WASHINGTON — In parallel actions on Thursday, the Securities and Exchange Commission and the U.S. District Attorney for the Southern District of New York filed civil and criminal charges against Ramapo, N.Y. officials for misleading investors in connection with bonds, some of which were issued to finance a minor league baseball stadium.
The SEC and U.S. attorney allege the town and an authority issued bonds, in one case over the objections of residents, and then misled investors and credit rating agencies by fabricating information to show their finances were in good condition when they were not.
For the Justice Department, this was a first-of-a-kind criminal case. The indictment obtained by U.S. attorney Preet Brahara included 22 counts of wire fraud, securities fraud and conspiracy to commit securities fraud against Christopher St. Lawrence, supervisor and director of finance of the town, as well as president of the RLDC, and Aaron Troodler, the former executive director of the Ramapo Local Development Corp, which issued the bonds.
Until now, the department has mostly been involved in antitrust cases over bid-rigging of investments in the muni market.
The SEC filed civil securities fraud charges in the U.S. District Court of the Southern District of New York in Manhattan against the town of Ramapo, the RLDC, and four town officials. Besides St. Lawrence and Troodler, it charged Michael Klein, a town attorney, and Nathan Oberman, the town's deputy finance director.
The SEC is seeking an unspecified amount of civil penalties and has asked the court to bar all four individuals from the muni market.
The commission has also asked the court to require Ramapo and the RLDC to retain a court-appointed independent consultant, an independent auditing firm acceptable to the commission staff, and, if either want to issue munis, an independent disclosure council also acceptable to the staff. These conditions are to be in place for five years, the SEC said.
St. Lawrence was arrested Thursday morning and Troodler was expected to surrender to authorities later in the day.
The SEC's complaint, which mirrors much of the indictment obtained by the U.S. attorney, alleges the town, the RLDC, and the four former and current officials used fraud to hide the strain in Ramapo's finances related to 16 muni securities offerings made between September 2010 and September 2015 and to prevent further political fallout from the baseball stadium project. Fourteen of the offerings were from the town. Two others were from the RLDC but were guaranteed by the town and were related to the baseball stadium.
The SEC found that each of the individual defendants either knowingly or negligently engaged in the fraud.
Lawyers for the defendants either would not comment or could not be reached for comment.
"Retail investors account for more than 75% of the $3.7 trillion municipal bond market, which is critical for our nation's infrastructure and development," said Andrew Ceresney, director of the SEC's enforcement division. "We won't stand for public officials and employees who resort to alleged accounting trickery to mislead investors who are investing in their financial futures as well as the future betterment of our communities."
Bharara, during a Thursday press conference in New York City, said "Christopher St. Lawrence and Aaron Troodler kicked truth and transparency to the curb. They defrauded both the citizens of Ramapo and thousands of municipal bond investors."
Most of the fraudulent activity was designed to conceal the town's deteriorating general fund, which faced deficits ranging between $250,000 and $14 million between the town's fiscal years 2009 and 2014, according to the SEC. The defendants, through a series of fabricated receivables over that time period, were able to make it look like the fund actually had positive balances of between $1.4 million and $4.1 million.
The SEC cites as one prominent example of fraud when St. Lawrence, with the help of Oberman, misled a credit rating agency about the town's general fund balance before some of the issued bonds were rated.
St. Lawrence told the credit rating agency on a phone call in January 2013, where Oberman was present, that Ramapo experienced "increased fund balances across the board, and had a stable balance in the general fund" for fiscal year 2012, according to the SEC.
Immediately after the call, St. Lawrence said to Ramapo officials, "Listen I'm going to tell you this right now. We need to do this [upcoming] refinancing of the short term [RLDC] debt as fast as possible, because ... we're going to have to all be magicians to get to some of those numbers."
The propping up of the general fund was done using fraudulent receivables, starting with $3.08 million to plug a hole in the town's fiscal year 2009 financial statements. The money was supposed to have come from the sale of a 13.7 acre parcel of land known as the Hamlets to the RLDC. That land was never transferred to the RLDC, in part because it was a habitat for timber rattlesnakes and state environmental officials wanted to conduct a two-year study of it. Nevertheless, the sale was reported in official statements and placement memoranda for 14 Ramapo offerings during the complaint's relevant time period. The town's auditors forced St. Lawrence and the defendants to reduce the stated amount to $2.5 million in fiscal year 2014.
The defendants also disguised the property donated for the baseball stadium as a $3.66 million transaction in August 2010, even though Troodler and St. Lawrence knew there was no payment obligation from the RLDC on that transaction. Klein and others fraudulently reported that they were going to receive $3.1 million and $314,000 during that time from land transactions when they weren't. In addition, they failed to disclose liabilities, mostly legal fees.
Additionally, Oberman participated in a scheme to inflate the general fund by directing improper transfers from the town's ambulance fund to the general fund totaling $12.4 million between fiscal years 2009 and 2014.
The alleged fraudulent actions also involved the baseball stadium, which the town pursued despite a referendum in August 2010 where 70% of voters disapproved the bonds. The town board went ahead with the project using bonds with a five-year maturity schedule, short enough to avoid the referendum requirement.
The final official statement said the $25 million of bonds, coupled with $14 million from the town, would be enough to finance the stadium. In reality, the stadium development cost $60 million, most of which was financed with Ramapo general obligation bonds that were unrelated to the stadium.
St. Lawrence and Troodler concealed the extra costs from bondholders, and the RLDC's inability to repay the bonds, both in the initial offering and when the bonds were refinanced in 2013.
Ultimately, the SEC found that St. Lawrence and Troodler are liable as controlling persons for the securities law violations of the RLDC and St. Lawrence was liable for the violations of the town. Additionally, St. Lawrence, Troodler, Klein, Oberman, and the RLDC aided and abetted the violations of the town, while St. Lawrence, Troodler, Klein, Oberman, and the town aided and abetted the violations of the RLDC.
Andrew Coen contributed to this story.
