UPDATE 2-Indiana school district, bond underwriter charged with fraud -SEC
WASHINGTON, July 29 (Reuters) - The U.S. Securities and Exchange Commission, pressing ahead with a crackdown on the municipal bond market, on Monday filed groundbreaking fraud charges that alleged an Indiana school district and its underwriter lied about financial information.
The West Clark Community Schools district failed to submit annual reports or notices required by statute for a 2005 bond issue and then, in an official statement for a 2007 bond sale underwritten by City Securities Corporation, said it had complied with disclosure obligations, the SEC said. Official statements summarize new bond sales for investors.
City Securities did not follow up on ensuring West Clark made the disclosures, the commission added.
"This is the first time the SEC has charged a municipal issuer with falsely claiming in a bond offering's official statement that it was fully compliant with the annual disclosure obligations it agreed to in prior offerings," said Andrew Ceresney, co-director of the SEC's enforcement division.
He added that these were the first charges against an underwriter and its principal for not doing the necessary research to attest to the truthfulness of an official statement.
The SEC also alleged City Securities and its public finance chief, Randy Ruhl, provided "improper gifts and gratuities to representatives of municipal bond issuers, and then wound up charging these and other expenses back to the issuers."
The gifts included "multi-day golf trips and tickets to various sporting events," according to the SEC.
For the school district, most of the fault in the case rests with the underwriter it hired, West Clark's attorney said.
"It's pretty obvious to me that City Securities was the real target of the investigation," said Michael Gillenwater, corporate counsel for West Clark, which is located near the Kentucky border and has seven campuses.
Gillenwater said the district has never had problems repaying debt. Still, he said the five members of the school board have other jobs and areas of expertise.
"They're not in the finance business. They relied on City Securities and their bond counsel and others to advise them that this paperwork was in order," he said. "And it appears they got some bad advice."
West Clark consented to a cease-and-desist order, began adopting written policies on its obligations and will provide annual training to bond-related personnel.
City Securities, without admitting or denying the charges, paid nearly $580,000: it paid $279,446 in disgorgement and prejudgment interest and $300,000 as a penalty. The corporation is reviewing its policies and also agreed to cease and desist, the SEC said.
Ruhl, who also did not admit or deny the findings, agreed to cease and desist and pay disgorgement and prejudgment interest of $20,320 and a penalty of $18,155. He is also permanently disbarred from working with brokers, dealers, advisers, transfer agents or credit rating agencies, according to the SEC. Ruhl's lawyer did not answer a request for comment.
Ruhl no longer works for City Securities, according to company spokeswoman Jenny Parker, who said the SEC agreement limited what it could say about its part of the investigation, which she said started earlier than the district's, in 2010.
"We made immediate and substantial changes... We now have tighter internal controls. We have better-qualified employees. We have deeper client relationships," she said, adding that the company hired a manager to ensure it complies with securities laws and would check on issuers' compliance as well.
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The charges resemble a precedent-setting case against Harrisburg, Pennsylvania, earlier this year. In that instance, the SEC said the city failed to file financial disclosures or was tardy. It then charged the city with fraud for making allegedly misleading statements outside of disclosure documents.
"These filings for municipal entities have been largely ignored for all of my practicing life as an attorney," said West Clark's Bailey. "There's a new sheriff in town and they're making it known they're going to be watching this."
In 2010 the commission created a new municipal bond enforcement unit that immediately set to work, mostly focusing on a scheme involving derivatives sold to municipalities. Recently, it has turned to disclosures.
Ten days ago, the SEC charged Miami, Florida, for masking budget deficits in bond documents. It has also charged South Miami with fraud for not disclosing problems with the tax-exempt status of two deals, and Victorville, California, for inflating the value of property used to secure a bond sale. In March, it settled with Illinois for misleading investors about employee pension problems, the second time ever that it charged a state.
In most of those cases, though, the commission focused on public entities and their officials. But in May it also agreed to a record fine with a former investment banker for breaking rules against influence peddling to win bond underwriting business.