In the first federal jury trial by the U.S. Securities and Exchange Commission (SEC) against a municipality or its officers, jurors found that the City of Miami, Florida (Miami or the City) and its former budget director defrauded bond investors in 2009 by failing, in connection with the sale of municipal bonds, to properly disclose certain inter-fund transfers of moneys between its capital-improvement and general funds in the City's Comprehensive Annual Financial Report in fiscal years 2007 and 2008. The inter-fund transfers included transfers of restricted fees and occurred prior to and in connection with an offering and sale of municipal bonds in 2009.1
According to the SEC's complaint, the City "failed to disclose to bond investors and ratings agencies the nature of $37.5 million of fund transfers from its capital-improvement fund to its depleted general fund – moves that allowed the City to make it appear that it had adequate reserves in the general fund," when, in fact, it did not.2 According to the SEC, "the transferred money had already been pledged to several ongoing capital projects and some of it was restricted by the City code for designated purposes."3
The SEC also contended that after Miami officials learned of the problem following an audit, they "concealed the issue from ratings agencies and bond investors" by failing to disclose the "deteriorating financial condition" of Miami in the offering documents of three subsequent and separate municipal bond issuances in 2009 totaling $153.5 million.4 Consequently, some of the City's municipal bond offerings were rated more favorably by the rating agencies, and such ratings were subsequently "downgraded after an auditor's report forced the City to reverse most of the fund transfers."5
According to the SEC, City officials "moved the money in order to pad the City's reserves and make the City seem financially healthy ... because the City's budget projections showed the City was going bankrupt." The SEC's findings also concluded that "many of the raided accounts were either filled with highly restricted dollars, money already spent, or dollars that were still needed to pay for ongoing expenses."6 Moreover, through its actions in 2007 through 2009, the SEC alleged that the City violated an existing cease-and-desist order that the SEC brought in 2003 based on similar securities law violations, which will be addressed in a subsequent ruling.7
In its ruling, the federal jury found that the City and its former budget director acted "knowingly" or with "severe recklessness" in making misrepresentations or material omissions of material facts in connection with its bond offerings. The jury found that the City used a "device, scheme or artifice to defraud" in violation of both the Securities Act and the Exchange Act.8 Specifically, the jurors returned a unanimous verdict, finding that the City violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the federal Securities Act, Section 10(b) of the Exchange Act, and Rule 10b5 promulgated thereunder. The jury also found that the City's former budget director violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and that he aided and abetted the City's violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. The jury also rejected both the City's and its former budget director's defenses that they relied on their auditors It found, among other things, that they did not completely disclose the facts about the conduct at issue to their auditors and that they did not rely on and follow in good faith the advice that they received from their auditors.9
Following the decision, the SEC said in a statement that it "will continue to hold municipalities and their officers accountable, including through trials, if they engage in financial fraud or other conduct that violates the federal securities laws."10
The proceedings against Miami highlight the importance of disclosure and the involvement of staff of the issuer in reviewing the offering documents used in connection with the sale of municipal bonds.
Notes
1 See the SEC's Statement on Jury's Verdict in Trial of the City of Miami and Michael Boudreaux.
2 See Governing article "Jury: Miami Defrauded Bond Investors, Again."
3 See The Bond Buyer article "In a First Federal Jury Trial, Miami, Boudreaux Found Guilty."
4 See the SEC's Statement on Jury's Verdict in Trial of the City of Miami and Michael Boudreaux.
5 See Wall Street Journal article "Jury Finds Miami Defrauded Bond Investors."
6 See Governing article "Jury: Miami Defrauded Bond Investors, Again."
7 See SEC opinion and The Bond Buyer article "SEC May Litigate Rather than Settle Due to Miami, Boudreaux Verdict."
8 Jury Verdict, Securities and Exchange Commission v. City of Miami and Michael Boudreaux, Case No. 13-22600-CIV-ALTONAGO/O'Sullivan, (S.D. Fla. September 14, 2016.)
9 Jury Verdict, Securities and Exchange Commission v. City of Miami and Michael Boudreaux, Case No. 13-22600-CIV-ALTONAGO/O'Sullivan, (S.D. Fla. September 14, 2016.)
10 See The Bond Buyer article "SEC May Litigate Rather than Settle Due to Miami, Boudreaux Verdict."
