SEC settles fraud charges with Arizona charter school
An Arizona-based nonprofit charter school agreed to settle Securities and Exchange Commission allegations that it misled investors and its former president agreed to pay a $30,000 penalty and will not participate in future municipal securities offerings.
On Monday, the SEC charged Park View School, a state-funded, nonprofit charter school with misleading investors in a $7.6 million municipal bond offering in April 2016. It also charged Debra Kay Slagle, the school's then-president.
"Issuers and conduit borrowers of municipal bonds must provide investors with an accurate picture of their financial condition, and any financial projections they provide to investors must have a reasonable basis," said LeeAnn Gaunt, chief of the Division of Enforcement's Public Finance Abuse Unit. "The SEC will continue to vigorously pursue those who deceive investors, as we allege Slagle and Park View did."
The SEC filed the complaint in the U.S. District Court for the District of Arizona. The SEC said the school violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934.
When Park View sold its bonds in 2016, the SEC said the school was in dire financial trouble so that it could not pay its operating expenses without borrowing heavily. Before the 2016 bond offering, Slagle and Park View funded the school’s ongoing operations by improperly using money that was set aside in reserve accounts for a prior bond offering in 2011, the SEC said.
The bonds were issued by the Industrial Development Authority of the County of Pima, Arizona and Park View was the conduit borrower. Park View was solely responsible for making payments on the debt.
“When the 2016 bond offering took place, Park View and Slagle did not disclose Park View’s current financial difficulties to investors in those bonds,” the SEC wrote. “Instead, they authorized an offering document, called an Official Statement (the“2016 Official Statement”), which contained false and misleading financial projections.”
In those projections, the school said it was reducing its operating losses in the current fiscal year, that it would be profitable in the upcoming fiscal year and then would be able to repay its bondholders.
In reality, Park View was not able to meet its financial projections in that 2016 official statement unless it implemented a significant expense reduction program, which it did not, the SEC said.
In the 2016 official statement, the school misleadingly represented that it would reduce its operating expenses during the 2016 FY and then later years. Slagle, president of Park View from November 2003 to February 2017, retained a consultant to prepare a feasibility study, which she understood would be part of the 2016 official statement, the SEC said.
“Before agreeing to use Park View’s projected operating expense numbers for the feasibility study, the consultant told Slagle on multiple occasions that the expense projections required a major cost cutting program in light of Park View’s prior financial difficulties,” the SEC said. “Slagle assured the consultant during a conference call in early April 2016 that she understood the need for cost cutting and would implement an expense reduction plan. Slagle also represented to the consultant in early April 2016 that she was already cutting costs significantly.”
That was misleading and false, the SEC said.
A feasibility study is not meant to be a wish list, said Peter Chan, a partner at Baker McKenzie and former SEC enforcement lawyer who was not involved in the case.
Park View had a history of financial woes. In April 2011, it was the conduit borrower for a $6.625 million bond offering by the Pima Industrial Development Authority. Those bonds were used to construct a new building that now houses its two charter schools in Prescott Valley, Arizona.
In an indenture agreement, it said that the indenture trustee would deposit about $248,000 of the 2011 bond proceeds into an operating reserve fund under the trustee’s control. That fund provided important protections for investors because it could be used to repay the 2011 bonds if other reserve accounts were depleted, the SEC said.
After the 2011 bond offering, Park View’s operating expenses exceeded its monthly payments from the trustee and Slagle then submitted forms to withdraw money from the operating reserve fund, which were nearly all impermissible because of the indenture agreement, the SEC said.
“Although Slagle certified in writing to the trustee that each withdrawal was permissible for unbudgeted expenses or repair costs, she knew, or was reckless in not knowing, that the withdrawals were used for routine operating expenses or unauthorized transfers,” the SEC said.
Given financial difficulties, Park View could not replenish the operating reserve fund after making withdrawals, the SEC said.
The allegations of the misuse of bond proceeds from 2011 reminded Chan of Harvey, Illinois in which the city misled investors by diverting bond proceeds from their intended use.
“If you have misused bond proceeds in a first offering, that creates a significant risk the next time you do a bond offering because people want to know that you misused bond proceeds the first time,” Chan said.
“The case together is a reaffirmation that the SEC continues to look at issuer disclosure, particularly with issuers that are financially treading water,” Chan later said.
The SEC is on the lookout for malfeasance with school districts and the SEC, Chan said, noting that in the SEC’s press release it addressed the number of cases it has brought against school districts.
Park View School declined to comment.