WASHINGTON — Miami and its former budget director Michael Boudreaux are urging a federal district court to dismiss the securities fraud charges the Securities and Exchange Commission filed against them in July for disclosure failures.
The SEC has until Nov. 8 to respond to motions filed by both defendants, who are arguing that its case against them is flawed.
Miami’s brief, filed with the U.S. District Court for the Southern District of Florida, attacks the SEC lawsuit for failing to connect alleged misrepresentations and omissions about the city’s budget to the sale of the 2009 bonds specified in the complaint. Boudreaux’s motion argues that he is entitled to immunity from the suit because he was a city employee carrying out basic functions and was not acting alone or profiting by the alleged misconduct.
The SEC suit against Miami charges it with three counts of securities fraud for making “numerous material misrepresentations and omissions to investors” in 2009 bond offering documents and financial statements over interfund budget transfers allegedly designed to “mask” a deficit in the city’s general fund.
The SEC is seeking financial penalties from the city, a rare measure against a municipality. Miami, already under a cease and desist order from a previous muni case, denies wrongdoing and vows to “vigorously defend” itself in court. The SEC claims that Boudreaux, who was fired in 2010 and now lives in New Orleans, proposed fund transfers that improperly appropriated money, which prevented the city from meeting its legally-required reserve of 20% of annual revenue.
The city is urging Judge Cecilia Altonaga to dismiss the case with prejudice, so the SEC could not file the claim again.
“The SEC’s failures are not a matter of deficient pleading potentially rectified through an amended filing, nor are they matters more properly before the court on summary judgment,” Miami’s defense team from Cole, Scott & Kissane, P.A. told her. “At this point, after over four years of protracted investigation pre-suit, the SEC lacks any sufficient factual basis to support its general allegations of fraud, which cannot be corrected by motion practice. The complaint should be dismissed, and judicial economy warrants dismissal with prejudice.”
The city claims the SEC’s allegations of misleading documents from 2007 and 2008 are not material because the SEC complaint never drew a direct line between those documents and the 2009 offering.
“If the purportedly false information is not material to the investor, it is not material to the SEC,” Miami told the judge. The SEC has also not identified any high-ranking city employees in the complaint, instead attempting to “draw inference upon inference to improperly impute the state of mind of Mr. Boudreaux to the city itself,” the motion states. Further, even if the case proceeds, Miami argues that the securities laws at issue do not provide for the civil monetary penalties the SEC is seeking.
Boudreaux’s motion, filed by his attorney Benedict P. Kuehne, argues that the SEC never alleged that Boudreaux was acting outside his authority or on his own initiative, so that he cannot be personally liable for the alleged fraud. Securities lawyers have said that the SEC’s decision to personally charge Boudreaux, a rare occurrence in a muni fraud case, is a signal that SEC commissioners and chairman Mary Jo White are serious about their vows to crack down on individuals responsible for fraudulent actions.
“Because Boudreaux was acting within the scope of his official responsibilities, he is entitled to qualified immunity from liability,” Boudreaux’s lawyer argues. “Accordingly, the complaint should be dismissed against him.”
Boudreaux’s “qualified immunity” defense is rooted in common law, but his motion warns that this defense is only an immunity from the suit and not from liability. He would have liability if the judge allows the trial to proceed, the motion states. While the qualified immunity defense has been most frequently applied to civil rights cases, which the motion cites, it applies in this case because Congress has not passed laws barring it, Kuehne says.
“These decisions all uniformly recognize that common law qualified immunity is the presumed position to protect public officials from having their official conduct challenged, such that Congress must specifically abrogate the defense in specific causes of action in order to eliminate its application,” Kuehne concludes.
A mediation date has been set for the middle of next year, but participants in the case have said a mediation hearing is required and is not an indication that the SEC is moving towards an out-of-court settlement with either Miami or Boudreaux. A two-week window for trial has already been set beginning Sept. 29 of next year.