As explained in our prior legal updates, the Securities and Exchange Commission (SEC or Commission) had promised to ramp up enforcement efforts in the municipal securities space. The SEC has more than lived up to its promise; there already have been several actions against municipalities in connection with municipal bond offerings this year.
Just last week, the SEC struck again. This time it charged the City of Miami and its former Budget Director with securities fraud in connection with several municipal bond offerings and other public disclosures. The SEC also charged the City of Miami with violating a 2003 cease-and-desist order based on similar conduct.
There are no signs of the SEC slowing enforcement efforts in the municipal securities space. Rather, we project this trend to continue apace, if not accelerate. In this regard, in announcing the Miami action, George S. Canellos, Co-Director of the Division of Enforcement, underscored the Commission’s ongoing commitment to “hold accountable not only municipalities, but also individual municipal officials for fraudulent disclosures to investors.”
The Case against Miami
The SEC charged the City of Miami and its former Budget Director, Michael Boudreaux, with securities fraud for making material misrepresentations and omissions within municipal bond offering documents and within the City of Miami’s Comprehensive Annual Financial Reports (CAFRs). The SEC’s complaint, filed in federal court in the Southern District of Florida, alleges misrepresentations and omissions relating to a series of transfers made by Miami, and initiated by Boudreaux, from its Capital Projects Fund to its General Fund that were designed to make it appear that Miami had maintained its target of a $100 million reserve for the General Fund and had complied with legal requirements regarding the size of its General Fund reserves. According to the SEC, Miami failed to disclose the full effect of these transfers, and falsely represented that the funds transferred were unused even where those funds had been allocated to specific projects or had already been spent.
The Commission’s complaint further alleges that, based on the falsely inflated balances in the General Fund, Miami was able to obtain more favorable ratings on municipal bond offerings from credit rating agencies, and thus, was able to issue debt on more favorable terms. Following the eventual revelation of these misrepresentations and omissions, rating agencies downgraded their ratings.
Additionally, the SEC alleges that Boudreaux knowingly misrepresented that various funds were unused or not allocated to specific projects in order to obtain approval to make certain transfers to the General Fund despite questions and concerns from other officials regarding the truth of those assertions. He also provided information used to draft sections of Miami’s CAFRs that contained misrepresentations and omissions.
The SEC charged Miami and Boudreaux with violating the antifraud provisions of the securities laws, specifically, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The complaint also charges Boudreaux with aiding and abetting Miami’s violations of Section 10(b) and Rule 10b-5 thereunder. The SEC seeks injunctive relief, along with financial penalties against Miami and Boudreaux.
Notably, this is not Miami’s first scrape with the SEC. In 2003, the SEC obtained a cease-and-desist order against the City of Miami for violating the antifraud provisions of the securities laws in connection with bond offerings in 1995. This action marks the SEC’s first time alleging further misconduct by a municipality subject to a cease-and-desist order. Accordingly, the SEC has also requested the court to order Miami to comply with the prior SEC order.
Both the City of Miami and Boudreaux have denied any wrongdoing and intend to contest the charges.
Continued Scrutiny of Municipalities Expected
Activity in the municipal securities space thus far this year confirms the SEC’s resolve to fulfill its promise of increased enforcement. As a result, the importance of effective internal policies and procedures governing municipal securities issues cannot be understated.
In the current environment, it is prudent for municipal issuers to periodically review their policies, procedures and internal controls for municipal securities. Based on SEC actions thus far this year, specific policies, procedures and internal controls warranting consideration include those governing: (1) disclosures made in financial statements; (2) disclosures made pursuant to continuing disclosure agreements and disclosures regarding credit ratings; (3) use of proceeds from offerings; (4) public statements regarding financial condition and credit ratings; (5) the hiring of internal personnel and external experts for disclosure functions; (6) the designation of an individual responsible for ensuring compliance with such policies, procedures and internal controls; and (7) the implementation of active and ongoing training programs regarding compliance and disclosure obligations.