The Securities and Exchange Commission is charging the city of Miami and its former budget director with securities fraud, according to a civil complaint filed Friday in federal court.
George S. Canellos, co-director of the SEC's Division of Enforcement, said in a news release that the city of Miami actively marketed bonds to investors while hiding the true reason for moving around approximately $37.5 million in city funds.
"The fact that a city official would enable these false and misleading disclosures to investors merely a few years after Miami had been reprimanded by the SEC for similar misconduct makes this repeat behavior all the more appalling and unacceptable," Canellos said.
An SEC investigation found that the city of Miami and former budget director Michael Boudreaux made materially false and misleading statements and omissions about certain interfund transfers in three 2009 bond offerings totaling $153.5 million. Similar misleading information was reportedly included in the city's fiscal year 2007 and 2008 Comprehensive Annual Financial Reports. Those reports are distributed to broad segments of the investing public, including investors in previously issued city debt.
According to the SEC complaint, Boudreaux orchestrated the transfers from the city's capital improvement fund to its general fund in order to mask increasing deficits in the general fund. Investors and bond rating agencies regularly use the general fund as a key indicator of financial health.
Boudreaux's attorney, Michael Pizzi, said his client is being used as a scapegoat and plans to be fully exonerated in court.
"This is an outrageous abuse of power by the SEC," Pizzi said. "Mr. Boudreaux was an employee of the city who made recommendations on filling budget gaps. Mr. Boudreaux was not responsible for decisions made by the mayor, the city manager and the commissioners."
The SEC's action also charges the city of Miami with violating an SEC cease-and-desist order that was entered against the city in 2003 based on similar misconduct. This is the first time the SEC has alleged further wrongdoing by a municipality subject to an existing SEC cease-and-desist order.
The City of Miami responded to the SEC’s charges in a statement on Friday.
”The City prides itself on the transparency of its bond offering documents and its history of meeting its obligations to bondholders. The City did not violate any securities laws, and looks forward to the opportunity to demonstrate that in a court of law,” it said.
The city emphasized numerous points about the SEC’s complaint. Among them, it said that the complaint is about routine transfers that it called “immaterial,” because the transfers amounted to less than $37.5 million out of budgets that totaled more than $1 billion in the 2007 and 2008 fiscal years.
The city also said that it made extensive disclosures about the transfers, that outside auditors approved of them, and that credit rating agencies Fitch and Standard & Poor’s understood both the transfers and the city’s overall financial condition.