A South Carolina school district has sued its former financial advisors and bond counsel alleging that representatives of the firms knew or should have known about the fraudulent activities of the district’s former chief financial officer.
Brantley Thomas, the former Berkeley County School District CFO who is now serving a more than five-year-sentence for embezzling $1.2 million of district funds, is also named in the complaint, which was filed Wednesday in the South Carolina Court of Common Pleas for Berkeley County.
Compass Municipal Advisors; First Southwest Securities, now known as Hilltop Securities; Burr & Forman LLP, formerly the McNair Law Firm PA; as well as Frannie Heizer, Brian Nurick, and Michael Gallagher are also named
Nurick and Gallagher, now with Compass, were financial advisors who formerly worked at First Southwest. Heizer, the district’s former bond counsel, is a partner at Burr & Forman LLP, which acquired McNair last year.
In the 10-count complaint, the school district said it “unearthed and unraveled a complex and multi-faceted web of fraud, corruption, conspiracy, and professional negligence…involving all of the defendants,” a scheme that was successfully concealed for years.
Nurick, a managing director at Compass, denied charges made by the district.
“Compass Municipal Advisors will contest the complaint vigorously,” he said in a statement to The Bond Buyer Friday. “We are confident the final resolution will be favorable.”
Ben Brooks, spokesman for Hilltop, said the firm is aware of the lawsuit. "It is our policy not to comment on pending litigation," he said.
William "Lee" Thuston, chairman and partner at Burr & Forman, said, "We categorically deny the allegations of the complaint and we will vigorously defend against them."
The school district has requested a jury trial and is seeking $50 million and trebled damages, plus punitive damages and legal fees.
The district’s suit contends that the municipal bond professionals neglected their fiduciary duties.
“These professional advisors, charged with duties of loyalty and good faith, should have served as a firewall to shield the district from Thomas’ corruption,” the suit said. “Instead, they abandoned their fiduciary duties in exchange for access to millions of dollars in public funds for their personal gain, all at the expense of the district and the taxpayers of Berkeley County.”
While there is no indication that bond proceeds were misspent, the district alleges that it was forced to issue $30.8 million in taxable bonds costing more than $1 million in higher interest rates and a loss of a bond premium because bond counsel and the FAs “knew or should have known that a reimbursement resolution or some other mechanism was required under federal tax law to allow the debt to remain tax-exempt.”
The district contends that the taxable debt was necessary to conceal project cost overruns and misappropriation of funds by the CFO and the lack of a reimbursement resolution.
According to the suit, Nurick and Gallagher created the South Carolina Association of Governmental Organizations, or SCAGO, as a pool bond conduit issuer to promote financing and investment opportunities. The district said it was told by the FAs that SCAGO membership would save on bond issuance costs, but the savings didn’t materialize “because Compass charged more costs to the pooled services than was appropriate for such transactions.”
The FAs, through SCAGO, also “inappropriately charged the district for unnecessary and extravagant junkets, including trips to New York City, by passing the costs of those trips to the taxpayers of Berkeley County and other districts,” the complaint said.
“The financial advisor defendants interviewed bank executives for issuance of bonds in New York City, when it was more appropriate to do so in Charlotte, North Carolina, where the banks were actually located,” the suit alleges. “To conduct those interviews, the financial advisor defendants booked expensive hotel rooms, first class airfare, meals, and Broadway Shows, and then added those costs to the issuances funded by the school districts.”
The case against the FAs and bond counsel developed through the investigation of Thomas, which began in early fiscal 2017, according to disclosures in the district’s 2017 and 2018 audits. Thomas was fired Feb. 26, 2017 and had been with the district in various positions since 1992. He became CFO in 2008.
Last year, indictments against Thomas were filed by the state of South Carolina and the federal government. He was charged with “diversion of assets to personal bank accounts, falsifying invoices and kickback schemes with certain vendors,” according to the audits.
In January 2018, Thomas, who was then 61, pleaded
Superintendent Eddie Ingram said the district is “extremely concerned about the fraud that was committed” against it.
“To best serve those who depend on us, public school districts rely on professionals, including bond counsel and financial advisors, to advise, protect, and guide districts in matters that fall outside of our own professional expertise,” Ingram said in a statement. “In Berkeley, these professionals failed this district and our taxpayers in favor of personal gain.”
The district, which has about 36,000 students, had $570.1 million of general obligation bonds outstanding as of June 30, 2018. It is based in Moncks Corner, about 30 miles north of Charleston.
The GOs have unenhanced ratings of Aa2 from Moody's Investors Service and are rated AA by S&P Global Ratings. Both assign stable outlooks.
