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From Securities Regulation Daily, November 21, 2017

SEC charges Long Island town, former official with municipal securities fraud

By Amy Leisinger, J.D.

The SEC has charged Oyster Bay, New York, and its former supervisor with fraud in connection with the town’s municipal securities offerings. According to the Commission, the defendants hid the fact that Oyster Bay had agreed to indirectly guarantee private loans made to the owner of several local restaurants and concession stands and did not disclose the potential financial threat to the municipality in the event of nonpayment (SEC v. Town of Oyster Bay, November 21, 2017).

In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York filed a superseding indictment for securities fraud against the supervisor.

The town and the official made an unusual decision to assist a local businessman, and investors were deprived of information necessary to fully understand the potential financial risk, said New York Regional Office Senior Associate Director Sanjay Wadhwa.

Alleged fraud. According to the SEC, between June 2010 and June 2012, Oyster Bay agreed to indirectly guarantee four private bank loans (totaling over $20 million) for a local concessionaire in connection with the individual’s longstanding relationship with town and its leaders, who received gifts, food, and services from the businessman. The defendants learned that the town could not guarantee private debt under the New York Constitution, but, at the direction of the supervisor, the town worked with outside counsel and ultimately developed a structure for the side deals they believed to be enforceable, the SEC stated. If the concessionaire had defaulted on the loans, according to the Commission, Oyster Bay would have been liable for millions in termination payments—well beyond its available resources.

The town and its supervisor intentionally drafted resolutions and concession agreements in vague terms to conceal the existence and nature of the guarantees from investors in the town’s 26 securities offerings, as well as from advisors that prepared the offerings and the town’s financial statements, the Commission alleged. When the defendants finally did disclose the guarantees, the disclosures contained materially misleading statements about their terms, including enforceability, the SEC contends.

By this conduct, the SEC alleged, Oyster Bay and the former supervisor violated the antifraud provisions of the federal securities laws. The official aided and abetted the town’s violations and is also liable as a controlling person, according to the Commission. In addition to injunctions, the SEC seeks an order requiring the town to retain a court-appointed independent consultant and prohibiting it from engaging in the offer or sale of its own municipal securities unless it implements the consultant’s recommendations. The SEC also seeks to prohibit supervisor from participating in any offering of municipal securities.

The case is No. 1:17-cv-06809.

Attorneys: Alexander M. Vasilescu for the SEC.

MainStory: TopStory Enforcement FraudManipulation MunicipalSecuritiesNews NewYorkNews

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