WASHINGTON, July 29 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.
MORE MUNICIPAL MARKET SCRUTINY
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