SEC’s First Action Based On Dodd-Frank Muni Adviser Fraud Section

The SEC has been focusing on municipal bond offerings, filing a series of enforcement actions. An action brought this week is the first, however, based on the Dodd-Frank fraud section related to municipal advisers. The action center on the use of what the Orders allege is confidential information. In the Matter of School Business Consulting, Inc., Adm. Proc. File No. 3-17288 (June 13, 2016).

Respondents in the proceeding are Terrance Bradley, a 26 year veteran of a California school district and the founder of School Business Consulting. The firm was formed after his retirement from the school system to serve as a consultant for school districts.

In September 2010 Keygent LLC, a registered municipal adviser whose business focuses solely on advising school districts and community colleges regarding bond issues, retained School Business. The firm was named to Keygent’s Advisory Board and was paid a monthly fee. This gave the adviser access to the extensive contracts of Mr. Bradley throughout the California school system.

Among the clients solicited for Keygent were those of School Business. In some instances Mr. Bradley reviewed pitch books used by Keygent before they were sent to the school districts. In other instances he separately recommended to his clients that they meet with Keygent.

During the hiring process for five School Business clients, Keygent received confidential information about them from the firm. California law did not require a bidding process but many districts used one. Each of the candidates for the municipal advisor position were expressly directed not to have contact with any officials at the district except the single official specified in the RFQ. This limitation was intended to permit the districts to control the information disseminated, placing each candidate on the same footing. Mr. Bradley had drafted, or assisted in drafting, the RFQ documents used by five school districts.

Mr. Bradly provided what is alleged to have been confidential information to Keygent. That included advanced copies of draft interview questions; a draft of the RFQ document for one district which later incorporated a suggestion made by the adviser that required a competitor to disclose negative information; information about competitors; and advice on how to answer certain interview questions.

The school district clients were not aware that Mr. Bradley shared the information

with Keygent, although he did advise them of his affiliation with the firm and recused himself from the actual interview process for four of the five districts (one insisted he attend despite Mr. Bradley’s statement that he had a conflict). Mr. Bradley was not authorized to share the information.

Based on the foregoing School Business was engaged in the solicitation of a municipal entity, according to the Order. Accordingly, it was required to register as a municipal advisor under Exchange Act Section 15B(a)(1). Under Section 15B(c)(1) such an adviser has a fiduciary duty to its municipal entity clients. MSRB Rule G-17 requires that in the conduct of its municipal securities business every broker, dealer, municipal securities dealer and municipal adviser deal fairly with all persons and not engage in unfair, deceptive or dishonest conduct. Likewise, Exchange Act Section 15B(a)(5) prohibits fraudulent and deceptive practices while undertaking the solicitation of a municipal entity. The Order alleges violations of these Sections.

To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on Exchange Act Sections 15B(a)(1)(B), 15B(A)(5) and 15B(c)(1) and MSRB Rule G-17. Mr. Bradley was barred from the securities business. School Business was censured and will pay a penalty of $30,000. Mr. Bradley will pay a penalty of $20,000. See also In the Matter of Keygent LLC, Adm. Proc. File No. 3-17287 (June 13, 2016)(proceeding against the adviser and Anthony Hsieh and Chet Wang, both managing directors of the firm; the proceeding is based on the conduct detailed above; the firm agreed to a series of undertakings; Respondents consented to the entry of a cease and desist order based on Exchange Act Sections 15B(a)(5) and 15B(c)(1) and MSRB Rule G-17. The firm will pay a penalty of $100,000, Mr. Hsich $30,000 and Mr. Wang $20,000).

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