PHOENIX – The Securities and Exchange Commission is investigating whether a municipal advisor for Babylon, N.Y. bond financings had a conflict of interest and violated his fiduciary duty by also owning a company that provided the town with workers.
The SEC probe centers on Pelham, N.Y.-based Red Hill Professional Services and its principal, Douglas Jacob, a former town comptroller who provided MA services to the Town of Babylon on two bond issuances in 2015 and 2016 totaling $65 million. The investigation was revealed in a letter that the SEC’s New York office sent to Babylon town attorney Joseph Wilson asking that the town maintain any records created after Jan. 1, 2015 relating to the two issuances, Red Hill, and Jacob.
The June 30 letter, which was provided to The Bond Buyer by Babylon officials, was signed by SEC enforcement division attorney Kristin Pauley. The letter asks for records to be preserved related to an ongoing investigation, and informs the town that it has a duty to preserve and prevent the destruction of the evidence the SEC is seeking. It does not provide any further details on the inquiry.
The SEC declined to comment on the matter, as is standard for ongoing investigations.
Rich Schaffer, the town supervisor, told The Bond Buyer that the investigation is related to whether or not Red Hill’s activities represent a conflict of interest. In addition to its advisory role on the bond issuances that help fund the city's capital projects, Red Hill provides contracted staffing services to various city departments such as waste management, Schaffer said.
Under the Dodd-Frank Act, which was enacted in 2010, municipal advisors owe a fiduciary duty to their government and other clients to place the interests of those clients over their own. In addition, the Municipal Securities Rulemaking Board’s Rule G-42 on duties of non-solicitor MAs requires advisors to disclose any “actual or potential conflicts of interest.”
Jacob has had previous trouble with the law. He was Babylon comptroller and director of solid waste management from 1993-2004, and was one of several town officials charged in 1997 with felonies for filing false documents, larceny, conspiracy, receiving a bribe, and official misconduct. Acquitted on most of the charges, he was convicted on reduced misdemeanor charges for the false filings. He served three years of probation, which he completed in 2001.
According to the firm’s filings with the SEC, Jacob founded Red Hill in October 2007 and previously worked as an individual consultant on solid waste service.
Because the regulatory regime for non-dealer MAs is much newer than that for dealer MAs, having only been codified by the SEC in a rule effective in July 2014, there is not a long track record of enforcement actions. The SEC filed its first case under the fiduciary duty law in March 2016 when it charged Kansas-based Central States Capital Markets and some of its employees with failing to disclose that they also worked for an underwriter and were being paid both advisory and underwriting fees for their work.
Schaffer said that Babylon is preparing for its annual bond issuance like the ones Red Hill has previously worked on, but that Jacob voluntarily stepped down from his role as MA pending the results of the SEC’s inquiry.
“Doug voluntarily stepped out,” Schaffer said, adding that he has always been “very happy” with Red Hill’s services and that he personally believes Jacob has done nothing wrong.
“I don’t believe there is a conflict,” Schaffer said adding however that he believes it is appropriate to let experts at the SEC make that determination. Schaffer, who is serving his sixth non-consecutive term as supervisor dating back to 1992, said the SEC has not indicated when it might complete its investigation.
“All we know is they sent this letter,” he said.
Jacob did not respond to requests to be interviewed for this report.