WASHINGTON – A federal court judge has approved Miami's $1 million settlement with the Securities and Exchange Commission over charges the city acted fraudulently in taking steps to hide its deteriorating financial condition from bondholders.
Judge Cecelia Altonaga, who sits on the U.S. District Court for the Southern District of Florida in Miami, approved the final judgement against Miami on Wednesday. It had been agreed to by both parties. The city's commissioners voted 4-0 to approve the civil penalty amount on Oct. 13.
The settlement amount is the largest the SEC has ever imposed on a municipality and comes after a Sept. 14 guilty verdict in the commission's first federal jury trial against a municipality or one of its officials for violating the securities laws. Miami will have 14 days from the date the final order was entered to make the payment.
Michael Boudreaux, the city's former budget director, who the jury also found guilty of defrauding investors, has not reached a settlement with the SEC. His lawyer, Benedict Kuehne, has said he intends to appeal.
In addition to the large civil penalty, the settlement also includes a permanent injunction against the city barring it from negligently or knowingly and willingly committing securities fraud under Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5. The injunction also applies to parties that receive individual notices of the final judgment, including any of the city's officers, agents, servants, employees, and attorneys. It also applies to other individuals actively associating with, or participating with, those parties.
Additionally, the settlement states that Miami's actions violated a prior SEC cease-and-desist order against the city from 2003 that was tied to an earlier securities fraud case involving the city's failure to disclose its deteriorating financial condition in three 1995 bond offerings. Miami is the only issuer to have violated an existing cease-and-desist order. The settlement commanded Miami to comply with the earlier order.
The SEC filed its complaint against Miami and Boudreaux in 2013 alleging that starting in 2008 they misled investors about inter-fund transfers that were designed to cover up a growing general fund deficit in its fiscal years 2007 and 2008. The SEC said the misleading transfers were also meant to get more favorable bond ratings for offerings that were obtained in May, July, and December 2009.
The alleged omissions and misrepresentations were made in: offering documents for the three bond transactions in 2009 that totaled $153.5 million; presentations to bond rating agencies; and the city's comprehensive annual financial reports (CAFRs) for fiscal years 2007 and 2008, according to the SEC.
The city disclosed the inter-fund transfers in each of their CAFRs and official statements but, according to the SEC, said the transfers contained money that was not expended and was being returned to the general fund. In reality, that money had already been pledged to several ongoing capital projects and some of it was restricted by city law for designated purposes and not the general fund, the SEC said. Thus, the funds that were transferred should not have been considered unallocated, the commission said.