July 2013 was a big month for the Securities and Exchange Commission (the "SEC") in its quest to increase enforcement in the municipal market. On July 19, 2013, the SEC charged the City of Miami, Florida ("Miami"), and its former budget director ("Boudreaux") with securities fraud in connection with several municipal bond offerings and other disclosures made to investors. On July 29, 2013, the SEC entered a Cease and Desist Order against West Clark Community Schools in Indiana (the "District") for material misstatements in an official statement regarding continuing disclosure compliance. Each of those actions is discussed briefly below.

SEC v. City of Miami, Florida and Michael Boudreaux.

On July 19, 2013, the SEC filed a lawsuit charging Miami and Boudreaux with securities fraud in connection with statements or misstatements made in the offering documents for three municipal bond offerings in 2009 and in its Comprehensive Annual Financial reports ("CAFRs") for 2007 and 2008. The SEC's action also charges Miami with violating a prior SEC cease-and-desist order that was entered against the city in 2003 based on similar misconduct. This is the first time the SEC has alleged further wrongdoing by a municipality subject to an existing SEC cease-and-desist order.

According to the SEC's complaint (which has not yet been answered by Miami), an SEC investigation found that beginning in 2008, Miami and Boudreaux made materially false and misleading statements and omissions about certain interfund transfers from the Capital Projects Fund to the General Fund in order to mask increasing deficits in the General Fund. Specifically, the SEC alleges that (i) Miami did not disclose the full amount or effect of the transfers to the General Fund's budget and its fund balance; (ii) Miami represented that the project funds transferred in 2007 and 2008 were "unexpended" or "unused," when in reality the funds were allocated to specific capital projects that still needed the money or had already spent it; and (iii) Miami failed to disclose it had not adjusted its Capital Projects Funds budget to reflect the transfers to the General Fund.

The SEC also alleged that Miami's fiscal year 2007 and 2008 CAFRs (which are distributed to broad segments of the investing public, including investors in previously issued city debt) contained material omissions, including inaccurate statements about the sources of interfund transfers in the MD&A and the use of "a boilerplate footnote" listing the interfund transfer, but failing to include any description or details about the transfers or the impact on the General Fund as purportedly required by Governmental Accounting Standards Board Statement No. 38.

The SEC alleges that Boudreaux orchestrated the transfers to the General Fund in order to mask increasing deficits in the General Fund. Miami was required by law to maintain a specified General Fund balance; the misleading transfers allegedly prevented a violation of that law. Miami also allegedly received more favorable ratings in connection with three bond issues as a result of the transfers; the ratings were downgraded after an internal city investigation resulted in a reversal of many of the transfers. In order to gain approval of the transfers, Boudreaux also allegedly made misrepresentations to the City Commission and others in the administration about the transfers and concealed the transfers in Miami's internal records.

The SEC's complaint seeks injunctive relief and financial penalties against Miami and Boudreaux, and an order commanding Miami to comply with the SEC's 2003 cease-and-desist order.

The Miami case has yet to be resolved in court and it is possible that some or all of the SEC's allegations will be disproved. Nonetheless, one of the lessons to be learned from the action is that transparency is good policy in governmental actions related to finances, including financial reporting. In addition, accurate descriptions of policies and unusual financial activities should be included in offering documents, particularly in lean years.

In the Matter of West Clark Community Schools.

On July 29, 2013, the SEC accepted an Offer of Settlement (the "Offer") and entered a Cease and Desist Order (the "Order") against West Clark Community Schools in Indiana ("West Clark") for material misstatements in an official statement regarding continuing disclosure compliance. This is the first time the SEC has charged a municipal issuer with falsely claiming compliance with its annual disclosure obligations in a subsequent offering document. In a companion cease-and-desist order, the SEC charged West Clark's underwriter ("City Securities") and the head of its public finance and municipal bond department for failure to conduct adequate due diligence to detect West Clark's false statement in the course of the 2007 bond offering.

The facts of the West Clark Order are disturbingly simple. In 2005, West Clark issued bonds and entered into a contractual undertaking to annually disclose certain financial information and operating data and to disclose event notices pursuant to SEC Rule 15c2-12. In 2007, West Clark issued bonds again and affirmatively stated in its offering document that it had not failed, in the past five years, to comply with prior 15c2-12 undertakings. However, between 2005 and 2010, West Clark never submitted any of its contractually required disclosures. The Order found that the statement in the 2007 offering document and in the Certificate and Affidavit signed by West Clark (stating that the offering documents did not contain any untrue statements of material fact) were materially false. The Order finds that West Clark knew, or was reckless in not knowing, that the statements were false and as a result, violated the antifraud provisions found in Section 17(a)(2) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

In determining to accept the Offer, the SEC considered several undertakings made by West Clark. With the assistance of counsel, West Clark agreed that it would, within 180 days of entry of the Order: (i) ensure that all contractually required disclosure submissions are current and accurate; (ii) adopt and ratify enhanced, written disclosure policies and procedures meeting parameters specified in the Order and thereafter publish them on EMMA; (iii) implement annual training for personnel involved in the bond offering and disclosure process; and (iv) establish policies and procedures to ensure that in the future the district submits all documents, reports and notices to EMMA as required.

The West Clark Order is a continuation of the SEC's efforts to improve compliance with the continuing disclosure requirements of Rule 15c2-12. The Order highlights the SEC's view that statements made in offering documents about Rule 15c2-12 compliance are per se material. Market participants may disagree that such a statement is material, but without a "material" misstatement, it is unlikely the SEC could wield its enforcement power against the municipal issuer. The entry of the Order will give the SEC the opportunity to pursue future actions to enforce Rule 15c2-12 against parties who are not regulated broker-dealers.