SEC's case against Oyster Bay nears its end
A district court judge’s approval is the last remaining step on the way to the Securities and Exchange Commission and a New York town concluding a multiyear enforcement action that looks like it will end without a financial penalty for the municipality.
The SEC announced Friday that it had approved a settlement with the Town of Oyster Bay, New York, which Oyster Bay had itself previously agreed to. In 2017, the SEC charged Oyster Bay and its former supervisor, John Venditto, with securities fraud for allegedly hiding the existence and potential impact of side deals with a local restaurateur to indirectly guarantee private loans. Venditto was not included in the settlement approved on Friday.
The town of about 300,000 agreed to permanent injunctions against violating the antifraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The town does not have to pay a fine. The SEC has historically been hesitant to impose financial penalties on municipalities if those penalties would be borne on the backs of the taxpayers.
The town also has to retain an independent consultant for three years to advise the town on its policies, procedures and internal controls when disclosing securities offerings. After a consultant is appointed, they will have 120 days to issue a report recommending improvements to the town’s securities offering disclosure policies and procedures, according to court documents.
Also, the consultant will have to file an interim report and a final report on Oyster Bay’s implementation of the recommendations during their time with the town.
In Oyster Bay’s Feb. 26 town meeting, its board agreed to a proposed settlement of litigation with the SEC. All of the town board members present agreed to settle.
In 2017, investigators said Oyster Bay failed to disclose four loan guarantees totaling $20 million during 26 securities offerings between August 2010 and December 2015. The loans were for a concessionaire, Harendra Singh, who owned and operated restaurants and concession stands at multiple locations.
The suit, filed in the U.S. District Court for the Eastern District of New York, alleged that the loan guarantees were the result of a “close relationship” between Singh, and officials in Oyster Bay and Nassau County that Singh had cultivated through “gifts, bribes, kickbacks, and political support” dating back to the 1990s.
Eventually, when Oyster Bay did disclose the information for issuances in 2015 and 2016, the disclosures were misleading, the SEC said.
Venditto stepped down in 2017 after being indicted by U.S. attorneys on federal corruption charges. The SEC suit details that Venditto personally intervened to help Singh obtain financing after initially learning through the town attorney that the New York Constitution would not allow the town to guarantee private debt.
Venditto directed the town to use a second law firm to resolve it, and then pushed for the approval of this “indirect guarantee” structure. He was acquitted by a federal jury in May of criminal corruption charges, which stemmed from the loan scheme.
This information was material to investors due to the potential impact on the town’s finances, the SEC said. For example, in one scenario outlined in the 2017 complaint, the town could have been required to make a termination payment of approximately $16 million, about 16% of the town’s operating budget, within 60 days had the vendor defaulted on the loans.
Moody’s Investors Service Analyst Douglas Goldmacher told The Bond Buyer in February that a fine would have been credit negative in proportion to its size.
“While a fine would have been credit negative in proportion to its size, of greater import is the fact that the town will not have its ability to issue debt curtailed, as had been previously proposed by the SEC,” Goldmacher said in February. “Given the town’s high dependence on accessing the short-term debt market, this is a credit positive.”
The SEC initially wanted to impose a court-appointed consultant for a five-year period who would have the power to prevent borrowing.
Oyster Bay Town Attorney Joseph Nocella wrote in a Feb. 21 memo that the settlement was in the best interests of the town, particularly because there was no fine or monetary penalty. He added that an outside consultant would give greater confidence to the securities market about the “soundness of the Town’s municipal bonds.”
Oyster Bay did not immediately respond to a request to comment on Friday’s news