SEC Charges the City of Miami With Civil Securities Fraud

The Securities and Exchange Commission accused the city of Miami of civil securities fraud on Friday, charging that the city and its former budget director were playing “shell games” with city bank accounts. As part of the complaint, the SEC accused the city of Miami of deliberately misrepresenting the city’s finances to bond investors.

In a complaint filed in Federal Court in Miami on Friday, the SEC alleged that the city and its former budget director, Michael Boudreaux, were making material omissions and misrepresentations about internal funds transferred in the run up to the offering of three 2009 bond offerings totaling $153.5 million.

The complaint alleges that Boudreaux orchestrated transfers of funds to mask mounting deficits and falsely inflate reserves in the cities financial statements for 2007 and 2008. The SEC is seeking to prohibit the city from violating securities laws, while imposing financial penalties of hundreds of thousands of dollars on both Miami and Boudreaux.

The director of the SEC’s Miami office, Eric Bustillo said in a statement that “Miami cannot continue to play shell games with its finances”, and added that both investigators and the markets deserve complete transparency when considering the city’s municipal bond offerings.

Ironically the City of Miami is already under a cease and desist order from 2003 for similar misconduct, making it the first time the SEC has had to investigate a city already under an existing court order. As a result the federal complaint also seeks to require the city to comply with the existing cease and desist order.

The SEC investigation began in 2009 after an expose in the Miami Herald revealed that Boudreaux had transferred $37.5 million of the city budget from construction projects he claimed no longer needed the funding. However, SEC investigators found that the projects were still in need of those funds or the funds had already been spent. The transfers allowed Boudreaux and the city to plug large holes in their budget and meet the requirements for a general fund reserve, which Boudreaux tried to inflate to $100 million. The end result of all the financial maneuvering was that the city of Miami was able to receive a favorable credit rating from the rating bureaus.

SEC investigators are calling Boudreaux   “the architect of the scheme”, a charge vigorously denied by his attorney who insists that his client is being made a scapegoat.

The city itself has vowed to fight the charges and Major Tomas Regalado denounced the charges as making the city pay for sins of the past. In a statement released on Friday, vowing to fight the SEC, the city said “The SEC’s lawsuit contains baseless allegations that the City misled the credit rating agencies about the transfers in advance of certain bond offerings conducted by the City in May 2009. In truth, the City discussed the transfers with the rating agencies …’’

The SEC has uncovered at least one smoking gun email where then Finance Director Diana Gomez commented to Boudreaux “As originally stated at the [Feb. 26, 2009] meeting, I do not believe it is fiscally prudent or financially responsible to mask the loss in the General Fund for FY 2008 with these journals”

In 2010, after being fired by then City Manager Carlos Mogoyo, Boudreaux filed a whistleblowers lawsuit alleging that he was fired for refusing to mislead SEC investigators. Another whistleblower lawsuit was filed by Victor Igwe, the city auditor at the time of the budget transfers who in a series of audits questioned the actions, calling them “illegal” after commissioners let his contract expire in June 2011.

Separately SEC investigators are also probing the public financing of the Miami Marlins $634 million ball park in Little Havana, honing in on whether city officials mislead those who voted for the plan.

Both investigations are still ongoing.

For investors this is a classic story of requiring due diligence to be thorough and conducted independently, regardless of who the issuer is and what their alleged reputation is. Few would expect a city to go to such lengths to defraud the public, unfortunately as we can see here it happens.