Miami Weighs $1 Million Settlement for SEC Suit

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BRADENTON, Fla. – The city of Miami will consider paying $1 million to settle a lawsuit brought by the Securities and Exchange Commission.

If city commissioners agree to the payment at their Oct. 13 meeting, it would be the largest civil penalty ever imposed against a municipality for violating securities laws.

In addition to the $1 million, Miami would agree to a final judgment in the suit that includes an injunction against committing future securities law violations.

According to a resolution before commissioners next week, City Attorney Victoria Mendez said her office investigated claims made by the SEC, and recommended that the lawsuit be settled.

Mendez and other city officials did not respond to requests for comment Wednesday, amid preparations for Hurricane Matthew.

"I think that many, many market participants expected a severe penalty, and this is definitely a severe penalty," said Robert Doty, president of the municipal securities litigation consulting firm AGFS. "This demonstrates once again that the commission has become very serious about enforcing securities laws against municipal issuers."

A federal jury found Miami and its former budget director, Michael Boudreaux, guilty on Sept. 14 of defrauding investors by not disclosing the city's true financial picture in connection with three bond offerings in 2009.

Boudreaux has not reached a settlement with the SEC, said his attorney, Benedict Kuehne in Miami.

Boudreaux was found guilty on three of four counts involving violations of the Securities Act and Rule 10 of the Exchange act, and was exonerated on one count of fraud in Violation of Section 17(a)(1) of the Securities Act.

Kuehne said Boudreaux is pleased that the jury found him "not responsible for the principal allegation of securities fraud in Count 1, and intends to challenge the validity of the remaining lesser counts."

"Because he acted as a responsible member of the city of Miami at all times, following existing protocol and practices, he remains confident he will be fully cleared and able to restore his good name," Kuehne said.

The judge in the federal suit has ordered the SEC to file its request for relief by Oct. 28.

Miami is the first municipality to ever violate an existing SEC cease-and-desist order, which was finalized after an appeal in 2003 that stemmed from the city's failure to disclose its deteriorating financial condition in three bond offerings in 1995.

Miami's penalty, if approved by City Commissioners, is a "serious warning" to other issuers that have cease and desist orders against them, including 71 issuers that agreed to such orders pursuance to the SEC's Municipalities Continuing Disclosure Cooperation initiative, and issuers that entered settlements with the commission, Doty said.

"This is a significant warning to be very careful in the future," he said.

Miami's fine would be eight times larger than the $125,000 penalty the SEC imposed against the Fresno, Calif.-based Westlands Water District in March.

In Westlands, the agricultural district and two officials were charged with misleading investors about the district's financial condition when it issued $77 million of bonds in 2012. They agreed to cease-and-desist orders without admitting or denying the charges.

The SEC had never collected a civil penalty against a municipality until November 2013, when the agency imposed a $20,000 penalty against the Greater Wenatchee Regional Events Center Public Facilities District in Wenatchee, Wash.

The Wenatchee district defaulted on $41.77 million in bond anticipation notes issued in 2008 to finance a multi-use arena and ice hockey rink, though the default was later cured though the issuance of sales tax revenue bonds.

The SEC said the official statement for the Wenatchee bonds wrongly stated there had been no independent reviews of the financial projections for the center, when there had been, and that the OS failed to disclose that the financial projections were revised upward based on optimistic assurances by civic leaders that the community would support the project.

The Westlands and Wenatchee cases underscore to a key aspect concerning the sanctions Miami will pay, according to Doty.

Both Westlands and Wenatchee paid SEC fines from their respective district revenues, not from taxes as will be the case in Miami, he said.

"The civil penalty is significant because it's eight times the prior highest amount and it's payable by a general purpose government, therefore from taxes," Doty said. "Both of those are firsts."

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