School District Charged with Defrauding Muni Investors
By Hal M. Bundrick
NEW YORK (MainStreet)--In the first-ever enforcement action of its type, the Securities and Exchange Commission has charged a school district and its municipal bond underwriter with misconduct involving required disclosures. The West Clark Community Schools district in Indiana is accused of falsely stating that it had properly provided annual financial information and required notices prior to issuing bond offerings. However, the SEC claims West Clark had not submitted any of the required annual reports or notices for a $52 million bond offering in 2005, and that the underwriter did not conduct adequate due diligence to detect a false statement in the course of a 2007 $31 million offering.
"This is the first time the SEC has charged a municipal issuer with falsely claiming in a bond offering's official statement that it was fully compliant with the annual disclosure obligations it agreed to in prior offerings, and an underwriter and its principal for not doing the necessary research to attest to the truthfulness of that claim," said Andrew Ceresney, Co-Director of the Division of Enforcement. "West Clark Community Schools defrauded bond investors by leading them to believe that it had provided the annual financial information contractually required in a prior bond offering, when in fact for five years they failed to submit the required information. This case demonstrates that we will be vigilant in making sure municipal issuers and underwriters comply with their obligations."
The SEC also charged Randy G. Ruhl, who heads the public finance & municipal bond department at Indianapolis-based City Securities Corporation, the underwriter for the school district, for misconduct involving West Clark's disclosures. The SEC's investigation found that City Securities and Ruhl "provided improper gifts and gratuities" to representatives of municipal bond issuers, and then charged these and other expenses back to the issuers as costs for the "printing, preparation and distribution of official statements."
"City Securities abused its role as municipal underwriter by fraudulently obtaining reimbursement from bond proceeds for expenses unrelated to the issuance of bonds," said Elaine C. Greenberg, Chief of the Enforcement Division's Municipal Securities and Public Pensions Unit. "Moreover, City Securities violated MSRB rules by providing representatives of municipal securities issuers with valuable and excessive gifts such as multi-day golf trips and tickets to various sporting events."