Welcome!

Thank you for visiting my blog. My goal is to be a resource for information regarding current trends in the area of government bond compliance. If you have specific areas of interest, reach out with a text, call or email.

In October, I attended a conference hosted by the National Association of Bond Lawyers. Although it had been over ten years since I last attended one of those conferences, the themes of compliance and enforcement continued to be as relevant as ever. During a session on “Hot Topics in Securities Law”, the panelists provided chilling overviews of a number of enforcement actions initiated by the Securities and Exchange Commission (“SEC”) against governmental bond issuers, including government officials involved in the subject issuances. Here’s a sampling of a few enforcement actions filed this year by the SEC:

“SEC Charges Louisiana Town and Former Mayor with Fraud in Two Municipal Bond Deals”, https://www.sec.gov/news/press-release/2022-97. On June 2, 2022, the SEC charged the town of Sterlington, LA, the town’s former mayor and the municipal advisor with misleading investors in two water and sewer bond offerings from 2017 to 2018. The SEC alleged that false financial projections of anticipated sewer system revenue were created by the municipal advisor, and that the former mayor actively participated in and approved the creation of those projections. According to the SEC, the financial projections were designed to mislead investors regarding the town’s ability to pay debt service on the bonds. Among the relief requested by the government against the former mayor is the payment of a civil penalty and a permanent bar from participating in the municipal securities market. The charges against the town were made via cease-and-desist proceedings instituted before the SEC. The town submitted an Offer of Settlement, which the SEC indicated it would accept, in part due to “remedial acts undertaken by the Town relating to improvements to its internal controls and establishment of a financial oversight committee charged with, among other things, overseeing and approving any borrowing or applications for funds, and approving disbursements”. The matter against the former mayor remains pending in the United States District Court for the Western District of Louisiana.

“SEC Charges Rochester, NY and City’s Former Executives and Municipal Advisors with Misleading Investors”, https://www.sec.gov/news/press-release/2022-108. On June 14, 2022, the SEC filed two enforcement actions related to the sale of $119 million in municipal bonds by the City of Rochester, NY. The first action was filed against the City of Rochester, NY, the city’s former finance director, the city’s municipal advisory firm and two principals of the firm for allegedly violating the antifraud provisions of the federal securities laws. Following is a summary of the allegations of the complaint: On August 7, 2019, the city sold $119 million of municipal bonds (specifically, a $68,905,000 bond anticipation note and a $50,000,000 revenue anticipation note) on behalf of the Rochester City School District to provide financing for the district and city projects. The city and its former finance director told investors that $50 million of the bond proceeds “would be used to offset the effects of timing differences between cash receipts and disbursements” while the district waited to receive funding from the State of New York. Since the school district is the largest component of the city’s budget and the district was expected to repay the city the $50 million received from the revenue anticipation note, the district’s financial position was important to investors.

The city and the city’s former finance director knew the district had a large cash decline of $63 million as of the end of fiscal year 2019 (June 30, 2019). However, they did not attempt to investigate the true impact of the overspending on the district’s financial condition before the bonds were sold in August 2019. In addition, when the district’s former CFO met with the rating agency before bond sale, he represented that the district’s spending was within budget, although he also had knowledge of the overspending issue. Finally, the offering document prepared by the city, the former finance director and the city’s municipal advisor contained outdated financial statements for the district and did not disclose the distressed state of the district’s finances.

On September 18, 2019, the school district’s external auditors reported that the district overspent its fiscal year 2019 budget by $27.6 million. A downgrade of the city’s debt rating followed, the State of New York appointed a monitor over the district and provided a $35 million loan to the district. The government asked the court to order all defendants to pay civil penalties and sought to permanently enjoin the former finance director from participating in the municipal securities market. This matter is still pending in the United States District Court for the Western District of New York.

The second action was filed against the former chief financial officer of the Rochester City School District for alleged misconduct in connection with the August 7, 2019 bond sale by the City of Rochester. Following is a summary of the allegations of the complaint: The former CFO knew as early as June 2019 that the district was facing a potential budget deficit of approximately $25 million for fiscal year 2019 due to overspending. According to internal reports prepared by the former CFO’s staff and provided to him between June and July 2019, the budget shortfall was projected to be between $25 million and $50 million. Despite that knowledge, the former CFO did not share this information outside the district’s finance department. Instead, he led the rating agency to believe the fiscal year 2019 budget shortfall and the need for bond financing for fiscal year 2020 was the result of a delay in receiving expected aid from the State of New York.

The former CFO agreed to settle the charges against him, without admitting or denying any of the allegations in the complaint. A final judgment was entered against him on June 21, 2022, including an order to pay a civil penalty of $25,000 and permanently enjoining him from participating in future municipal securities offerings.

These enforcement actions should serve as a cautionary tale for parties involved in municipal securities transactions. When I work with issuers and conduit borrowers, my goal is to help clients develop a systematic compliance program that can prevent the opportunity for situations to arise that might result in an SEC investigation. Developing and implementing internal controls, policies and procedures is an important preliminary step to ensuring compliance by government issuers and officials.