Oyster Bay avoids fines in SEC fraud settlement
A Securities and Exchange Commission settlement approved by the Oyster Bay, New York, Town Board does not require the town to pay any fines.
Oyster Bay faced a November 2017 SEC lawsuit alleging it and former Town Supervisor John Venditto defrauded investors by hiding the existence and potential impact of side deals with a local restaurateur to indirectly guarantee private loans.
Investigators said at the time of the suit that Oyster Bay failed to disclose loan guarantees totaling $20 million during 26 securities offerings between August 2010 and December 2015.
The settlement, which still must be approved by a federal judge, requires the town of 293,000 to hire a municipal finance consultant to review bond disclosures for three years. The town board approved it Tuesday. The town will neither admit nor deny it was negligent and not be forced to pay a fine, according to settlement terms.
“The terms of the proposed settlement appear to be favorable for the Town of Oyster Bay,” said Moody’s Investors Service analyst Douglas Goldmacher. “While a fine would have been credit negative in proportion to its size, of greater import is the fact that the town will not have its ability to issue debt curtailed, as had been previously proposed by the SEC. Given the town’s high dependence on accessing the short-term debt market, this is a credit positive.”
The SEC initially sought to impose a court-appointed consultant for a five-year period who would have the power to prevent borrowing.
“The settlement is in the best interests of the town particularly because there is no fine or monetary penalty within the settlement,” Oyster Bay Town Attorney Joseph Nocella said in a Feb. 21 memo. “It is likely that the efforts of the outside consultant will give even greater confidence to the securities markets about the soundness of the Town’s municipal bonds.”
The municipal finance consultant under the proposed settlement would be limited to reviewing the town’s disclosure practices and procedures and recommending improvements if necessary.
“It does lift a cloud,” said Municipal Markets Analytics partner Matt Fabian of the importance of Oyster Bay’s reputation with investors if the town can put the lawsuit behind them. “To the extent that they have better disclosure practices it could be a positive.”
Howard Cure, director of municipal bond credit research at Evercore Wealth Management, said that the SEC penalties under the settlement are very light compared to what Oyster Bay could have faced. He noted that the town has sizable wealth and a large tax base that makes its debt a possible investment opportunity if the settlement is allowed to proceed.
S&P Global Ratings restored the town's rating to investment grade in March 2018 with an upgrade to BBB-minus from BB-plus, due largely to improved reserve levels.
“You have to convince investors that they have cleaned up their act and have monitors in place,” said Cure. “Once the town is regulated and you have some controls in place it should increase confidence.”
Oyster Bay has tested the market once since the SEC charges with a $191.2 million competitive transaction in May 2018 through two separate sales. A $152.7 million competitive sale of public improvement bonds was won by Bank of America Merrill Lynch with a net interest cost of 3.32%. The town also sold $38.54 million of bond anticipation notes that day which were won by BAML with a NIC of 2.28%.
The May 2018 bond deal was rated Baa3 by Moody’s. Oyster Bay has sold about $1.21 billion of securities in the last decade, according to Refinitiv data.
SEC spokeswoman Judith Burns declined to comment on proposed settlement.
The proposed SEC settlement does not include Venditto, who was acquitted by a federal jury in May of criminal corruption charges stemming from the loan scheme.