The SEC brought another action against a City for inadequate disclosure in connection with a municipal bond offering. In the Matter of the City of South Miami, Florida, Adm. Proc. File No. 3-15329 (May 22, 2013). The action centers on a bond offering initiated in 2002 to finance a public parking garage. The project traces to 1997 when the City began considering building a parking garage. In connection with the project the City also sought a developer for related retail space.
In 2002 the City entered into arrangements with a developer for the retail space. The role of the developer was limited in accord with the applicable tax requirements. Later bond council informed City officials that proceeds from tax exempt bonds could not be used to finance the retail portions of the project. This admonition was not communicated to subsequent City administrations.
In May 2002 the City issued $49.8 million in tax exempt bonds for the project. Shortly prior to the offering the City executed documents with the Florida Municipal Loan Council or FMLC for the tax exempt portion of the project. The City represented that proceeds of the offering would not be for private use and that the project would be conducted in accord with the applicable provisions of the IRS Code. Almost immediately after the offering, a portion of the proceeds were loaned to the developer.
After abandoning the project because of funding concerns, in 2005 it was substantially restructured by City officials. Essentially the retail space and the garage were ceded to the developer. This jeopardized the tax exempt status of the bonds. The Florida Municipal Loan Council and bond counsel were not informed of the changes.
The next year the project was still incomplete. The City sought to borrow additional funds from the FMLC to continue. In the Fall of 2006 the City applied to join the FMLC bond pool. The City failed to tell the FMLC that the project had been significantly restructured or that portions of the earlier bond offering had been loaned to the developer. Accordingly, the materials filed with in connection with the loan to contained material misrepresentations key to the tax exempt status of the project. Certifications filed by the City in each of the next two years stating that it was in compliance with the applicable requirements to maintain the tax exempt status were also inaccurate and materially incomplete.
In 2010 the City submitted a material event notice with the MSRB’s Municipal Market Access system. This notice acknowledged for the first time that the tax exempt status of the bonds had been jeopardized, although they had been trading for years. Subsequently, the City entered into agreements with the IRS under its Voluntary Compliance Agreement Program. Under the terms of the agreements the City was required to pay $260,325.40 and take steps to retire the bonds at the earliest possible date. To finance this the City had to borrow over $1.1 million. As a result of the settlement the tax exempt status of the bonds was preserved for the holders. The Order alleges violations of Securities Act Sections 17(a)(2) and (3).
The City resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, it will retain a consultant who will review the procedures of the City for the next three years and make recommendations which will be adopted.
This proceeding is one of a series of actions brought by the Commission centered on the municipal bond market. Like earlier actions against the City of Harrisburg, the State of Illinois and others, a critical common thread is the lack of procedures in the pertinent state or city government departments to ensure proper disclosure and compliance. This suggests that perhaps the time has come for a more comprehensive report on this critical issue. Perhaps more importantly, it should serve as a wake-up call to state and local government officials to examine and, if necessary reform, their procedures relating to municipal bonds.