WASHINGTON — A federal judge ruled that the Securities and Exchange Commission's fraud case against Miami, Fla. and its former budget director can continue in civil court, denying both defendants' motions to dismiss.

U.S. District Judge Cecilia Altonaga issued her rulings Dec. 27 in the U.S. District Court for the Southern District of Florida.Miami and ex-budget director Michael Boudreaux are contesting an SEC suit that charges the city with securities fraud for making "numerous material misrepresentations and omissions to investors" in 2009 bond offering documents, The suit charges Boudreaux with orchestrating misleading interfund transfers designed to mask a deficit in the city's general fund.

Both defendants have denied wrongdoing. The city had motioned for dismissal on the grounds that the SEC suit fails to "connect the dots" to false and misleading statements and relies on information the city claims is not material to the disputed documents. Boudreaux's lawyers argued that he is immune from suit because he was functioning in his official duties.

Altonaga rejected the defendants' arguments in her two orders dismissing the motions. Regarding the city's first claim, Altonaga decided the SEC had satisfactorily alleged falsity enough to satisfy the anti-fraud provisions in federal law.

"While the city recasts the Complaint as the SEC believing the city should have stated more explicitly "it was transferring money to improve the general fund's balance," this is not what the SEC complains of when it addresses the transfer of expended or restricted funds not disclosed as such in the information the city disseminated," Altonaga wrote.

Altonaga was more sympathetic to the city's claims that false data in its 2008 financial documents were not material considerations to investors in the 2009 bonds. The judge noted that previous rulings have determined that a court should not dismiss a complaint on the ground that statements or omissions are immaterial, "unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance."

Altonaga ruled that because the legal standard applicable in this proceeding requires her to view the allegations in a light favorable to the SEC, the motion to dismiss narrowly failed on the materiality question.

"There is just enough in the complaint to prevent the court from finding the information 'so unimportant that reasonable minds could not differ' as to its materiality," she wrote.

Altonaga also struck down the city's motion to dismiss the SEC's request to impose a financial penalty on Miami, a rare step in an enforcement action against a municipality but one experts have said may become more common in certain circumstances. Altonaga rejected Boudreaux's argument that he is entitled to "qualified immunity," noting a legal distinction between monetary damages and the type of civil penalty the commission seeks. While Boudreaux would have been shielded from a suit seeking damages, Altonaga said precedent makes clear that doesn't apply here, where the money the SEC seeks would be more accurately termed "equitable or specific relief."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.