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Publications Events

City of Miami and Its Former Budget Director Subjects of SEC Enforcement Action

Publisher: Day Pitney Alert
July 23, 2013
Day Pitney Author(s) Judith A. Blank

For the second time in recent history, the City of Miami, FL, is the subject of action by the Securities and Exchange Commission (the "SEC"), another sign of increased SEC enforcement activity against municipal issuers.

On Friday, July 19, 2013 the SEC filed civil charges against the City and its former Budget Director, alleging violations of the anti-fraud portions of the federal securities laws. The SEC claims, among other things, that the City made material misrepresentations and omissions in bond offering documents and in its Comprehensive Annual Financial Report concerning certain interfund transfers from its capital projects fund and special revenue funds to its General Fund, in order to "mask mounting deficits" and "falsely inflate" reserves and obtain more favorable bond ratings.

The transfers at issue took place during fiscal years 2007 through 2009, while the City reported decreasing General Fund balances due to "overspending, revenue underperformance and declines in property taxes due to the housing market correction," along with escalating pension and health care costs. The complaint alleges that in order to meet the City's financial goal of maintaining at least $100 million in General Fund reserves and to maintain its credit rating, the City's then-Budget Director convinced the City Commission and other officials to transfer more than $50 million in fiscal years 2007 through 2009 to the General Fund from capital projects funds and special revenue funds allocated for other purposes, while failing to disclose that it had not adjusted its capital projects funds and special revenue funds to reflect the transfers. Similar activity during the 1990s resulted in a cease and desist order being entered in 2003. The current complaint alleges that the 2007-2009 activity was in violation of the earlier order.

As noted above, the Miami complaint is another sign of increased SEC action against municipal issuers. In May of this year, the SEC brought a complaint against the City of South Miami, charging it with misleading investors regarding the tax-exempt status of bonds issued to finance economic development in the City. The SEC alleged that the City should have known the bonds would not comply with the provisions of federal tax law applicable to tax-exempt municipal debt and the sale of such bonds on a tax-exempt basis amounted to a violation of federal securities laws. The City of South Miami has agreed to a settlement and taken steps to improve internal controls regarding bond disclosure.

This year has also seen SEC action against the City of Harrisburg, PA, (see earlier Day Pitney alert) and the state of Illinois. In both cases, the issuers agreed to settlements.

Unlike the most recent SEC actions, here the SEC is seeking not only an order commanding the City to comply with the prior SEC order and a permanent injunction enjoining the City and its officials from violating the federal securities laws, but also civil monetary penalties from the City and the former Budget Director personally.

While the facts and circumstances of this, and every case, are unique, the takeaway applies to every municipal issuer - the SEC is continuing to increase its scrutiny of public finance disclosures. The attorneys in Day Pitney's Municipal Finance Group routinely counsel clients on proactively addressing compliance with their disclosure obligations. Please feel free to contact any of the attorneys on the right of this alert if you would like to discuss this alert or your disclosure obligations.