SEC Charges City of Miami, Budget Director with Fraud

The SEC brought another action centered on the municipal bond market. This case, against the City of Miami and its former Budget Director, not only accuses the defendants of fraud in connection with three bond offerings, but also of violating a prior consent decree which is a first for the agency. SEC v. City of Miami, Florida, Civil Action No. 1:13-cv-22600 (S.D. Fla. Filed July 19, 2013).

The action centers on three bond offerings in May, July and December 2009. In advance of those offerings the City distributed its Comprehensive Annual Financial Reports or CAFRAs. That document contains a Management’s Discussion and analysis section and the audited financial statements of the City. The transmittal letter represented that the CAFRA was complete and reliable in all material aspects. The documents in part rely on the budget from the then budget director and now defendant, Michael Boudreaux.

On May 29, 2009 the City issued about $53 million in Limited Ad Valorem Tax Bonds. The bonds were not insured but they were secured by certain pledged City ad valorem tax revenues. The Preliminary Official Statement for the bond offering contained excerpts of the City’s CAFR, including the MD&A section, and the audited financial statements. Subsequently, in July and December 2009 the City issued, respectively, $37 million and $65 million in similar bonds on the same basis and using comparable documents. In each instance rating agencies gave the bonds favorable ratings which secured good terms for the City.

Despite the representations in the documents distributed by the City, a series of transfers had been made from its Capital Projects Fund to its general fund that were not reflected in those materials. The transfers were made to conceal deficits in the general fund. The City had established a goal of maintaining $100 million in reserves in its general fund. The funds transferred were supposed to be restricted. To effectuate the transfers Mr. Boudreaux falsely told the City Commission that the funds were unallocated. He then concealed the transactions in the City’s internal records. Mr. Boudreaux also made misrepresentations to the rating agencies which helped secure the favorable ratings for the bond offerings, according to the complaint.

Previously, in March 2003 the Commission issued a cease and desist order against the City for violations of the anti-fraud provisions of the federal securities laws. The violations were in connection with bond offerings in 1995.

The Commission’s complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22753 (July 15, 2003).

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