It seems as though several large cities have been facing financial woes lately. Harrisburg, Pa., is having an auction of historic memorabilia to pay down debt, Detroit has filed Chapter 9 bankruptcy, and now, the Securities Exchange Commission (SEC) has charged Miami with fraud.
The charges are the results of three bond offerings that occurred in 2009. According to the SEC, Miami committed securities fraud when they misled investors about the city’s financial health in an alleged scheme to obtain better terms on the $153 million worth of bond offerings.
In documents released by the SEC, the city of Miami provided false information on its 2007 and 2008 financial reports in order to mislead and cover up a widening deficit in its general fund. By doing so, the SEC alleges, the city obtained higher credit ratings from firms who rate credit. The SEC alleges that Michael Boudreaux, the city’s former budget director, initiated the plot, which involved the transfer of money between two city funds, which were not fully disclosed to the investors.
Miami is represented by the law firm of Morgan, Lewis & Bockius. An attorney for the firm, Ivan Harris, claims the action by the SEC is “unwarranted.” The attorney said the SEC only brought the charges now because of statute of limitations deadlines.
Miami released a statement that read, “(It) prides itself on the transparency of its bond offering documents and its history of meeting obligations to bondholders. The city did not violate any securities laws, and looks forward to the opportunity to demonstrate that in a court of law.”
Boudreaux’s private attorney, Michael Pizzi, failed to immediately respond to calls from the media outlets. In its complaint, the SEC seeks unspecified financial damages against the city, which has a population of 413,892 people, as well as Boudreaux as an individual.
The SEC’s Miami Regional Office director, Eric I. Bustillo, confirmed to media outlets that this is the first time the SEC has sought penalties against a municipality in a fraud case. He indicated that the city had failed to disclose the nature of some $37.5 million of fund transfers to its general fund from its capital-improvement fund. He said the moves were designed to make it appear as though the city had adequate reserves placed in the general fund.
The SEC has also charged the city with violating a 2003 cease-and-desist order from the SEC that was designed to ban similar conduct. This is also the first time the SEC has accused a municipality of violating such an enforcement action. The earlier action from the SEC was the result of a 1995 bond offering by the city.
Regarding the fraud charge, SEC spokespeople have indicated that the active marketing of bonds was to cover up the true reason for inter-fund transfers, which were to boost the image of the city’s primary marketing fund.
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