A South Carolina school district's lawsuit against its former financial advisors and bond attorneys is heading for a trial after settlement talks failed.
The Berkeley County School District filed a 10-count complaint March 6 alleging that its public finance team and former chief financial officer committed fraudulent acts against it.
The school district and attorneys for Compass Municipal Advisors, attorney Frannie Heizer and the firm of Burr & Forman LLP, which purchased the former McNair Law Firm, had hoped to resolve the allegations without further litigation.
“We certify that we have made a good faith effort to settle this case and thus far have been unable to do so,” they said in a joint motion Aug. 26, requesting that the court designate the lawsuit as “complex,” a move that would allow one judge to be assigned to hear it.
In South Carolina, multiple judges can issue rulings in a lawsuit.
“This will be a complicated case involving multiple parties and conduct spanning years,” the motion said. “The parties will benefit from having the case handled throughout by a single judge knowledgeable about the facts and background of the case.”
On Oct. 4, Judge Benjamin H. Culbertson was appointed to preside over the lawsuit.
In the case, filed in the South Carolina Court of Common Pleas for Berkeley County, the parties still must go through the discovery phase. The joint motion said the trial could take two to three weeks and that more than 55 witnesses may be called to the stand.
The district has leveled allegations of fraud, breach of contract, negligence and other charges against the finance team members and their companies when they worked with Brantley Thomas, the former CFO. Thomas is also a defendant in the March 6 suit. Court records indicate that he hasn’t responded to filings.
Thomas is in prison after stealing more than $1.15 million from the district. He pled guilty to nearly 40 state and federal charges of embezzlement, forgery, misconduct in office, breach of trust and money laundering.
The district alleges that over a period of many years, Thomas engaged in “a pervasive scheme of corruption in which he embezzled and misappropriated district funds, demanded and accepted multiple illegal kickbacks, and exposed the district to exorbitant fees and losses that have cost the taxpayers of Berkeley County millions of dollars.”
The school district contends in the complaint that it “unearthed and unraveled a complex and multi-faceted web of fraud, corruption, conspiracy, and professional negligence” involving all of the defendants.
Financial advisors Brian Nurick and Mike Gallagher and their current firm, Compass Municipal Advisors LLC, have denied all charges and called the lawsuit frivolous.
Frannie Heizer, a former bond attorney for the district when she worked for the McNair Law Firm, denied charges made against her and requested that the judge change where the case will be heard by a jury.
Burr & Forman, where Heizer currently is a partner, filed a motion to dismiss the complaint because the firm contends it never represented the district. Burr said it was never known as the McNair Law Firm and didn’t employ Heizer when the alleged offenses occurred.
Burr also said “it didn’t acquire the alleged liability” of McNair when it acquired the firm on Jan. 1.
Texas-based Hilltop Securities was dismissed from the case earlier this year.
On April 30, the school board accepted a settlement and $822,966 from Hilltop even though the firm never served as a vendor to the district.
Nurick and Gallagher worked at Southwest Securities when they advised the school district from January 2012 through November 2014. In 2015, Southwest Securities and First Southwest Co. merged and became Hilltop Securities.
The district’s lawsuit contends that municipal bond professionals neglected their fiduciary duties, and that bond proceeds were misspent.
“These professional advisors, charged with duties of loyalty and good faith, should have served as a firewall to shield the district from Thomas’ corruption,” the suit said. “Instead, they abandoned their fiduciary duties in exchange for access to millions of dollars in public funds for their personal gain, all at the expense of the district and the taxpayers of Berkeley County.”
The district contends that Thomas and the financial advisors violated South Carolina’s Ethics Act because they failed to disclose that Gallagher was Thomas’ former brother-in-law.
According to the suit, Nurick and Gallagher created the South Carolina Association of Governmental Organizations, or SCAGO, as a pool bond conduit issuer to promote financing and investment opportunities.
The district said it was told by the FAs that SCAGO membership would save on bond issuance costs, but the savings didn’t materialize “because Compass charged more costs to the pooled services than was appropriate for such transactions.”
The FAs, through SCAGO, also “inappropriately charged the district for unnecessary and extravagant junkets, including trips to New York City, by passing the costs of those trips to the taxpayers of Berkeley County and other districts,” the complaint said.
The financial advisor defendants interviewed bank executives for bond issues in New York City, when it was more appropriate to do so where the banks were located in Charlotte, North Carolina, the suit alleged.
The district also contends that it was forced to issue $30.8 million in taxable bonds costing more than $1 million in higher interest rates and a loss of a bond premium because bond counsel and the FAs “knew or should have known that a reimbursement resolution or some other mechanism was required under federal tax law to allow the debt to remain tax-exempt.”
The district said it was necessary to issue taxable debt to conceal project cost overruns, misappropriation of funds by the CFO and the lack of a reimbursement resolution.
The case against the FAs and bond counsel developed through the investigation of Thomas, which began in early fiscal 2017, according to disclosures in the district’s 2017 and 2018 audits. Thomas, who became CFO in 2008, was fired Feb. 26, 2017.
A number of motions are pending in the suit, including the district’s motion for a protective order in an attempt to prevent discovery from being taken of its expert witness, bond attorney Brenton D. Jeffcoat.
The school district has requested a jury trial and is seeking $50 million and trebled damages, plus punitive damages and legal fees.
In the wake of the Thomas investigation, the school district also filed a malpractice lawsuit against its former auditors, Greene Finney & Horton of Greenville, in November 2018. The firm audited the district’s books from 1999 until 2016, giving clean opinions during those years.
The suit contends that auditors “failed to detect millions of dollars in fraudulent or inappropriate transactions that were evidenced in the financial system and bank statements.”
Charges in the eight-count suit against Greene Finney include negligence, breach of contract, conspiracy, unjust enrichment, fraud, and aiding and abetting a breach of fiduciary duty.
On Feb. 28, Judge Perry M. Buckner III denied motions by Greene Finney to dismiss some of the charges made in the district’s complaint.
The case has made little progress since then, although court records indicate that the district and Greene Finney were to undergo an alternative dispute resolution process to potentially negotiate a settlement.
The district is based in Moncks Corner, about 30 miles north of Charleston. It had $570.1 million of general obligation and revenue bonds outstanding as of June 30, 2018.
The GOs have unenhanced ratings of Aa2 from Moody's Investors Service and are rated AA by S&P Global Ratings. Both assign stable outlooks.
