The Securities and Exchange Commission (the "SEC")
continues its increased enforcement activity against municipal
issuers. On July 29, 2013, the SEC for the first time charged a
municipal issuer with securities fraud for stating in an official
statement that it was in full compliance with prior continuing
disclosure undertakings, when in fact it had failed to make
numerous filings, while also charging the underwriter and its
principal with failing to conduct the necessary due diligence to
confirm the accuracy of such statement. West Clark Community
Schools, an Indiana school district; City Securities Corporation
("City Securities"), its underwriter; and City
Securities' head of public finance, Randy Ruhl, were charged
after an SEC investigation revealed that the school district stated
in a 2007 official statement that it was in compliance with its
continuing disclosure obligations, even though it had not submitted
any of the required annual reports or notices since undertaking to
provide such continuing disclosure in connection with a 2005 bond
offering. The investigation also found that the underwriter did not
conduct adequate due diligence to detect the false statement in the
2007 official statement.
West Clark Community Schools, without admitting or denying the
SEC's findings, consented to an order to cease and desist from
committing or causing any violations of Section 17(a) of the
Securities Act and Section 10(b) of the Exchange Act and Rule
10b-5. The school district also agreed to undertake certain
remedial actions, including the adoption of written policies for
its continuing disclosure obligations; the designation of an
individual responsible for ensuring compliance with those
obligations; and the implementation of annual training for
personnel involved in the bond offering and disclosure
process.
In addition to finding that "City Securities, with Ruhl's
substantial assistance, made recommendations without forming a
reasonable basis regarding the accuracy of disclosures because of a
lack of due diligence, resulting in the public dissemination of a
materially false official statement," the SEC found that City
Securities provided improper gifts and gratuities to
representatives of other municipal bond issuers and then charged
these and other expenses back to the issuers under the guise of
costs for "printing, preparation and distribution of official
statements."
City Securities and Ruhl, without admitting or denying the
findings, agreed to settle the SEC's charges. City Securities
consented to an order to cease and desist from committing or
causing any violations of Section 17(a) of the Securities Act,
Sections 10(b) and 15B(c)(1) of the Exchange Act and Rules 10b-5
and 15c2-12, and MSRB Rules G-17 and G-20. It also agreed to be
censured and pay disgorgement and prejudgment interest of $279,446
as well as a penalty of $300,000 and to take a number of remedial
actions to enhance its disclosure and expense reimbursement
policies, including engaging independent compliance counsel.
Ruhl also consented to cease and desist from committing or causing
any violations of these provisions of the federal securities laws
and to pay disgorgement and prejudgment interest of $20,320 as well
as a penalty of $18,155. Ruhl is permanently barred from
association in a supervisory capacity with any broker, dealer,
investment adviser, municipal securities dealer, municipal advisor,
transfer agent or credit rating agency and is also subject to other
securities industry prohibitions.
This latest action follows close on the heels of the SEC's July
19, 2013, enforcement action against the City of Miami, in which
the SEC filed civil charges against the City and its former Budget
Director, alleging violations of the anti-fraud portions of the
federal securities laws (see last week's
Day Pitney alert), and earlier SEC actions against the City of
Harrisburg, PA, (see prior
Day Pitney alert) and the state of Illinois.
This week's SEC action emphasizes that the SEC is continuing to
increase its scrutiny of public finance disclosures and the
necessity of post-issuance compliance. The attorneys in Day
Pitney's Municipal Finance Group routinely counsel clients on
proactively addressing compliance with their disclosure
obligations. Please feel free to contact any of the attorneys on
the right of this alert if you would like to discuss this alert or
your disclosure obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.