Appeal Denial's MCDC Implications

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WASHINGTON — A federal appeals court recently agreed with a lower court that former Miami budget director Michael Boudreaux does not have immunity from Securities and Exchange Commission charges, a decision some experts think could have implications for the SEC's Municipalities Continuing Disclosure Cooperation initiative or other enforcement actions going forward.

The U.S. Court of Appeals for the Eleventh Circuit on Sept. 5 affirmed a federal district court's dismissal of Boudreaux's claim that he was immune from SEC charges on the grounds that he was acting within the scope of his official duties when he signed off on fund transfers the SEC said were designed to mask financial shortcomings in Miami's general fund and help obtain better bond ratings. Boudreaux's attorneys argued that he was entitled to "qualified immunity" from the lawsuit, which seeks financial penalties against both Boudreaux and the city in connection with what the SEC alleges was a fraudulent 2009 bond offering. Both the city and Boudreaux have denied wrongdoing.

Qualified immunity protects government officials performing discretionary functions when their actions do not clearly violate someone's established statutory or constitutional rights. The appeals court stated in its opinion that no appeals court had previously decided whether municipal officials are entitled to qualified immunity in an SEC enforcement action, but noted that while the defense has been applied to officials brought to civil court, "there is no history at common law of civil immunities being applied as a defense to federal enforcement actions."

The U.S. District Court for the Southern District of Florida rejected Boudreaux's motion to dismiss the charges on grounds the SEC suit does not seek traditional civil damages but rather "equitable or specific relief."

"The SEC does not seek damages from Boudreaux in a private suit; rather this is a government enforcement action that seeks civil monetary penalties against the defendants," the appeals court ruled, dashing Boudreaux's hopes to escape the lawsuit before trial.

Municipal Market Advisors said earlier this week that the ruling could have implications for the SEC's MCDC initiative, which doles out reduced penalties for issuers and underwriters who self-report certain violations but offers no such safe haven for individuals.

"This is opening the door for the SEC to take further action against issuers under the MCDC program and issuers should note whether this becomes a trend," MMA said in its Monday issuer brief.

John Grugan, a partner at Ballard Spahr in Philadelphia, said that the appeals court's ruling makes clear that at least within that jurisdiction issuer officials could be exposed to personal liability even if they're not alleged to have acted outside their normal duties. That could have implications for municipalities considering self-reporting before the MCDC's Dec. 1 issuer deadline, he said.

"Entities have to be very careful about self-reporting," Grugan said, "because once you do you have implicated the conduct of individuals."

Paul Maco, a partner at Bracewell & Giuliani in Washington D.C., said that the appeals court's decision is noteworthy because it is the first time a court at this level has evaluated this question with respect to public officials in SEC enforcement cases.

"There is not a tremendous amount of precedent," Maco said.

The case against Boudreaux and Miami was put on hold earlier this year pending the results of the former budget director's appeal. The trial was originally set to begin Sept. 29.

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