“If someone is really set on trying to circumvent the system … they will find ways around it,” said former MSRB chair Jay Goldstone, vice chair of a California bond accountability task force.

LOS ANGELES — A California task force formed after $1.3 million in bond proceeds was embezzled from a conduit issuer could have a draft proposal by late July, according to Fred Keeley, chair of the task force.

State Treasurer John Chiang charged the task force with developing best practice guidelines on the use of state and local bond proceeds.

"We are a little past the halfway mark," Keeley said. "When the state treasurer empowered this entity to come into existence, he was thinking it might be operational for six months."

The impetus for the task force was the embezzlement of community development district bond proceeds from a conduit bond issuer operated through the Association of Bay Area Governments.

The long-time director of financial services for ABAG's Finance Authority for Nonprofit Corporations, Clarke Howatt, is suspected of misdirecting the money from a bond account to his personal benefit.

Howatt waived his right to prosecution by indictment on Feb. 14 and consented to prosecution by information before U.S. District Judge Joseph Spero in San Francisco, according to court documents. A hearing, originally set for June 17, was moved to Aug. 26.

The parties are in negotiations on a plea agreement and the method of restitution in anticipation of a pre-trial disposition of the case, according to a June 16 filing.

Chiang and California Sen. Kevin de Leon jointly announced formation of both the task force and a special legislative committee in February. On the same day, State Controller Betty Yee said she would conduct an audit.

The Task Force on Bond Accountability drafted a mission statement in April to develop and recommend practices for public agencies to ensure that bond proceeds are used only for legal and intended purposes and that they are properly accounted for, managed, and safeguarded in a manner consistent with applicable legal requirements.

Yee released the results of her audit on June 2.

"Crucial internal control standards were not adequately followed at ABAG in its oversight of the authority," Yee said in a prepared statement. "Local governments must protect public money by ensuring that those who authorize spending are not the same people who write the checks."

Her audit found that the authority's director was authorized to release funds earmarked for developers, record the transactions, receive bank statements, and perform reconciliations.

"This is inconsistent with the principles of internal control that call for a segregation of duties so that any one person cannot both authorize spending and process the related paperwork," Yee said.

Keeley, a former Assembly Speaker Pro Tempore who retired from his position as Santa Cruz County Treasurer in January, was appointed chair of the 12-member committee in February.

The committee began with a broad scope, but has been narrowing it over the past few meetings as it hears testimony from bond industry experts on the strengths and weaknesses of how state and local governments issue bonds and disburse proceeds.

During its next meeting Friday, the committee will hear testimony on the effectiveness of bond oversight committees and then instruct staff on how to begin drafting best practices, said Jay Goldstone, the task force's vice chair, who is managing director of the Public Finance Group at Mitsubishi UFJ Financial, and former chair of the Municipal Securities Rulemaking Board.

The task force's initial scope was so broad as to encompass the issuance of every variety of municipal bond and every kind of issuer, large and small, Goldstone said.

"My sense — without prejudging the outcome too much — is that the task force thus far has heard testimony that there are not wholesale weaknesses in the system relative to the ability to defraud the system," Keeley said. "However, there could be better practices at certain points in the process."

There is no guarantee that establishing best practices will insure against future embezzlement of bond proceeds, however.

"I am not sure you can prevent it," Goldstone said. "If someone is really set on trying to circumvent the system, and they have a clear understanding of the system, they will find ways around it."

What the task force hopes to do is to make it less likely.

"It is a human enterprise and any human enterprise can be compromised or corrupted," Keeley said. "All we can do is to find the best methods of preventing and detecting; but because it is a human enterprise there is no way of creating a system that will guarantee 100% that a system will not be gamed or defrauded."

The task force is gauging whether the system is too dependent on the goodwill, good faith and honesty of the people in place and whether systemic safeguards are needed, Keeley said.

State lawmakers didn't ignore the ABAG embezzlement; the Senate Committee on Governance & Finance chaired by Robert Hertzberg, D-Los Angeles, released an oversight report titled "Misappropriated Bond Proceeds at the Association of Bay Area Governments" on May 14.

The report says some "specific policy issues are mentioned," but "the challenging work of formulating sensible and effective policies to enhance the safety of proceeds from bonds issued by California local governments is just beginning."

The committee's report was designed to "compile an accurate description, based on available information, of Clarke Howatt's alleged embezzlement of bond proceeds," but not be "comparable to any investigation being conducted by law enforcement authorities or audits being conducted by ABAG, the controller's office or any other entity."

The ABAG embezzlement was the motivational factor in forming Chiang's task force, but Keeley is careful to clarify its limits.

"The job of the task force is not to be some shadow grand jury -- or to explore in depth, or investigate, what occurred at ABAG," He said.

While the task force, legislative committee and Yee's audit all had slightly different missions, Keeley has worked closely with the heads of each effort over the course of his career. As a result, the triumvirate has an easy working relationship, he said.

He was Assembly Speaker Pro Tempore when Hertzberg was Assembly Speaker. Early in his career, Keeley, then chief of staff for state Assemblyman Sam Farr, hired Yee to her first job in a fellowship position. Farr is now a congressman.

"We are in close communication with the legislature, treasurer and the controller," Keeley said.

The task force was formed by Chiang, however, and the action ultimately taken by the task force will be up to the treasurer, Keeley said.

 

 

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