The SEC filed another settled financial fraud action tied to the municipal bond market which is clearly an area of increasing focus. This proceeding named as a Respondent the operator of the largest public health system in Miami-Dade County Florida. In the Matter of Public Health Trust of Miami-Dade County, Florida, File No. 3-15472 (September 13, 2013).
Public Health Trust is a quasi-governmental agency that operates the public health system in Miami-Dade County Florida under a local ordinance and state law. The System has a contract with the County to provide medical care to indigent patients. It primary source of revenue is charges for patient services. Those are typically paid by commercial insurers, Medicaid and Medicare. Since a large number of its patients are indigent, the revenue for the System falls short of expenses. The County contributes non-operating revenues to Public Health Trust to offset the operating losses.
In early 2009 the System began discussions with the County regarding a new bond issue. The County would be the issuer of the bonds. Repayment would come solely from the revenue of Public Health Trust. At the same time the System had a rising level of patient accounts receivable and declining cash available. The Controller for the System began to question the amount of accounts receivable and collection rates reported that were used to calculate revenue figures.
The bond offering was made in 2009 before the questions about the System’s receivables was resolved. The Official Statement for that offering contained certain financial information regarding the System as well as the audited financial statements for the System for 2008. The Official Statement was false and misleading according to the Order for three key reasons.
First, it contained unaudited financial information and made revenue projections for fiscal year 2009 which lacked a reasonable basis. The projection representing that absent corrective action, the system would experience a $56 million non-operating loss for fiscal year 2009. At the time the projection was made although there were significant questions about the receivables of the System they had not been resolved. The projection was made with stale information and lacked any reasonable basis, according to the Order.
At the time the projection was made officials failed to identify the fact the receivables were overstated, a fact that they would later acknowledge. After the bonds were sold the external auditors for the system discovered difficulties with the patient accounts receivable valuation. That resulted in a large adjustment to net income. Ultimately the system reported a non-operating loss of $244 million for 2009. In addition, the Official Statement misrepresented the projected non-operating loss as an operating loss.
Second, the Official Statement contained partial year information which is incorrect. The Statement claimed that it contained information for an eight month period ended May 31, 2009. In fact the information presented was for a period ended April 30, 2009. As a result a loss from operations reported as $255 million was in fact $290 million.
Finally, the System failed to account for an adverse arbitration award involving patient accounts in 2008. The December 2008 arbitration award required the System to pay $3.9 million in cash to a third party receivables company. It also required the System to transfer to that company $360 million face amount of existing accounts receivable and $250 million face amount of future accounts receivable. That award was omitted from the 2008 audited financial statements which were thus incorrectly represented as being prepared in accord with GAAP. The Order alleges violations of Securities Act Sections 17(a)(2) and (3).
To resolve the proceeding Public Health Trust consented to the entry of a cease and desist order based on the Sections cited in the Order. The Commission took into account the remedial efforts of the System including the fact that it retained an outside consultant.
This is one of a series of cases the Commission has brought regarding municipal bond offerings, an area which is clearly becoming an enforcement priority. See, e.g., In the Mater of West Clark Community Schools, Adm. Proc. File No. 3-15391 (July 29, 2013); City of South Miami Florida, Adm. Proc. File No. 3-15329 ((May 22, 2013); In the Matter of the City of Harrisburg, Pennsylvania, Adm. Proc. File No. 3-15316 (May 6, 2013). Each of these proceedings centered on the quality of the financial information made available to investors in connection with the offering. Indeed, in connection with the City of Harrisburg proceeding the Commission issued a Section 21(a) Report discussing the question and the adequacy of procedures utilized by state and local authorities to prepare that information.