The SEC brought another action against a City for
inadequate disclosure in connection with a municipal bond offering. In the
Matter of the City of South Miami, Florida, Adm. Proc. File No. 3-15329
(May 22, 2013). The action centers on a bond offering initiated in 2002 to
finance a public parking garage. The project traces to 1997 when the City began
considering building a parking garage. In connection with the project the City
also sought a developer for related retail space.
In 2002 the City entered into arrangements with a
developer for the retail space. The role of the developer was limited in accord
with the applicable tax requirements. Later bond council informed City
officials that proceeds from tax exempt bonds could not be used to finance the
retail portions of the project. This admonition was not communicated to
subsequent City administrations.
In May 2002 the City issued $49.8 million in tax exempt
bonds for the project. Shortly prior to the offering the City executed
documents with the Florida Municipal Loan Council or FMLC for the tax exempt
portion of the project. The City represented that proceeds of the offering
would not be for private use and that the project would be conducted in accord
with the applicable provisions of the IRS Code. Almost immediately after the
offering, a portion of the proceeds were loaned to the developer.
After abandoning the project because of funding concerns,
in 2005 it was substantially restructured by City officials. Essentially the
retail space and the garage were ceded to the developer. This jeopardized the
tax exempt status of the bonds. The Florida Municipal Loan Council and bond
counsel were not informed of the changes.
The next year the project was still incomplete. The City
sought to borrow additional funds from the FMLC to continue. In the Fall of
2006 the City applied to join the FMLC bond pool. The City failed to tell the
FMLC that the project had been significantly restructured or that portions of
the earlier bond offering had been loaned to the developer. Accordingly, the
materials filed with in connection with the loan to contained material
misrepresentations key to the tax exempt status of the project. Certifications
filed by the City in each of the next two years stating that it was in
compliance with the applicable requirements to maintain the tax exempt status
were also inaccurate and materially incomplete.
In 2010 the City submitted a material event notice with
the MSRB's Municipal Market Access system. This notice acknowledged for the
first time that the tax exempt status of the bonds had been jeopardized,
although they had been trading for years. Subsequently, the City entered into
agreements with the IRS under its Voluntary Compliance Agreement Program. Under
the terms of the agreements the City was required to pay $260,325.40 and take
steps to retire the bonds at the earliest possible date. To finance this the
City had to borrow over $1.1 million. As a result of the settlement the tax
exempt status of the bonds was preserved for the holders. The Order alleges
violations of Securities Act Sections 17(a)(2) and (3).
The City resolved the proceeding, consenting to the entry
of a cease and desist order based on the Sections cited in the Order. In
addition, it will retain a consultant who will review the procedures of the
City for the next three years and make recommendations which will be adopted.
This proceeding is one of a series of actions brought by
the Commission centered on the municipal bond market. Like earlier actions against
the City of Harrisburg, the State of Illinois and others, a critical common
thread is the lack of procedures in the pertinent state or city government
departments to ensure proper disclosure and compliance. This suggests that
perhaps the time has come for a more comprehensive report on this critical
issue. Perhaps more importantly, it should serve as a wake-up call to state and
local government officials to examine and, if necessary reform, their
procedures relating to municipal bonds.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegal, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, President, U.S. China Business Counsel. Live in
Washington, D.C at 600 14th St. N.W., Penthouse (no charge for ASECA
members attending live in Washington who pre-register by sending an e-mail to
email@example.com). Webcast Nationally by the ABA. For further
information please click here.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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