SEC charges California school district, officials with fraud
A Los Angeles County school district, its superintendent and its chief business officer were charged by the Securities and Exchange Commission with defrauding investors in the sale of $100 million in general obligation bonds.
The SEC said Thursday it had charged the Montebello Unified School District, its former Chief Business Officer Ruben James Rojas, and its Superintendent Anthony Martinez in connection with a December 2016 bond offering.The district and Martinez agreed to settle in an administrative proceeding without admitting or denying the SEC's findings, while Rojas faces charges in a California federal court that he violated Section 10(b)5 of the Exchange Act and Section 17(a) of the Securities Act, collectively known as the anti-fraud provisions of the securities laws.
“Montebello deprived investors of material information regarding the audit of its financial statements,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “The SEC will hold accountable those who take steps to mislead investors on these important issues.”
The district agreed to engage an independent consultant to evaluate its policies and procedures in regards to municipal securities disclosures. Martinez was ordered to pay a $10,000 penalty.
In December 2016, Montebello Unified School District sold municipal bonds to investors for new facilities and maintenance, allegedly concealing in the offering documents that its own auditor had raised concerns about potential fraud and internal control problems at the district.
Beginning in mid-November 2016, over a month before the final bond sale, a senior Montebello accounting officer told Montebello’s independent auditor about allegations of fraud and accounting improprieties at the district, the SEC found.
That auditor asked for information regarding those allegations but Montebello and Rojas allegedly failed to provide timely responses, impeding the audit’s timely completion.
The audit firm repeatedly warned Rojas, other school officials and the Montebello Board of Education that the audit firm could not finish its audit for fiscal year 2016 without conducting further analyses of the fraud allegations and the District’s accounting controls.
Instead, Montebello and Rojas terminated the audit firm, preventing the auditor from completing its fiscal year 2016 audit, the SEC found.
Montebello and Rojas concealed the audit’s termination from investors in the December 2016 bond offering. Instead, it deceptively stated that the audit firm served only as an independent auditor to the district, and attached the fiscal year 2015 audited financial statements with a clean audit opinion, the SEC said.
“These statements and omissions gave investors the false impression that the fiscal year 2016 audit, and a clean opinion for that audit, would be forthcoming,” the SEC said.
Montebello placed Rojas on temporary paid administrative leave for one month beginning in late summer 2016 and terminated his contract in March 2017.
In mid-November 2016, the lead partner and manager for the audit firm learned that Rojas had been placed on administrative leave during September 2016 due to allegations of improper conduct.
“On December 1, 2016, the audit firm sent a letter to Montebello noting that it had been made aware of allegations of improprieties at the district as well as questions concerning Rojas’s qualifications and integrity, which could impact the firm’s ability to complete its pending audit of Montebello’s fiscal year 2016 financial statements,” the SEC said. “Additionally, the audit firm made the highly unusual request for a closed session meeting with Montebello’s Board to discuss the firm’s concerns.”
Rojas also signed an engagement letter to retain the audit firm. It specified that the firm could spend additional time due to Montebello’s failure to facilitate the audit by making information available or due to “unexpected circumstances,” the SEC said. That letter made Montebello responsible for providing the audit firm with access to the information.
On Dec. 7, 2016, Montebello issued the preliminary official statement to investors and did not disclose the existence of the auditor’s letter. The POS included a copy of the audit firm’s fiscal year 2015 audit report, which had a clean audit opinion.
“The POS was materially misleading because it suggested that the fiscal year 2016 audit would be forthcoming in a timely fashion without disclosing that the Audit Firm requested a closed Board meeting to discuss concerns, including concerns about alleged improprieties at the District, that could delay the audit’s completion,” the SEC said.
On Dec. 9, 2016, the audit firm sent a second later saying that additional matters had arisen that could prevent them from completing the fiscal year 2016 audit.
On Dec. 13, 2016, Rojas signed on Montebello’s behalf, the contract of purchase with the underwriters for the bond offering. That contract required Montebello to disclose any information that he was aware of that would render the information in the final official statement to be false or materially misleading, the SEC said.
“These misleading statements and omissions were material to investors,” the SEC said. “The undisclosed information would have been significant to the underwriters’ and their counsel’s willingness to move forward with Montebello’s bond offering at that time, and would have been material to an investor’s willingness to purchase Montebello’s bonds at the then-prevailing price and yield.”
In December 2016, while Rojas was working with bond and disclosure counsel on the supplemental POS, counsel inquired about the state of the fiscal year 2016 audit. Rojas said that Montebello had received an extension of the filing deadline for the audit report, the SEC found.
Martinez, 48, signed one of the misleading bond offering documents, the misleading letter to the Los Angeles County Office of Education asking for an extension and false closing certificates that were provided to bond and disclosure counsel, the SEC found.
The district released a statement pledging its dedication to providing good disclosure.
"Our goal is to provide disclosures that are accurate and compliant with the law and values of this school district," the statement said. "We are pleased that the SEC recognizes the district’s current efforts to do so. MUSD will continue to cooperate with local, state and federal agencies to ensure transparency to all of our stakeholders."
In 2017, a California state auditor report questioned the district’s ability to remain solvent and its use of bond funds. The auditor found that the district did not have proper oversight of the bonds, putting them at risk of abuse and that it failed to ensure its employees did not have conflicts of interest when approved expenditures and contracts related to the bond funds.
The auditor warned that the district was in danger of becoming financially insolvent and said the board continued to approve budgets in which expenditures exceeded revenues.
In July, local newspapers reported that the school district would pay its former superintendent Susanna Contreras Smith $4.9 million for a wrongful termination lawsuit. Smith’s lawsuit alleged she was fired in 2016 for exposing political corruption at the district and for coming forward about alleged misconduct involving Rojas.