How Miami and Boudreaux Are Challenging SEC Fraud Charges

WASHINGTON – The Securities and Exchange Commission and Miami have each asked a federal judge in Florida to rule in their favor before a trial can be held over the SEC's fraud charges against the city and a former city official.

The competing motions for summary judgment are part of a multi-year case the SEC first brought in 2013 against Miami and Michael Boudreaux, the city's former budget director.

The commission charges that Miami and Boudreaux released official documents with materially false and misleading statements and omissions concerning inter-fund transfers that masked the deterioration of the city's general fund for fiscal years ending on Sept. 30 of 2007 and 2008.

The alleged omissions and misrepresentations were made in: bond offering documents for three offerings in 2009 that totaled $153.5 million; presentations to bond rating agencies; and the city's comprehensive annual financial reports (CAFRs) for fiscal years 2007 and 2008, according to the SEC.

In its motion for summary judgment, the SEC lays out what it calls undisputed facts that demonstrate ten material misrepresentations and omissions that drove the city and Boudreaux's "scheme." Most of the facts relate to transfers the city made between its capital projects fund and its general fund to boost the general fund holdings.

The city disclosed those transfers in each of their CAFRs and official statements, but, according to the SEC, the defendants said the transfers contained money that was not expended and was being returned to the general fund. In reality, that money had already been pledged to several ongoing capital projects and some of it was restricted by the city code for designated purposes and not the general fund, the SEC lawyers said. Thus, the funds that were transferred should not have been considered unallocated, they said.

Boudreaux and the city allegedly made similar false representations to credit rating agencies, according to the SEC.

The commission's motion acknowledges that Boudreaux has a remaining affirmative defense that he relied on the advice of auditors with the city's accounting firm as well as other city officials in his decision-making.

"The court should grant summary judgment if [the SEC] establishes there is no genuine issue of material fact, and therefore is entitled to judgment as a matter of law," the SEC lawyers wrote. "Here, the commission's statement of undisputed material facts and the law in this memorandum yield only one reasonable conclusion: the defendants committed the violations of the federal securities laws the complaint alleges."

The commission asks the judge for an order that would: command the city to comply with a prior cease-and-desist order from 2003 that resulted from an earlier securities fraud case; find that Boudreaux and the city cannot meet the burdens for the affirmative defense; enter an injunction against Boudreaux and the city from future violations of laws against securities fraud; and require the two defendants to pay an unspecified amount of civil penalties.

Lawyers for the city and Boudreaux are arguing that even after seven years of investigation and litigation, the SEC still does not have evidence to support those claims.

"The SEC … cannot present any evidence that anyone profited or that any investors were misled or suffered any harm from the alleged misrepresentations and omissions," they argue in their motion for summary judgment.

The lawyers said no commission claims can be based on the 2007 CAFR, which identified a $13.1 million transfer from the capital projects fund, because it was not incorporated into any of the three 2009 bond offerings cited in the complaint. The lawyers also said there is "not a single scintilla of evidence that the defendants made assertions in the 2007 CAFR in a manner that was reasonably calculated to influence the investing public."

They argued that the 2008 CAFR did not have any misrepresentations as it "provided extensive information regarding the purposes of the three [fiscal year] 2008 inter-fund transfers and the circumstances under which they were made." The three transfers amounted to roughly $34 million and were made from the capital projects fund and a special revenue fund to bolster the general fund.

The defendants' lawyers also said that the SEC's argument that transferred funds were not "unused" is flawed because there is no evidence that: the city had to make payments; there was a specified time when those payments would have to be made; or the city could not use other available funding sources for the projects.

"Any reader of the 2008 CAFR … knew precisely what the city was doing and why it was doing so," the lawyers wrote. "There is no false statement upon which any claim can be based, let alone fraud."

In regard to materiality, the lawyers accuse the SEC of trying to hold their clients, who they say followed Governmental Account Standards Board and other recognized requirements, to a higher standard "which simply does not exist." They also argue that the rating agencies that eventually made determinations based on the information the city provided took "a much more sophisticated, nuanced, and holistic view of the city's finances" than just looking at the fund transfers.

Additionally, the city's 2003 cease-and-desist order related to prior securities fraud charges did not involve the same type of transfers as are being considered in this case and should be considered irrelevant, the defendant's lawyers said.

The lawyers also said Boudreaux can show that he relied in good faith on the advice of professionals as there is undisputed evidence that he preemptively ran his transfer ideas past an accounting firm representative who, after the presentation, "was completely satisfied with … Boudreaux's recommendation."

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