Financial advisors, bond counsel deny charges in South Carolina school suit
A South Carolina school district’s lawsuit alleging that its financial advisors and bond attorneys participated in fraudulent activities with the district’s chief financial officer should be dismissed, defendants say.
Five individuals and firms filed motions in the case, including a request for a change of venue, in response to the suit filed by the Berkeley County School District in the South Carolina Court of Common Pleas for Berkeley County on March 6.
The 45-page complaint levels allegations of fraud against finance team members and their companies when they worked with Brantley Thomas, the former CFO.Thomas is in jail for stealing more than $1 million from the district after pleading guilty to nearly 40 state and federal charges of embezzlement, forgery, misconduct in office, breach of trust and money laundering. Thomas is also a defendant in the March 6 suit.
The school district contends in the suit that it “unearthed and unraveled a complex and multi-faceted web of fraud, corruption, conspiracy, and professional negligence…involving all of the defendants,” a scheme that was concealed for years.
Financial advisors Brian Nurick and Mike Gallagher and their current firm, Compass Municipal Advisors LLC, responded in court documents filed May 3, denying all allegations and calling the lawsuit frivolous.
“Plaintiff’s filing of the subject action was, and is, intended to harass and/or injure defendant Compass and is frivolous as that term is defined in the South Carolina Frivolous Civil Proceedings Sanctions Act,” said attorneys for Compass, who filed similarly worded responses on behalf of Nurick and Gallagher.
If the claims and the suit aren’t dismissed immediately, the defendants warned that they may take action against the district.
“Plaintiff is placed on notice that defendant Compass may pursue all remedies including, but not limited to, damages, attorneys’ fees and costs,” said the filings.
Nurick and Gallagher worked at Southwest Securities when they advised the school district from January 2012 through November 2014.
In 2015, Southwest Securities and First Southwest Co. merged and became Hilltop Securities, a Texas-based financial services company. Hilltop was also named as a defendant in the Berkeley County School District’s suit.
Even though Hilltop never served as a vendor to the district, the firm agreed to pay $822,966 to settle its case. The amount represents the fees received by Nurick and Gallagher when they advised the school district from 2012 to 2014.
On April 30, the school board accepted the settlement and two days later, Hilltop was dismissed from the lawsuit.
“Resolving this matter now with a disgorgement of fees serves everyone’s interest as we can put this matter behind us,” Hilltop spokesman Ben Brooks said May 1. “The resolution of this case affirms that there is no admission of wrongdoing or liability.”
Frannie Heizer, a former bond attorney for the district when she worked for the McNair Law Firm, denied charges made against her and requested that the judge change where the case will be heard by a jury.
“Because of the substantial prejudice defendants may be subjected to being judged by a jury comprised of Berkeley County residents…Heizer respectfully shows to the court that the ends of justice and the convenience of witnesses would be promoted by a change of venue for all further proceedings and for trial,” Heizer’s attorney said in a May 8 filing.
Heizer also moved to dismiss the suit because of what she said is a “defective” affidavit filed on behalf of the district with its complaint.
Burr & Forman LLP, where Heizer currently is a partner, filed a motion to dismiss the complaint because the firm contends it never represented the district. Burr said it was never known as The McNair Law Firm and didn’t employ Heizer when the alleged offenses occurred.
Burr also said “it didn’t acquire the alleged liability” of McNair when it acquired the firm on Jan. 1.
The district’s suit contends that the municipal bond professionals neglected their fiduciary duties.
“These professional advisors, charged with duties of loyalty and good faith, should have served as a firewall to shield the district from Thomas’ corruption,” the suit said. “Instead, they abandoned their fiduciary duties in exchange for access to millions of dollars in public funds for their personal gain, all at the expense of the district and the taxpayers of Berkeley County.”
In one count of fraud, the district contends that Thomas and the financial advisors violated South Carolina’s Ethics Act because they failed to disclose that Gallagher was Thomas’ former brother-in-law.
The district also alleges that it was forced to issue $30.8 million in taxable bonds, costing more than $1 million in higher interest rates and a loss of a bond premium, because bond counsel and the FAs “knew or should have known that a reimbursement resolution or some other mechanism was required under federal tax law to allow the debt to remain tax-exempt.”
The taxable debt was necessary, the district said, to conceal project cost overruns and misappropriation of funds by the CFO, in addition to the lack of a reimbursement resolution.
According to the suit, Nurick and Gallagher created the South Carolina Association of Governmental Organizations, or SCAGO, as a pool bond conduit issuer to promote financing and investment opportunities. The district said it was told by the FAs that SCAGO membership would save on bond issuance costs. The savings didn’t materialize “because Compass charged more costs to the pooled services than was appropriate for such transactions.”
The FAs, through SCAGO, also “inappropriately charged the district for unnecessary and extravagant junkets, including trips to New York City, by passing the costs of those trips to the taxpayers of Berkeley County and other districts,” the complaint said.
“The financial advisor defendants interviewed bank executives for issuance of bonds in New York City, when it was more appropriate to do so in Charlotte, North Carolina, where the banks were actually located,” the suit alleged. “To conduct those interviews, the financial advisor defendants booked expensive hotel rooms, first class airfare, meals, and Broadway Shows, and then added those costs to the issuances funded by the school districts.”
The school district has requested a jury trial and is seeking $50 million and trebled damages, plus punitive damages and legal fees.
The case against the FAs and bond counsel developed through the investigation of Thomas, which began in early fiscal 2017, according to disclosures in the district’s 2017 and 2018 audits.
Thomas, who was fired in February 2017, had been with the district in various positions since 1992. He became CFO in 2008.
In January 2018, Thomas, who was then 61, pleaded guilty to federal charges of embezzlement, money laundering and public corruption. His case has been called one of the largest embezzlement schemes in South Carolina’s history.
In the wake of the Thomas investigation, the school district filed suit against its auditors, Greene Finney & Horton of Greenville, in November 2018. The firm audited the district’s books from 1999 until 2016, giving clean opinions during those years.
The suit’s detailed accounting of Thomas’ misdeeds contends that auditors “failed to detect millions of dollars in fraudulent or inappropriate transactions that were evidenced in the financial system and bank statements.”
Charges in the eight-count suit include negligence, breach of contract, conspiracy, unjust enrichment, fraud, and aiding and abetting a breach of fiduciary duty.
On Feb. 28, Judge Perry M. Buckner III denied motions by Greene Finney to dismiss some of the charges made in the district’s complaint.
Statewide Grand Jury Chief Creighton Waters told the school board at its April meeting that the district will receive $939,654 from a state restitution order to come from Thomas’ retirement account. A federal court has also ordered $761,828 in restitution to be paid to the district.
The Berkeley County School District is located in Moncks Corner, a town about 25 miles north of Charleston. The district has about 34,000 students in grades K-12. Berkeley County has a population of more than 200,000.
Despite the district’s difficulties as a result of Thomas’ activities, Moody's Investors Service said May 3 that the district has a solid financial position.
The key credit factors underpinning the district’s Aa2-rated general obligation bonds include “a solid financial position, an extensive tax base, a healthy wealth and income profile, and somewhat elevated debt and pension liabilities,” according to analyst James Kerin.
Kerin said Moody’s would continue to monitor ongoing lawsuits the district has filed against its former auditing firm, bond counsel and financial advisors.
“It is not anticipated to have a materially adverse effect on the district's financial position,” Kerin said, referring to the litigation.
The district had $570.1 million of long-term debt, including $276 million of GOs, outstanding as of June 30, 2018. S&P Global Ratings gives an AA rating to the GOs.