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From Securities Regulation Daily, December 30, 2013

SEC's fraud case over Miami bond issuance survives motion to dismiss

By Rodney F. Tonkovic, J.D.

A district court has found that the SEC has adequately alleged that the City of Miami, Florida (Miami) violated the securities laws in connection with a bond offering. The Commission alleged that Miami violated the antifraud provisions of the securities law in connection with three bonds issued in 2009. The court denied Miami's motion to dismiss (SEC v. City of Miami, Florida, December 27, 2013, Altonaga, C.).

Allegations. In 2003, the Commission issued a cease-and-desist order against Miami in connection with an issuance of bonds in 1995. The SEC claims that Miami has again violated the same securities laws in connection with three bonds issued in 2009. The action was brought against the city and its former budget director, Michael Boudreaux.

On three occasions in 2009, Miami issued $51 million in uninsured Limited Ad Valorem Tax Bonds, $37 million in uninsured Non Ad Valorem Revenue Refunding Taxable Pension Bonds, and $65 million in uninsured Special Obligation Bonds. These bond offerings contained excerpts from Miami's 2008 Comprehensive Annual Financial Report (CAFR) as well as antifraud certifications. The bond offerings were given favorable ratings by the ratings agencies.

When issued to the investing public, Miami's 2008 CAFR contained material misrepresentations and omissions concerning over $24 million of transfers to Miami's General Fund. In drafting these disclosures, parts of which were used in the bond offerings at issue, Miami relied on information supplied by Boudreaux.

The transferred funds, however, included money restricted by the City Code for designated purposes. If those funds had not been transferred, Miami would have been required by law to replenish its General Fund reserves within two fiscal years. The transfers were devised by Boudreaux as part of a scheme to help Miami obtain positive bond ratings, and Boudreaux was alleged to have made false statements to the ratings agencies regarding Miami's projected operating deficit.

Miami's finance director warned Boudreaux that the transfer of funds to the General Fund would be a "shell game" if they had to be returned to the Capital Projects Funds from whence they came. In 2010, the transfers were determined to be improper and were reversed. When this was disclosed in Miami's 2009 CAFR, the ratings agencies lowered their ratings on Miami's bonds and issued a negative outlook.

According to the Commission, Boudreaux was responsible for all of the transfers and misrepresented their true nature during meetings with the public and with city officials. The Commission alleged further that Boudreaux knowingly furnished materially false and misleading information that was included in Miami's filings and was relied on in preparing the CAFRs. Boudreaux's conduct violated the antifraud provisions of the Securities Act and the Exchange Act, the Commission asserted. The Commission seeks a cease-and-desist order and a declaration that the defendants have violated the federal securities laws.

Misrepresentations. The court first found that the complaint properly alleged a false or misleading statement. Miami argued that the factual allegations were unconnected to any of the claims, i.e., that the complaint was a "shotgun pleading." The court was unconvinced, stating that it had no difficulty in reviewing that sufficiency of each count of the complaint and that Miami pointed to no uncertainties in how to interpret or apply the factual allegations. Making the SEC re-plead its complaint would be inefficient, and would only add delay and expense, the court added. Overall, the court found that the complaint "satisfies the who, what, when, where, and why of Rule 9(b)."

Materiality. Next, the court determined that the alleged misrepresentations and omissions were material. Miami argued that the 2008 CAFR clearly showed that it was merely transferring money between its own accounts, that the ratings agencies knew this, and that there was no duty to disclose anything more. The court accepted the SEC’s contention that Boudreaux's manipulations were qualitatively material, increasing the General Fund by 35 percent, as well as qualitatively material because they involved the improper use of restricted funds.

Scienter. Miami argued the complaint at best showed that Boudreaux acted with scienter, but he was a "low-level employee" whose scienter could not be imputed to the city. Given the evidence supplied in organizational charts, the court declined to conclude at the motion to dismiss stage that Miami's "Budget Director was not a high ranking employee capable of having his scienter imputed to the City." As to Miami's scienter, the court, attributing Boudreaux's scienter to the city and looking at the allegations holistically, found that scienter was properly alleged.

Sanctions. Finally, the court declined to dismiss the SEC's claim for civil penalties. Miami maintained that municipalities are immune from punitive damages under the common law. The court was not persuaded and wrote that civil penalties, which serve as a disincentive to violations of the securities laws, do not serve the same goals as punitive damages.

The case is No. 13-22600.

Attorneys: Amie Riggle Berlin for the SEC. Brian A Dominguez (Cole, Scott and Kissane, P.A.) for the City of Miami. Benedict P. Kuehne (Law Office of Benedict P. Kuehne, P.A.) for Michael Boudreaux.

MainStory: TopStory Enforcement FraudManipulation FloridaNews

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