PALM BEACH, FLA. – The Securities and Exchange Commission attorney who handled the SEC's case against the city of Miami and its former budget director detailed the key takeaways from the trial for market participants meeting here on Friday.

Amie Riggle Berlin, an SEC senior trial counsel in Florida described the case during The Bond Buyer's and Bond Dealers of America's National Municipal Bond Summit here.

The SEC filed its complaint against Miami and its former budget director Michael Boudreaux in 2013 alleging that the city and Boudreaux played a shell game to hide the city's deteriorating financial condition from bondholders.

A federal jury found both defendants guilty in September last year of misleading investors about interfund transfers that were designed to cover up a growing general fund deficit in the city's fiscal years 2007 and 2008. The SEC made the case that the misleading transfers were meant to get more favorable bond ratings for offerings that were obtained in May, July, and December of 2009.

The city disclosed the interfund transfers in each of their comprehensive audited financial reports and official statements but, according to the SEC, said the transfers contained money that was not expended and was being returned to the general fund. In reality, that money had already been pledged to several ongoing capital projects and some of it was restricted by city law for designated purposes and not the general fund, the SEC said. Thus, the funds that were transferred should not have been considered unallocated, the commission said.

Miami, which had been under a cease and desist order from a previous case at the time of the violations, agreed to a $1 million settlement, the largest ever for a municipality. Boudreaux faces a $15,000 penalty but is still challenging the ruling in court.

Both Miami and Boudreaux had argued that they relied on auditors in connection with the alleged fraud and misrepresentations, but the jury threw the defense out, finding that neither defendant met any of the four requirements for a reliance on professionals defense.

"We called it the garbage-in garbage-out defense at trial," Berlin said. "It was clear from the evidence that the city and Mr. Boudreaux had not given the auditors the full picture so they couldn't rely on their unqualified audit report."

Berlin said that the reliance on advice of outside professionals, "while it is a widely thrown around defense, has very sophisticated requirements." She went through the four necessary requirements for the audience and explained where Miami and Boudreaux had failed in meeting each of the standards.

The first standard required them to make a complete disclosure to their auditors, "saying here's how we moved the money around, here's why we did it, 'Is this okay?'" Berlin said.

"It can't be that you're relying on the professionals around you and relying on the mere presence of them," she said. "It has to be a full disclosure of all of the facts and everything you are doing and the jury found that [Miami and Boudreaux] hadn't."

Miami and Boudreaux also needed to show they sought advice from the auditors by affirmatively asking the auditors if the disclosures were okay. The defendants also would have had to show that the auditors explicitly provided advice and that they relied in good faith on the auditor advice. The jury found Miami and Boudreaux didn't do any of that.

Berlin cautioned about the fourth requirement, relying in good faith on advice, saying there are some situations where a defendant can't rely in good faith despite a favorable response from a professional because "they know better and know they shouldn't be doing" what they're doing.

She added that in the case of Miami and Boudreaux, the auditors wrote in their unqualified audit opinion that they were only auditing the numbers provided and not the management discussions about fund transfers that went into the numbers. As a result, Berlin said she was able to show that the auditors specifically said they did not give an opinion on the misrepresentations and omissions on which the SEC built its case.

Defendants hoping to use a reliance on professionals defense should also be aware that it is a partial defense that a jury can consider when they deliberate but does not mean on its own that the defendant is not liable.

The reliance is "just one factor to be considered," Berlin said.

Some members of the audience asked whether the SEC believes Miami's actions represent a more widespread issue in the market and others wondered whether market participants like underwriters, financial analysts, and ratings agencies should be concerned about similar misrepresentations and omissions.

Berlin said she can't comment about the possibility of open cases but added, "I think every municipality that is involved in a bond offering [is] constantly reminded of their obligations."

"Even if there's not a prior cease and desist order detailing for them why the conduct is wrong and why they shouldn't do it again, [issuers] represent throughout the process that they are telling the truth and making a full disclosure," she said. "When they're involved in this process, that disclosure and providing the full picture isn't just something that is in the wings, it's in the front and it's apparent in every document that happens throughout the deal process."

Berlin added that "if some municipalities make a decision not to play by the rules or they are just severely reckless … the SEC will not hesitate to enforce the laws."

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