SEC Accuses Miami of Misleading Investors in Muni Bonds

The U.S. Securities and Exchange Commission accused the city of Miami and Michael Boudreaux, a former budget director, with securities fraud related to several municipal bond offerings about four years ago.

Florida’s second-largest city and Boudreaux shifted money from a projects account to the general fund to mask budget gaps and win higher grades from ratings companies on three 2009 debt sales totaling $153.5 million, the SEC said yesterday. Boudreaux’s lawyer said he’s being made into a scapegoat.

In 2010, the SEC began cracking down on state and local governments for not giving investors accurate information about their financial condition prior to bond sales, focusing on pension deficits. Since then, Illinois and New Jersey have both settled with the agency over such issues. The agency has since broadened its focus beyond retiree obligations, as in Miami.

“Miami actively marketed bonds to the investing public while hiding the true reason for interfund transfers to boost the image of its primary operating fund,” George S. Canellos, co-director of the SEC’s enforcement division, said in a statement. The agency said in a court complaint that Miami had been ordered to stop violating anti-fraud laws in 2003.

“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. The agency said the transfers began no later than 2007.

Fighting Claims

Ivan Harris, a lawyer for the city, said it would contest the SEC’s claims.

“The city disputes these charges, and looks forward to demonstrating in a court of law that they are without merit,” Harris, with Morgan Lewis & Bockius LLP’s Miami office, said by e-mail. The agency is seeking civil and monetary penalties.

The SEC is blaming Boudreaux for decisions made by higher-ranking officials, the former budget chief’s lawyer, Michael Pizzi, said by telephone. Boudreaux sued the city after he was fired in 2010, attributing his dismissal to his cooperation with the agency’s investigation into the transfers. The case was dismissed in state court, records show. Pizzi said it is in abeyance pending the outcome of the SEC case.

Extending Authority

“They should charge every budget director in America who ever made a budget transfer,” Pizzi said. “This is a ridiculous extension of SEC authority that puts the SEC in the position of micromanaging municipal budgets.”

“It’s absurd and Mr. Boudreaux will have his name cleared in court,’ Pizzi said.

An attempt to reach Carlos Migoya, the former Miami city manager who fired Boudreaux in 2010, through a message left with Beba Luzarraga, an aide, wasn’t successful.

The agency said in its complaint that transfers were masked by Boudreaux to obtain the City Commission’s approval, falsely claiming that the project funds hadn’t been allocated or used. The SEC complaint, filed in U.S. district court in Miami, says the transfers also weren’t properly reported in public disclosure documents.

“Mr. Boudreaux is being made a scapegoat for decisions made by mayors and city managers and commissioners, as well as the downturn in the housing market and the economy,” Pizzi said. “The SEC is taking on a low-level employee with absolutely no evidence of fraud or ill intent. It’s unconscionable.”

Not Unusual

Pizzi said Miami was not unusual in deferring capital projects during the worst years of the recession to “fill gaps in the operating budget.”

The SEC said the city and Boudreaux made “material misrepresentations” to credit rating companies about the transfers and the projected 2009 budget deficit.

A report by city auditors forced Miami to reverse most of the transfers, leading to the declaration of fiscal distress and subsequent credit rating cuts, the SEC said.

The city’s borrowing costs have risen this year. Miami general-obligation bonds maturing in January 2022 traded today to yield 3.5 percent, compared with a yield of about 2.4 percent in a similar transaction Jan. 22, according to data compiled by Bloomberg.

Standard & Poor’s rates the bonds BBB-, or a step above noninvestment-grade securities, or junk, and has a negative outlook on the credit.

The move reflects the SEC’s continuing drive to require state and municipal debt issuers, as well as officials of those entities, to accurately depict their financial condition.

In April, the agency accused Victorville, California, and a securities underwriter of inflating property values at a former Air Force base in connection with an April 2008 bond sale. The bankrupt California cities of Stockton and San Bernardino have also reported being contacted by the regulator.

In March, Illinois settled agency accusations that it misled investors by failing to disclose how it was funding its employee pension funds, which sent its credit rating tumbling. The SEC settled a similar case with New Jersey in 2010, the first time the regulator had targeted a state.

-- With assistance from Michael B. Marois in Sacramento, California, Michelle Kaske and Toluse Olorunnipa in New York, and Bill Faries and Susannah Nesmith in Miami.

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