BRADENTON, Fla. – Miami told bondholders it will dispute Securities and Exchange Commission allegations of securities fraud against the city and former budget director Michael Boudreaux.
“The city intends to vigorously defend against such charges and has not changed its position stated in prior material event notices filed on this subject matter,” Miami said in a material event notice filed late Wednesday with the Municipal Rulemaking Securities Board’s EMMA system.
The SEC filed a lawsuit July 19 charging Miami and Boudreaux with three counts of securities fraud for making “numerous material misrepresentations and omissions to investors” in 2009 bond offering documents and financial statements about inter-fund budget transfers that were designed to “mask” a deficit in the city’s general fund.
The suit contains an additional count against Boudreaux for aiding and abetting the city’s violation of Section 10(b) of the Exchange Act and Rule 10b-5, which pertain the securities fraud and disclosures. It also includes a count for violating a cease and desist order Miami signed in 2003 for similar disclosure problems, the first time the SEC has charged a city for violating such prior orders.
In a three-page response to the suit posted on the city’s website, Miami Mayor Tomas Regalado called the SEC’s charges and allegations “unfounded” and “baseless.”
Regalado claimed the city disclosed all relevant information, and said that rating agencies were aware of the budget situation, and that the transfers were reviewed and approved by the city’s outside auditors, McGladrey & Pullen LLP.
McGladrey doesn’t comment on client matters, public relations director Terri Andrews said.
Mentioning the auditors early in the case is a “standard defense,” said Thomas Tew, a partner at Miami-based Tew Cardenas LLP. “The question is always whether the auditors were given a complete discussion of the facts.”
Tew represented the city in its previous run-in with the SEC in 1999 when the agency cited Miami for misleading investors in documents for three bond issues sold in 1995 and in secondary market disclosure documents about the city’s then-deteriorating financial condition.
Miami spent years appealing SEC rulings until new elected officials leading the city decided to end the legal challenge.
The SEC did not seek a financial penalty at that time. However, the agency is seeking civil penalties in the current suit from the city and the former budget director.
In 1997, the city filed a lawsuit against Deloitte & Touche LLP, which performed the city’s audits from 1989 to 1995 – the critical years leading to Miami’s budget meltdown and appointment of a financial oversight panel by the governor.
The lawsuit was settled in 2002 with Deloitte paying the city $1.9 million.
Tew said that he had not seen Regalado’s comments with regard to the current SEC suit, though he did say that he consulted with attorneys for Boudreaux.
Also on Wednesday, Standard & Poor’s issued a statement saying that its long-term ratings on Miami’s bonds will not immediately be affected by the SEC’s suit.
S&P rates the city’s general obligation bonds BBB with a negative outlook.
“We will continue to follow the progress of the complaint and the city’s legal response,” said analyst Le T Quach. “However, we believe downward pressure exists, and the negative outlook reflects our view of this ongoing issue as well as other downward pressures on the ratings, including Miami’s decreasing revenues, low financial position, and continued fixed cost pressures.”
On Thursday, Moody's Investors Service said the SEC's complaint is "a credit negative event that could result in significant financial penalties." Moody's assigns an A2 rating to the city's GOs along with a negative outlook.