PHOENIX — The Securities and Exchange Commission's actions against the Beaumont Financing Authority showed that the legacy of the Municipalities Continuing Disclosure Cooperation Initiative is here to stay, attorneys said.
Several municipal legal experts weighed in on the Aug. 23 SEC announcement that it had settled charges against the Beaumont, Calif. Financing Authority, its former executive director, underwriter O’Connor & Company Securities Inc., and that firm’s co-founder.
It was the commission's first post-MCDC disclosure action and the SEC noted that the BFA and O’Connor could have chosen to participate in that initiative, but did not.
Lawyers said the case showed that the SEC is not rolling back its efforts to ensure accuracy about past disclosure in official statements, and that it is willing to put some teeth into its enforcement actions for market participants that didn’t self-report and accept the more lenient settlements offered by the MCDC.
“I think this is consistent with what the SEC did when it brought the MCDC,” said Bob Stracks, of counsel at Quarles & Brady in Chicago. “It seems like the violations were relatively serious.”
The SEC found that the BFA negligently failed to disclose a poor record of compliance with its continuing disclosure agreements when it conducted $32 million of bond sales in 2012 and 2013.
It also found that Alan Kapanicas, Beaumont's former city manager, who also had been former executive director of BFA, was negligent when he, "failed to exercise reasonable care" and "repeatedly either failed to read and understand the district's [continuing disclosure agreements] or disregarded their requirements."
O’Connor got dinged for violating securities fraud laws and Municipal Securities Rulemaking Board Rules G-17 on fair dealing and G-27 on supervision.
Anthony Wetherbee, the firm's co-founder and former primary investment banker, was also charged with negligence in committing securities fraud and violating the MSRB's fair dealing rule.
All four entities agreed to settle the charges against them without admitting or denying the commission's findings.
Robert Doty, president and proprietor of consulting firm AGFS in Annapolis, Md., said that the large personal fine of $37,500 for Kapanicas was noteworthy even though it was not a record.
“For a municipal finance official that’s a lot of money,” said Doty.
Kapanicas also agreed to be barred from participation in any future municipal bond offerings, a potentially crippling blow to the career of any public finance official to accept such a penalty. Doty said the case is a signal that although the MCDC program is over, the SEC is still focused on the subject matter of disclosure.
“MCDC is not going away", said Doty. “Obviously it’s not going away.”
Stracks said the stiffer penalties-O’Connor paid -- $150,000 compared to the $100,000 it would have owed under the MCDC -- reflected comments by SEC enforcement staff that penalties would be noticeably harsher for market participants who didn’t report because those that did should be able to see that cooperating was worth their while.
“I think that’s exactly right and I think that’s what they did,” said Stracks. “You’ve got to develop procedures and follow them. I think that’s the takeaway. Be very, very careful.”
Some lawyers speculated that the case could have arisen out of the MCDC itself, as the SEC settled charges with firms responsible for 96% of the market's share of underwritings but may have gotten reports from even more that it chose not to take actions against.
An experienced securities lawyer who spoke on condition of anonymity said that the situation with Beaumont appeared “incestuous,” noting that Kapanicas had been a high-ranking official with both the city and the BFA. The lawyer noted that the SEC chose to file a complaint against Kapanicas in U.S. District Court rather than bring it before one of the commission’s own administrative law judges as it did with the other defendants. But he said the Beaumont action was otherwise a fairly typical disclosure case.