The Commission filed two more settled actions tied to the municipal bond market. One a proceeding was brought against a school district, alleging it made false statements regarding its bond offering. In the Matter of West Clark Community Schools, Adm. Proc. File No. 3-15391 (July 29, 2013). A second, related proceeding, named the broker for school district’s offerings and one of its employees. That proceeding alleges that the firm failed to conduct adequate due diligence regarding the offering by the school district, recommended the purchase of the securities without having adequate procedures to ensure prompt compliance by issuers with their obligations, charged improper expenses to the offering and made inappropriate payments to municipal employees. In the Matter of City Securities Corporation, Adm. Proc. File No. 3-15390 (July 29, 2013).
West Park Community Schools is located in Clark County, Indiana. In March 2005 the District conducted an offering for $52 million of municipal bonds. Under Rule 15c2-12 the District executed a Continuing Disclosure Agreement. That undertaking required the District to provide an annual report containing certain financial information and operating data to the appropriate national and sate repositories. The District was also required to provide timely notices of certain specific events regarding the bond issue. One of those obligations was to provide notice if it could not furnish the annual report.
As the sole underwriter for the offering, City Securities reviewed various drafts of the papers which became the Official Statement. Those papers contained the undertakings of the District regarding its future disclosure obligations and reports. The broker disseminated the 2005 Official Statement in connection with the offer and sale of the bonds.
In 2007 the District conducted an offering of $31 million of municipal bonds. City Securities was the sole underwriter. The Official Statement for the 2007 offering contained a representation that over the past five years the District “never failed” to comply in all material respects with its prior undertakings. At the closing the District executed a statement containing a representation stating that the Official Statement was accurate in all material respects.
In 2007 City Securities again served as underwriter. Accordingly, the firm participated in the drafting of the Official Statement for the offering. During that process the firm was obligated to form a reasonable basis through adequate due diligence for believing the truthfulness of the District’s representations regarding compliance with its prior disclosure obligations, according to the Order. Under the firm’s procedures Randy Ruhl, a vice president and named Respondent in the action along with the firm, was designed as supervisor of the Department beginning in January 2007 and as the person responsible for monitoring and ensuring compliance. Mr. Ruhl was obligated to take reasonable steps to ensure that Department employees conducted due diligence. The firm disseminated the 2007 Official Statement in connection with the offer and sale of the bonds.
In fact the District’s representations were false. Between 2005 and 2010 it failed to submit any annual reports or notices as required. The District thus failed to comply with its disclosure obligations and executed a false representation at the 2007 closing. As a result the Order alleges that the District violated Securities Act Section 17(a)(2) and Exchange Act Section 10(b).
The firm, according to the Order, failed to conduct the due diligence necessary regarding the representations of the District. The firm also did not have procedures and policies in place which provided a reasonable assurance it that it would receive prompt notice of certain required disclosure submissions by an issuer.
From 2007 through 2010 the firm also mischaracterized expenses such as charitable donations and entertainment expenses and then billed them back to various municipal securities issuers. The firm also made improper gifts and gratuities to certain personnel of municipal securities issuers. The Order naming City Securities and Mr. Ruhl as Respondents alleges violations of Securities Act Section 17(a)(2) and Exchange Act Sections 10(b), 15(c)(2) and 15B(c)(1). Mr. Ruhl aided and abetted the violations of the firm, according to the Order.
Each Respondent settled with the Commission. The District agreed to implement a series of undertakings that will ensure it has proper policies and procedures. In addition, the District consented to the entry of a cease and desist order “from committing or casing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act . . . “
City Securities agreed to implement a series of undertakings and consented to the entry of a cease and desist order from “committing or causing any violations and any future violations of section 17(a) of the Securities Act, and Sections 10(b), 15(c)(2) and 15B(c)(1) of the Exchange Act . . . “ The firm also agreed to pay disgorgement of $238,000, prejudgment interest and a civil money penalty of $300,000.
Mr. Ruhl consented to the entry of a similar cease and desist order and agreed to pay $18,155 as disgorgement, prejudgment interest and a civil money penalty equal to the amount of the disgorgement. He also agreed to the entry of a bar order from the securities business and from participating in any penny stock offering with a right to apply for reentry after one year. In addition, he agreed to the entry of a bar from serving in a supervisory capacity in the securities business.