WASHINGTON – The Securities and Exchange Commission is battling with Miami and former budget director Michael Boudreaux over whether they can defend themselves against securities fraud charges by saying they relied on advice from auditors.
With the trial slated to start within the next few weeks, the SEC is arguing that Miami and Boudreaux should be barred from introducing evidence on this defense, even though the commission last week failed to get the judge to throw out the defense in a summary judgment.
Lawyers for the city and former budget director contend the SEC can't have another go at killing their reliance defense after failing on its first attempt to do so.
The trial is scheduled to begin during the two weeks after Aug. 22. Judge Cecilia Altonaga, who sits in the District Court for the Southern District of Florida in Miami, is expected to preside over the trial.
The SEC case, filed in 2013, alleges that Miami and Boudreaux misled investors by failing to disclose inter-fund transfers that masked the deterioration of the city's general fund for fiscal years ending on Sept. 30 of 2007 and 2008.
The alleged omissions and misrepresentations were made in: bond offering documents for three offerings in 2009 that totaled $153.5 million; presentations to bond rating agencies; and the city's comprehensive annual financial reports (CAFRs) for fiscal years 2007 and 2008, according to the SEC.
The city disclosed those transfers in each of their CAFRs and official statements but falsely stated that the money was not expended and was being returned to the general fund, the SEC said.
In actuality, that money had already been pledged to several ongoing capital projects and some of it was restricted by the city code for designated purposes, according to the SEC lawyers. Thus, the funds that were transferred should not have been considered unallocated and sent to the general fund, the commission lawyers said.
Both sides agree that defendants can only use the reliance defense if they meet four criteria, according to SEC v. BankAtlantic Bancorp Inc. A federal court in that case said such a defense can be used if the defendants: completely disclosed the issue to an accountant; sought professional accounting advice as to the legality of the conduct; received advice that the conduct was legal; and relied on that advice in good faith.
The SEC argues that the city and Boudreaux cannot satisfy even one of the four factors for the defense. Its lawyers wrote in a subsequent motion on allowable evidence at trial that the two defendants did not completely disclose information to the auditors. Both Miami and Boudreaux are admitting they did not convey facts about the transfers, for example, that the money being transferred was not unused and was allocated to specific projects, the SEC said.
SEC's lawyers also say Miami and Boudreaux acknowledged they did not seek advice on: how to record the transfers; whether the transfers were proper under generally accepted accounting principles; and how to disclose the transfers in the CAFRs.
The city and Boudreaux neither sought nor received advice on the transfers or how to disclose them, the SEC alleges.
"Evidence about the auditors' work on the CAFRs and communications with them will mislead and confuse jurors into thinking the auditors implicitly approved of the defendants' conduct when the evidence shows they did not," the SEC lawyers wrote. "For similar reasons, the court should bar the defendants from presenting testimony or other evidence of communications with the … auditors or their work, as a way of back-dooring into evidence their insufficient reliance defense."
However, Miami and Boudreaux argue they are entitled to present evidence because they have met the criteria, primarily through the city's agreement with the auditing firm McGladrey & Pullen and discussions Boudreaux had with the firm's representatives about his transfer theories.
"No outside auditor ever informed Mr. Boudreaux or the city that they were not allowed to rely on their analysis and recommendations regarding the transfers or the city's financial statements," the lawyers for Boudreaux and Miami wrote.
Their lawyers, with the help of prior testimony from an expert witness on accounting, additionally present evidence that the auditors found no material misstatements in the two CAFRs and "concluded that the financial statements included the required disclosures as it related to the transfers."
They also cite one of the city's external auditors as saying he spoke with the city's finance director about the transfers and did not have an issue with how the disclosure was handled. The same auditor did not think the city's report of the transfers departed from GAAP, according to the lawyers.
"It is not the burden of the defendants to tell the auditors every fact that could possibly be relevant to accounting," the lawyers wrote. "The auditors have a professional obligation to obtain information they deem necessary to conclude their audit."
The commission is also asking Altonaga to exclude testimony from the expert accounting witness used by Miami and Boudreaux.