The U.S. Securities and Exchange Commission on Friday charged the city of Miami and its former budget director with civil securities fraud, saying the city engaged in questionable budget transfers that misled bond investors.
The SEC’s enforcement action also charged the city with violating an existing cease-and-desist order entered in 2003 based on “similar misconduct.” The agency said it’s the first time the SEC has alleged further wrongdoing by a municipality already under an existing cease-and-desist order.
The charges, filed in federal court in Miami, allege that the city and former Budget Director Michael Boudreaux “made materially false and misleading statements and omissions” about internal fund transfers leading up to three 2009 bond offerings totaling $153.5 million. They also are accused of including “false and misleading” information in the city’s 2007 and 2008 financial statements distributed to bond investors.
The investigation, which began in 2009 after a Miami Herald report, revealed that Boudreaux transferred $37.5 million from the capital budget, which pays for big-ticket construction items, into the general fund, to reduce gaping holes in the operating budget as the local economy soured. At the time, he justified the transfers by saying the projects were no longer necessary.
But the SEC found that the projects still needed those funds during that fiscal year, or that the money had already been spent. The transfers enabled Miami to meet its own requirements for general fund reserves. As a result, the city’s bond offerings were rated favorably by credit-rating agencies, which view general fund balances as key indicators of financial health.
“Miami cannot continue to play shell games with its finances,” Eric I. Bustillo, director of the SEC’s Miami regional office, said in a statement. “Investors and the markets deserve complete transparency in assessing the city’s municipal bond offerings.”
The SEC’s complaint seeks to prohibit the city from violating securities laws and to impose financial penalties on Miami and Boudreaux. It also seeks a court order directing the city to comply with the agency’s 2003 cease-and-desist mandate.
“Today, we’re paying for the sins of the past,” Miami Mayor Tomas Regalado said. “Now the city is very careful in segregating accounts.”
Boudreaux’s attorney, Michael Pizzi, said his client is a “scapegoat” for making a budget recommendation supported at the time by the city manager, mayor and commissioners.
“He was an employee who did his job and did absolutely nothing wrong,” Pizzi said. “There’s not a scintilla of evidence of bad intent or fraud on his part.”
The charges are likely to play a part in Regalado’s re-election this fall. His main challenger, Commissioner Francis Suarez, said earlier Friday that the SEC’s action would not come as a surprise to commissioners who have repeatedly criticized the city’s budget procedures.
“It’s a practice that hasn’t really improved, in my opinion, throughout Regalado’s tenure,” Suarez said. “One of the most unstable departments in the city has been the finance department.”
The revolving door in City Hall’s top administrative ranks during Regalado’s nearly four years in office has involved four city managers, five finance chiefs and three budget directors.
The most recent CFO, Janice Larned, was ousted earlier this month and temporarily replaced by Budget Director Daniel Alfonso, who Thursday was named interim city manager after Johnny Martinez suffered a stroke over the weekend.
Regalado, however, said the administration’s handling of finances has improved. He noted the bond sales under federal investigation took place under his predecessor, Mayor Manny Diaz. Regalado was a commissioner at the time.
A year ago, the SEC sent the city a letter alleging the fund transfers helped Miami misrepresent its financial situation to bond investors. Boudreaux received the same July 2012 letter.
SEC investigators looked at his colleagues who also signed off on Miami’s financial documents – former Finance Director Diana Gonzalez, former CFO Larry Spring and former City Manager Pete Hernandez – but none of them were charged.
After he was fired in 2010 by then-City Manager Carlos Migoya, Boudreaux filed a whistleblower lawsuit alleging he was booted for refusing to mislead SEC investigators.
Last August, the city offered a settlement, arguing it had not violated generally accepted accounting principles nor tried to hide the budget moves. The proposed deal called for the SEC to publish a letter reprimanding Miami over the questionable transfers; in turn, the city would restructure its finance department and outline detailed procedures for future transfers.
Investigators did not comment at the time on the city’s proposal.
Friday’s charges marked the second time the city has been punished by the SEC for violating securities laws. In 2001, the agency concluded that Miami had inappropriately moved funds from its capital budget to its general fund to show a balanced overall budget before issuing $116.5 million in bonds. A judge issued the cease-and-desist order in 2003, prohibiting the city from engaging in similar transfers.
Separately, SEC investigators since December 2011 have been examining the public financing of the Miami Marlins’ $634 million ballpark. The feds have interviewed several Miami and Miami-Dade politicians in that probe, apparently homing in on whether city or county administrators misled elected officials who voted for the plan.
That investigation is ongoing.