SEC throws the book at Oyster Bay, N.Y.
WASHINGTON — The Securities and Exchange Commission on Tuesday charged Oyster Bay, N.Y., and its former top elected official with securities fraud by hiding the existence and potential impact of side deals with a businessman who owned and operated restaurants and concession stands.
The SEC filed a lawsuit in the U.S. District Court for the Eastern District of New York against both the Long Island town and its former supervisor, John Venditto, who stepped down in January after being indicted by U. S. Attorneys on federal corruption charges related to the same set of facts.
The SEC suit alleges that between approximately June 2010 and June 2012 Oyster Bay agreed to indirectly guarantee four private loans — totaling more than $20 million — for a concessionaire who owned and operated restaurants and concession stands at multiple locations. But the town failed to disclose the indirect guarantees in connection with any of the 26 securities offerings it issued between August 2010 and December 2015.
When the town eventually did disclose the information for issuances in 2015 and 2016, the disclosures were misleading, the SEC said.
The suit alleges that the loan guarantees were the result of a “close relationship” between the concessionaire, Harendra Singh, and officials in Oyster Bay and Nassau County that Singh had cultivated through “gifts, bribes, kickbacks, and political support” dating back to the 1990s. The benefits included free limousine services for Venditto’s family and friends, as well as discounts and free food and drink at Singh’s restaurants.
The SEC did not name Harendra Singh in the suit, only referring to him as the concessionaire. But Singh was identified in enforcement documents obtained by The Bond Buyer.
The suit details that Venditto, 68, personally intervened to help this benefactor obtain financing after initially learning through the town attorney that the New York Constitution would not allow the town to guarantee private debt. Venditto directed the town to use a second law firm to resolve this "problem," and then pushed for the approval of this “indirect guarantee” structure.
This information was material to investors due to the potential impact on the town’s finances, the SEC said. For example, in one scenario outlined in the complaint, the town could have been required to make a termination payment of approximately $16 million, about approximately 16% of the town’s operating budget, within 60 days had the vendor defaulted on the loans.
“As alleged in our complaint, Oyster Bay and its most senior elected official concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “Investors were deprived of information they needed to understand the town’s true financial condition as they made investment decisions.”
The SEC’s complaint charges Oyster Bay with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Venditto is charged with violations of Section 17(a)(1) and (a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. He also is charged with liability under Section 20(a) of the Exchange Act as a controlling person for the violations by the town, and with aiding and abetting violations.
The SEC first deployed “control person liability” against the mayor of Allen Park, Mich. in 2014 in a muni case, and securities litigators have predicted that the SEC will make more frequent use of that tool to hold individuals to account. That section of the Exchange Act provides that an individual may be liable for the securities law violations of persons over whom they exercise control.
The suit seeks a litany of orders against Oyster Bay, including an unspecified amount of civil monetary penalties and a court order requiring the town to retain a court-appointed consultant to review and recommend improvements to its financial reporting policies and municipal security disclosure policies and procedures.
The SEC wants the court to prohibit Oyster Bay from selling bonds for five years unless it implements the recommendations of the consultant, and is also seeking an order barring Venditto from participating in a municipal securities offering. In a parallel action, the U.S. Attorney’s Office for the Eastern District of New York today filed a superseding indictment that included criminal securities fraud charges against Venditto.
Oyster Bay received a Wells notice from the SEC in July informing the town that the SEC planned to bring fraud charges against it. In its Aug. 16 response, Oyster Bay told the SEC that the town itself is a victim of a criminal scheme cooked up by Singh and a then-deputy town attorney, Frederick Mei. The town board was unaware of the loan guarantees and did not agree to them, Oyster Bay’s attorneys told the SEC, and those provisions were not legally enforceable anyhow. There is no evidence Venditto was aware of the arrangement, the town argued, and even if the payments had been made they would not have impacted the town’s ability to pay bondholders.
“Should the SEC proceed here, it would be a first-of-its-kind case of the worst variety,” lawyers at Quinn Emanuel Urquhart & Sullivan and Morvillo Abramowitz Grand Iason & Anello, who are representing the town proclaimed in the Wells response. “This would be the first municipal enforcement action where the SEC charged a municipal issuer for alleged omissions that did not go to the issuer’s actual finances, the bond issuance itself, or issuer’s realized liabilities. It would also be the first municipal case where the SEC charged a town that had been victimized to its detriment by those who held positions of public trust. And, it would be the first municipal case where the SEC jumped into a public corruption scandal without a compelling connection to investor protection.”
Oyster Bay told the SEC that the town has already suffered through civil lawsuits brought by lenders and been “left holding the bag” by Singh’s and Mei’s wrongdoing. The town is dealing with financial troubles, as its previous triple-A credit rating was slashed seven notches from 2011 to 2016, which Venditto attributed in July 2016 to miscalculated revenues and a steep decline in annual mortgage taxes following the 2008 recession. Oyster Bay's general obligation bonds now have a BB-plus junk-level rating from S&P Global Ratings and are rated Baa3 by Moody’s Investors Service, the lowest in its investment grade category.
“The town and its taxpayers should not bear any more of the burden of Mei’s and others’ wrongdoing than they already have, Oyster Bay declared. “An SEC enforcement action here is not consistent with the commission’s mission and would inflict significant harm on the taxpayers of an already besieged municipality.”