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SEC Sues City Of Miami With Municipal Bond Offering Fraud

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The Securities and Exchange Commission (SEC) filed a lawsuit against the City of Miami for allegedly committing fraud in its municipal bond offerings and other related disclosures to investors. The former budget director of the city was also included in the case.

SEC Sues City Of Miami With Municipal Bond Offering Fraud

SEC investigation says Michael Boudreaux made false statements

Based on the investigation of the SEC, the City of Miami and its former budget director, Michael Boudreaux made materially false and misleading statements as well as omissions regarding specific inter-fund transfers in three bond offerings worth $153.5 million in 2009.

According to the commission, the City of Miami and Boudreaux also filed similar false and misleading information in the Comprehensive Annual Financial Reports (CAFRs) of the city for the fiscal years 2007 and 2008. The CAFRs were distributed to broad segments of the investment community including investors of the previously sold debt of the city.

The former budget arranged the transfers of millions from the Miami’s Capital Improvement Fund to its General Fund to deceive investors regarding the true financial situation of the city. At that time, the City of Miami’s General Fund is suffering from increasing deficits. Investors and bond rating agencies look at the General Fund to determine the financial stability of the city.

SEC’s other charges against the City of Miami

Aside from municipal bond offering fraud, the SEC also charged the City of Miami for violating its cease-and-desist order against the city in 2003 for committing a similar conduct.

In a statement, George S. Canellos, co-director of the Division of Enforcement said,  “Miami actively marketed bonds to the investing public while hiding the true reason for inter-fund transfers to boost the image of its primary operating fund.”

“The fact that a city official would enable these false and misleading disclosures to investors merely a few years after Miami had been reprimanded by the SEC for similar misconduct makes this repeat behavior all the more appalling and unacceptable.  We will hold accountable not only municipalities, but also individual municipal officials for fraudulent disclosures to investors,” added Canellos.

Boudreaux transfer of funds

Based on the lawsuit, Boudreaux initiated the transfer of $37.5 million between funds for the City of Miami. According to SEC, the city did not disclose to bondholders that transferred funds include restricted funds. Under the city code, restricted funds cannot be commingle with any other funds or revenues generated by Miami.

In addition, the SEC alleged that the Miami failed to inform bondholders that the transferred funds were allocated to specific capital projects still in need of such funding until the end of the fiscal year or in some cases the fund were already used. The transfer allowed the city to meet or nearly comply with the requirements necessary to maintain the reserve levels of its General Fund.

The municipal bond offerings of the city received favorable ratings from credit rating agencies in the wake of the transfers. A report from the Office of Independent Auditor General (OIAG) of Miami forced the city to reverse all transfers, and to declare a state of fiscal urgency because it failed to meet the required fund levels of its general Fund. As a result, credit rating agencies downgraded their rating on the city’s debt.

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