CHICAGO – A suburban Chicago school district that ran into financial trouble after mishandling bond proceeds faces a Securities and Exchange Commission inquiry into its past bond issues.
A June 6 subpoena demands that Lincoln-Way Community High School District 210 in Will County produce bond-related documents and communications, including statements related to its certification that the offering statements were materially correct.
The SEC subpoena follows a May 4 subpoena from a federal grand jury probing actions of the district and its former superintendent, including the use of bond funds.
"According to the correspondence received from the SEC, 'this investigation is a non-public, fact-finding inquiry. We are trying to determine if any federal securities laws have been violated. The investigation and subpoena do not mean any laws have been broken nor does the investigation mean we have a negative opinion of any person, entity or security,'" the district said in a statement.
The May subpoena sought detailed records related to retired Superintendent Lawrence Wyllie's documents as well as various district documents and contracts including "all records relating to misappropriation of federal, state, and local funds to include bond funds, restricted funds, and student activity funds, for the time period of 2006 to the present."
Moody's Investors Service slapped the district with a five-notch downgrade April 29, citing its use of short-term borrowing to deal with fallout from the improper accounting of past bond proceeds. The rating agency lowered the rating to Baa3, the lowest investment grade level, from A1 and assigned a negative outlook to the district's $259 million of debt.
The SEC subpoena demanded documents related to the district's 2009, 2013, and 2015 bond transactions including information provided to the district on the costs, financial estimates, risk, alternatives, and estimates ahead of the transactions from financial team members and escrow agreements.
The SEC is seeking communications and written policies and the accounting treatment on the district's placement of revenues into various funds, budget documents, bookkeeping and accounting practices, and communications with the board on fiscal matters. It also wants an organizational chart of who was responsible for directing fiscal staff from Jan. 1, 2009 to the present.
The notice seeks information on the use of proceeds "including but not limited to placement of $10 million of the 2009 bond proceeds into its life safety fund." The district had previously disclosed that money should have gone into a capital fund.
"All documents but not limited to communications concerning the certificates the district agreed to provide to the underwriter in connection with the 2009 bonds, the 2013 bonds, and the 2015 bonds certifying that to the best of the district's knowledge and belief, each respective official statement was materially true and correct and did not omit a material fact, including but not limited to documents reflecting the district's own due diligence to confirm this certification," the subpoena says.
The district must submit the requested documents by June 27, according to the notice signed by Sally J. Hewitt, senior attorney in the SEC's Division of Enforcement.
"The district is collecting all requested information and cooperating to the fullest extent," the district said in the statement, which notes that it self-reported its accounting errors regarding the bond proceeds earlier this year.
Lincoln-Way released the subpoena following a Freedom of Information Act request from the Daily Southtown newspaper.
Moody's attributed the April downgrade to "the weakened financial position of the district, which has necessitated the issuance of tax anticipation warrants to support operations. The rating also considers the recent discovery of misappropriation of bond proceeds and restricted funds, the resolution of which will exacerbate the district's budget pressures."
The district's elevated debt burden is additionally pressured by capital appreciation bonds that will drive debt service costs up substantially in 2021. The district is closing one of four high schools to cut costs but faces public opposition and a legal challenge.
"The negative outlook reflects the likelihood that the district's financial position will continue to narrow in fiscal 2016 and beyond," Moody's said. The district enrolls more than 7,000 students from six suburbs far southwest of Chicago.
In November the district hired Crowe Horwath to conduct a sweeping review of the district's accounting practices and use of proceeds from sales in 2006, 2007, and 2009 that helped finance the construction of two new high schools. Voters approved up to $225 million in borrowing in a 2006 referendum.
The report offered a stinging assessment of the management of bond proceeds. While it found that no proceeds were missing, it revealed some proceeds and interest earnings were improperly transferred among differing funds and spent on non-capital expenses.
The board in mid-April accepted the report's finding and recommendations and approved corrective actions including the transfer of money to correct funds. The Illinois Board of Education put the district on a financial watch list last year, creating a pressure to shore up its balance sheet or face additional state intervention.
The SEC has said it will be working in tandem more with federal criminal prosecutors on cases, as underscored by charges brought by both against officials of the town of Ramapo, N.Y.