WASHINGTON – The Securities and Exchange Commission on Friday announced that a subsidiary of BOK Financial Corp. that served as an indenture trustee and dissemination agent for municipal conduit bonds previously tied to securities fraud has agreed to pay more than $1.6 million to settle charges that it helped to conceal numerous problems and red flags from bondholders.
The subsidiary of the Oklahoma-based bank is BOKF NA. BOKF neither admitted nor denied the SEC's findings but agreed to disgorge $984,200 of ill-gotten gains along with interest of $83,520 and pay a penalty of $600,000.
The SEC also filed a complaint in a New Jersey federal court against former senior vice president of BOKF NA, Marrien Neilson, who the SEC is alleging was chiefly responsible for the failures. BOKF terminated Neilson on July 9, 2015.
Scott Grauer, executive vice president of BOKF NA, said that the settlement allows the company to "put this matter behind us and move forward."
"Our company has built its solid reputation by being a good corporate citizen, serving the needs of clients and communities with integrity, and never sacrificing our values in the interest of short-term results," Grauer said. "The actions of a former employee in this matter are completely contrary to our guiding principles. Our board of directors and audit committee have worked with the SEC to create policies and procedures to prevent this from happening again."
Robert Heim, a lawyer with Meyers & Heim who is representing Neilson, said his client "vigorously denies the allegations that the SEC has made and intends to defend herself in court." The SEC is seeking a jury trial in that case and is asking for a permanent injunction against future violations and a final judgment ordering Neilson to disgorge her ill-gotten gains along with interest as well as pay civil monetary penalties.
Lara Shalov Mehraban, the SEC's associate regional director for its New York office, said in a statement accompanying the announcement that "BOKF was in a crucial gatekeeper position to stand up for bondholders and notify them about material problems with the bonds, but instead turned a blind eye and chose to protect Brogdon and the fees it collected from his deals."
The charges are related to prior SEC fraud charges against Christopher Brogdon, an Atlanta-based businessman who has been in the nursing home, assisted living, and retirement community business for more than 25 years. A federal court has since ordered Brogdon to repay $85 million to investors.
The SEC found that Brogdon committed fraud through at least 43 entities he owned or controlled by falsely claiming in offering documents that investors would receive interest from the revenues generated by the projects in which they thought they were investing. Instead, he commingled investor funds and used the money for personal expenses and other personal business ventures, including restaurants and commercial real estate.
BOKF served as indenture trustee and dissemination agent for the majority of Brogdon's bond offerings since 2000 and Marrien Neilson was the employee responsible for activities related to the Brogdon bond offerings, including supervision of other responsible BOKF employees, according to the SEC.
BOKF served as the indenture trustee for 39 of Brogdon's offerings since 2000, according to the SEC. Of those 39, 17 were issued between 2007 and 2015, the relevant period for the SEC's investigation.
The Brogdon offerings typically mandated the creation of a debt service reserve fund (DSRF) that could only be used to pay principal and interest on the bonds if no other funds were available to make the required payment. If the DSRF was drawn down, the trust indentures usually required that the Brogdon-controlled borrower replenish the amount drawn down within 12 months, with equal monthly payments amounting to 1/12 of the draw down.
If the borrower failed to replenish the DSRF, that was considered an "event of default" and BOKF was required to act in the best interest of the bondholders. BOKF had the power to "proceed with any right or remedy … as it may deem best." The bondholders, if polled by BOKF, also had the right to request BOKF exercise its legal right under the indenture and, if 51% of bondholders holding at least 35% of the principal amount of bonds outstanding were in agreement, they could require BOKF to accelerate the maturity date for payment to declare all principal due immediately, according to the SEC.
Neilson and the other members of the Tulsa Corporate Trust (TCT), a business unit within BOKF which was the exclusive provider of the trustee work, interpreted the indentures to require disclosure and notification to bondholders if BOKF failed to replenish, as opposed to a draw on, the DSRF, the SEC said.
BOKF also served as a dissemination agent for at least 33 Brogdon offerings, including 14 between 2007 and 2015. The continuing disclosure agreements (CDAs) for the offerings required BOKF to file certain documents on the Municipal Securities Rulemaking Board's EMMA system if the borrower did not do so itself, including: annual financial statements; other annual or periodic financial information related to the borrower or the facility; and event notices related to the facility or the offering. Additionally, if the borrower did not provide BOKF with notice that the required documents were not being filed, BOKF was required to file a notice on EMMA "without further direction or instruction" from the borrower and "in a timely manner," the commission said.
The SEC alleges Neilson was responsible for overseeing these activities by pointing to evidence that she was: the most senior person in TCT responsible for the Brogdon offerings; the primary point of contact at BOKF for Brogdon and his associates; the person who made all key decisions related to the administration of the Brogdon offering accounts after they closed; and the person who other employees with TCT sought to approve filings of EMMA notices related to the offerings.
The SEC found that Neilson concealed problems and red flags related to the bond offerings, including that Brogdon drew down on DSRFs and failed to replenish them in the manner laid out by the trust indentures. During the relevant period, the offerings had a cumulative DSRF deficiency of between $1.1 million and nearly $4 million, according to the SEC.
She also ignored Brogdon's failure to provide or file annual financial statements on EMMA and his sending of checks on the day debt service was due or sometimes several days after the due date. The SEC found that despite BOKF's duties as dissemination agent, the practice within TCT was to avoid filing EMMA notices stating that the Brogdon-controlled borrowers had failed to file annual financial statements, a practice that diverged from non-Brogdon accounts.
Additionally, the SEC cited evidence that Neilson did not disclose that one offering, called the "Sumner offering," which Neilson served on as administrator until March 2013, had a facility serving as collateral that had been closed since 2006.
Despite problems with offerings that occurred in the earlier part of the investigation period, BOKF served as trustee for one new Brogdon offering in 2008, two new offerings in both 2009 and 2010, one new offering in 2011, five new offerings in both 2012 and 2013, and one new offering in 2014, according to the SEC.
The commission said that BOKF caused Brogdon to violate antifraud provisions of federal securities laws by making material misrepresentations to investors about his compliance with continuing disclosure and by engaging in a scheme to defraud by failing to replenish his DSRFs and concealing insufficient revenue.
The SEC said that in making its decision to accept BOKF's offer of settlement, it took into account the bank's remedial efforts, which included implementing additional policies and procedures regarding acceptance of new, unrated conduit municipal financing business and implementing automated reporting on DSRF balances for all department accounts.
