securities for which it was a sole, lead, or co-lead manager, ordinary investors had no comparable ability to assess the operation of the market.  There was no way for those investors to monitor supply and demand in the market or to assess when broker-dealers might decide to stop supporting the market, which could cause numerous and repeated auction failures.
4. In August 2007, the credit crisis and other deteriorating market conditions strained the auction rate securities market.  Some institutional investors withdrew from the market, decreasing demand for auction rate securities.
5. The potential for a market dislocation should have been evident to Credit Suisse.  In those auctions where Credit Suisse was a lead manager, Credit Suisse's support bids filled the increasing gap between the supply of, and the demand for, auction rate securities, maintaining the impression that the auction process was functioning.  From Fall 2007 until February 2008, demand for auction rate securities continued to erode, and Credit Suisse’s inventory of auction rate securities grew.  Credit Suisse was aware of increasing strains on the auction rate securities market and increasingly questioned the viability of the auction rate securities market.  On January 28, 2008, Credit Suisse provided written disclosure of these increasing risks of owning or purchasing auction rate securities to its customers; prior to that date, certain of its representatives did not fully disclose those increasing risks to certain of their clients.
6. In February 2008, Credit Suisse and other broker-dealers stopped supporting the auctions.  Without the benefit of support bids, the auction rate securities market collapsed, leaving investors who thought they were buying liquid, short-term investments instead holding long-term or perpetual securities that they were unable to sell at par value.
7. In certain instances, Credit Suisse representatives told certain of the firm’s customers that auction rate securities were liquid investments that were alternatives to money market funds as part of a strategy for cash management.  Specifically, certain employees acting on behalf of Credit Suisse represented to certain investors that auction rate securities were highly liquid, highly rated alternatives to money market investments and other cash-equivalent investments.
8. In the context of the offer and sale of auction rate securities, the failure of certain employees acting on behalf of Credit Suisse to adequately state complete facts concerning auction rate securities constituted a violation of Section 36b-4 of the Act and a basis for proceedings under Section 36b-15(a)(2)(H) of the Act.
9. Credit Suisse, by failing reasonably to supervise its registered agents under the Act, as described in these Findings of Fact, has violated Section 36b-31-6f(b) of the Regulations.

V. CONCLUSIONS OF LAW

1. The Commissioner has jurisdiction over this matter pursuant to the Act.
2.
As described in the Findings of Fact, Credit Suisse, by failing reasonably to supervise certain of its registered agents in their communication of material information concerning auction rate securities, violated Section 36b-31-6f(b) of the Regulations.  Such conduct constitutes a basis for 1) an action against Credit Suisse under Section 36b-15(a)(2)(K) of the Act; and 2) initiating administrative proceedings under subsections (a) and (d) of Section 36b-27 of the Act.
3. As described in the Findings of Fact, Credit Suisse, through the activities of certain of its registered agents, failed to adequately state complete facts concerning auction rate securities and, in so doing, engaged in dishonest or unethical practices within the meaning of Sections 36b-4 and 36b-15(a)(2)(H) of the Act.  Such conduct constitutes a basis for 1) an action against Credit Suisse under Section 36b-15(a)(2)(H) of the Act; and 2) initiating administrative proceedings under subsections (a) and (d) of Section 36b-27 of the Act.
4.
The Commissioner finds that this Consent Order and the following relief are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.

VI. REPRESENTATIONS OF CREDIT SUISSE

1.

In furtherance of its desire to resolve this matter informally with the Commissioner, Credit Suisse agreed to take certain measures that are set forth below.  Credit Suisse represents to the Commissioner that, to the best of its knowledge, it has complied with those measures that were to have been taken by the date of its consent to the entry of this Consent Order.

a.   
As soon as practicable after September 23, 2008, Credit Suisse will have offered to purchase, at par, auction rate securities that since February 14, 2008, have not been successfully auctioning, from Individual Investors who purchased those auction rate securities from or through a Credit Suisse account prior to February 14, 2008.
b. 
Credit Suisse shall have purchased such securities from investors who accepted this offer prior to December 11, 2008, by that date.
c. Credit Suisse shall have kept such offer open until December 31, 2009, and shall have promptly purchased such securities from any Individual Investor who accepted the offer between December 11, 2008 and December 31, 2009.
d. Credit Suisse shall have promptly provided notice to customers of the settlement terms publicly announced on September 16, 2008, and Credit Suisse shall have promptly established a dedicated telephone assistance line, with appropriate staff, to respond to questions from customers concerning the terms of the settlement.
e. No later than December 11, 2008, any Individual Investor that Credit Suisse could reasonably identify who sold auction rate securities in a Credit Suisse account below par between February 14, 2008 and September 16, 2008, would have been paid by Credit Suisse the difference between par and the price at which the Individual Investor sold those auction rate securities.
f. No later than December 11, 2008, Credit Suisse shall have notified all Individual Investors that a public arbitrator (as defined by section 12100(u) of the NASD Code of Arbitration Procedure for Customer Disputes, effective April 16, 2007), under the auspices of the Financial Industry Regulatory Authority (“FINRA”), would be available for the exclusive purpose of arbitrating any Individual Investor’s consequential damages claim.  Arbitration shall be conducted by public arbitrators and Credit Suisse shall pay all applicable forum and filing fees.  Any Individual Investors who choose to pursue such claims would bear the burden of proving that they suffered consequential damages and that such damages were caused by investors’ inability to access funds consisting of investors’ auction rate securities holdings in Credit Suisse accounts.  Credit Suisse shall be able to defend itself against such claims; provided, however, that Credit Suisse shall not contest in such arbitrations liability related to the sale of auction rate securities; and further provided that Credit Suisse shall not be able to use as part of its defense an Individual Investor’s decision not to borrow money from Credit Suisse.  Punitive damages are not, and would not be, available in the arbitration proceedings.
g. Credit Suisse shall endeavor to work with issuers and other interested parties, including regulatory and governmental entities, to expeditiously provide liquidity solutions for Institutional Investors.
h. Beginning December 11, 2008, and quarterly until December 31, 2009 (the “NASAA Reporting Period”), Credit Suisse shall have submitted a written report to the representative specified by NASAA, outlining the efforts in which Credit Suisse has engaged, and the results of those efforts, with respect to Credit Suisse’s Institutional Investors’ holdings in auction rate securities.
i. No less frequently than quarterly during the NASAA Reporting Period, Credit Suisse shall have conferred as requested with the representative specified by NASAA and addressed with the representative specified by NASAA any concerns expressed by such representative.
j. Credit Suisse shall have exercised its best efforts to identify Individual Investors who took out loans from Credit Suisse, between February 14, 2008 and December 11, 2008, that were secured by auction rate securities that were not successfully auctioning at the time the loan was taken out from Credit Suisse, and who paid interest associated with the auction-rate-securities-based portion of those loans in excess of the total interest and dividends received on the auction rate securities during the duration of the loan.  On or before March 31, 2009, Credit Suisse reimbursed such customers for the excess expense, plus reasonable interest, of the loan.  This paragraph does not apply to margin loans.

2. Credit Suisse represents and undertakes that, upon request by the Commissioner, Credit Suisse shall provide all documentation and information reasonably necessary for the Commissioner to verify compliance with the obligations, representations and undertakings of Credit Suisse set forth in this Consent Order.

VII. CONSENT ORDER

On the basis of the Findings of Fact, Conclusions of Law, and Credit Suisse's consent to the entry of this Consent Order,

IT IS HEREBY ORDERED THAT:

1.
This Consent Order terminates the investigation by the Division with respect to Credit Suisse’s marketing and sale of auction rate securities to Individual Investors.  However, nothing herein limits the ability of the Commissioner, individually or jointly with other states, in pursuing any investigation with respect to any individual concerning Credit Suisse’s marketing and sale of auction rate securities, whether that individual is associated with Credit Suisse or otherwise; and specifically excluded from and not covered by this paragraph are any claims by the Commissioner arising from or relating to the Consent Order provisions contained herein.
2.
This Consent Order is entered into solely for the purpose of resolving the Investigation and the referenced multistate investigation, and is not intended to be used for any other purpose.
3.
Credit Suisse shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act.
4.
Within ten (10) days after the entry of this Consent Order by the Commissioner, Credit Suisse shall pay to the “Treasurer, State of Connecticut”, by electronic funds transfer or wire transfer, a fine of One Hundred Ninety Six Thousand Seventy Dollars and Fifty Nine Cents ($196,070.59).
5.
In the event another state securities regulator determines not to accept Credit Suisse’s state settlement offer in connection with the multistate investigation referenced herein, the total amount of the Connecticut payment shall not be affected, and shall remain at $196,070.59.
6.
To the extent that Credit Suisse agrees to any subsequent settlement with any NASAA jurisdiction arising out of the above referenced coordinated investigations pertaining to Credit Suisse’s marketing and sale of auction rate securities to Individual Investors as described herein, which includes a term or terms analogous to the terms herein which are more favorable to Individual Investors in such NASAA jurisdiction than those terms identified herein, the subsequent more favorable settlement term or terms shall, upon the Commissioner’s request, be incorporated by reference into this Consent Order and become equally applicable to Connecticut Individual Investors.
7. In consideration for the settlement terms contained in this Consent Order, the Commissioner shall not seek additional penalties, and shall terminate all investigations with respect to Credit Suisse regarding the marketing of auction rate securities as described herein.  However, if the Commissioner determines that Credit Suisse has failed to adhere to the representations and undertakings in this Consent Order, the Commissioner may initiate an investigation and take enforcement action related to the marketing of ARS by Credit Suisse.
8. If payment is not made by Credit Suisse as required in this Consent Order, or if Credit Suisse defaults in any of its other obligations set forth in this Consent Order, the Commissioner may vacate this Consent Order, in the Commissioner’s sole discretion, upon ten (10) days notice to Credit Suisse, and without opportunity for administrative hearing, and/or may pursue appropriate enforcement measures under the Act.
9. This Consent Order is not intended to indicate that Credit Suisse or any of its affiliates or current or former employees shall be subject to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self-regulatory organizations or various states’ securities laws, including any disqualifications from relying upon applicable registration exemptions or safe harbor provisions.  In addition, this Consent Order is not intended to form the basis for any such disqualifications.
10. For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against Credit Suisse, including, without limitation, the use of any e-mails or other documents of Credit Suisse or of others for auction rate securities practices, limit or create liability of Credit Suisse, or limit or create defenses of or for Credit Suisse to any claims.
11. This Consent Order shall not disqualify Credit Suisse or any of its affiliates or current or former employees from any business that they otherwise are qualified or licensed to perform under applicable state law, and this Consent Order is not intended to form the basis for any disqualification.
12. This Order and any dispute related thereto shall be construed and enforced in accordance with, and governed by, the laws of the state of Connecticut without regard to any choice of law principles.
13. Nothing herein shall preclude the State of Connecticut, its departments, agencies, board, commissions, authorities, political subdivisions, and corporations (collectively, “State Entities”), other than the Commissioner in his administration of the Act and then only to the extent set forth in paragraphs VII 1 and 7, and the officers, agents, or employees of the State Entities from asserting any claims, causes of actions, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against Credit Suisse in connection with the marketing and sale of auction rate securities by Credit Suisse.
14. This Consent Order shall be binding upon Credit Suisse, its affiliates, successors and assigns, as well as the successors and assigns of relevant affiliates, with respect to all conduct subject to the provisions herein and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events and conditions under the provisions set forth in this Consent Order.
15. Credit Suisse shall not take any action, or make or permit to be made any public statement, denying, directly or indirectly, any finding in this Consent Order or creating the impression that this Consent Order is without factual basis.  Nothing in this paragraph affects Credit Suisse’s (a) testimonial obligations; or (b) right to take legal or factual positions in defense of litigation or other legal proceedings to which the Commissioner is not a party.
16. In consideration of Credit Suisse’s agreement to resolve the previously referenced multistate investigation relating to its marketing and sales practices for auction rate securities, and its agreement to fully comply with all the terms of this Consent Order, the Commissioner will have refrained from taking legal action against Credit Suisse with respect to its Institutional Investors until at least December 11, 2008, and will not seek additional monetary payments from Credit Suisse relating to Respondent Credit Suisse’s marketing and sale of auction rate securities.
17. This Consent Order contains, constitutes and embodies the entire agreement between the Commissioner and Credit Suisse relating to the auction rate securities matters described herein, there being no agreement of any kind, verbal or otherwise, which varies, alters or adds to this Consent Order, and this Consent Order supersedes any prior communications, understanding or agreement, whether written or oral, concerning the subject matter of this Consent Order.
18. In the event that one or more provisions contained in this Consent Order shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Consent Order.

NOW THEREFORE, the Commissioner enters the following:

1. The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against Credit Suisse, its affiliates or successors in interest based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by Credit Suisse and reflected herein are subsequently discovered to be untrue; and
3. This Consent Order shall become final when entered.

 
So ordered at Hartford, Connecticut      _______/s/_________
this 21st day of July 2010.      Howard F. Pitkin 
    Banking Commissioner 


CONSENT TO ENTRY OF ORDER

I, Pierre M. Gentin, state on behalf of Credit Suisse Securities (USA) LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of Credit Suisse Securities (USA) LLC; that Credit Suisse Securities (USA) LLC agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Credit Suisse Securities (USA) LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  Credit Suisse Securities (USA) LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that Credit Suisse Securities (USA) LLC shall pay pursuant to the foregoing Consent Order.     

 
Credit Suisse Securities (USA) LLC
  
           
By: ______/s/_____________________
Name: Pierre M. Gentin
Title: Managing Director

 
State of: New York

County of:  New York

On this the 19th day of July, 2010, before me, John J. MacDonald, the undersigned officer, personally appeared Pierre M. Gentin, who acknowledged himself/herself to be the Managing Director of Credit Suisse Securities (USA) LLC, a limited liability company, and that he/she, as such Managing Director, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself/herself as Managing Director.
 
In witness whereof I hereunto set my hand.
 

_________/s/______________________
Notary Public
Date Commission Expires: May 18, 2014
  

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