LOS ANGELES — Los Angeles Unified School District officials say they’ve been upfront about their plans to use bond proceeds to buy iPad tablets for students.
The district has had discussions with the Securities and Exchange Commission after the commission opened an informal inquiry into whether the district has complied with legal guidelines in the use of bond proceeds for the $1.3-billion iPad program.
The line of inquiry zeroes on whether LAUSD properly disclosed to investors how the bonds would be used, according to a presentation the school district made to the SEC dated March 31, 2015.
"SEC just wanted to come in and talk about bonds and proceeds disclosures," said Thomas Zaccaro, a partner with Zaccaro/Morgan LLP in Los Angeles. "There is disclosure in the [official statement] and other public documents regarding the use of the proceeds either for hardware and software computer technology."
The school district's disclosure on the use of bond proceeds was not only included in offering documents, but also in Board of Education documents. There were also investor presentations and rating presentations prior to the issuance of the bonds that also contained that information, said Zaccaro.
But since the bonds are general obligation, and not limited-use revenue bonds, the use of bond proceeds is not of material concern to investors, he said.
Since the bonds were GOs, they are repaid through county tax revenue. Investors do want to know if the county, through the tax revenues, is going to be able to repay the bonds. They are less concerned with what the bond proceeds will be used to pay for, he said.
As far as the district knows, SEC's inquiry is still an informal inquiry as opposed to a formal investigation, according to Zaccaro.
"A formal inquiry is when the SEC issues a formal order of investigation," Zaccaro said. "That gives staff subpoena power and ability to take sworn testimony. We aren't aware this is a formal investigation or that a formal order has been issued."
Earlier in his legal career, Zaccaro was the chief trial counsel of the Securities and Exchange Commission's Pacific Regional Office, where he was responsible for the management and supervision of all enforcement litigation conducted within the Pacific Region, according to the law firm's website.
"During his tenure with the SEC, Zaccaro often served as lead counsel in enforcement actions involving violations of the federal securities laws, including financial fraud, accounting fraud, insider trading, offering fraud, Ponzi schemes and sales of unregistered securities," according to a bio on the firm's website.
"My belief is that SEC staff just wanted information about the bonds," Zaccaro said. "You know as well as anyone, there have been a lot of municipal bond cases over the last few years."
Zaccaro pointed to cases in San Diego, Miami and the City of Harvey, Ill. in which the SEC conducted investigations.
The Harvey case looked at the use of bond proceeds. In that situation, the use of bond proceeds was more important to investors, because they were limited obligation bonds, he said.
Even though LAUSD had ample disclosure on the use of proceeds, it wasn't an issue that was material to investors, he said.
The presentation made to the SEC said, "investors consider the ability to generate property tax revenue to repay the bonds to be material information" and the "bond proceeds were not intended for projects that would generate revenue to repay the bonds. Accordingly, the particular use of the bond proceeds is not material."
The materiality questions "were confirmed by credit rating reports and the underwriter's due diligence questions," according to the presentation.
The OS contained "a broad description of the potential uses of the bond proceeds, which encompassed the LAUSD tablet program," according to the presentation.
The bonds issued by LAUSD pursuant to Measure R are general obligation bonds that are secured by ad valorem property taxes.
"In preparing the OS, LAUSD complied with its disclosure procedures, and relied on the advice of professionals concerning the adequacy of the disclosures in its OS for the Measure R bonds," according to the presentation.
Both LAUSD and the SEC declined to comment on the inquiry.
The news of the inquiry comes just after the revelation that LAUSD is trying to break a contract with Apple to provide iPads and Pearson to provide Common Core software for all its students. The program, which was to be rolled out over several years and be funded by bonds, has been controversial nearly since its inception.
Pearson was a subcontractor to Apple under a contract approved by the Board of Education in June 2013.
The district had already distributed 32,261 iPads to students with the Pearson curriculum at a total cost of $102.9 million, according to information from the school district. The curriculum added about $200, for a three-year license, to the total price of $768 for each device.
The district halted the program for further study near the end of last year amid questions that Apple and Pearson may have had an unfair advantage in the bidding process, which resulted in an FBI investigation.