SEC charges city of Miami with civil securities fraud

The U.S. Securities and Exchange Commission on Friday accused the city of Miami and its former budget director of playing financial “shell games” with city bank accounts, charging them with civil securities fraud for allegedly misrepresenting city finances to 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 Friday in federal court in Miami, allege that the city and former Budget Director Michael Boudreaux “made material misrepresentations and omissions” about internal fund transfers leading up to three 2009 bond offerings totaling $153.5 million. Boudreaux is accused of orchestrating the transfers “to mask” mounting deficits and “falsely inflate” reserves reported in the city’s 2007 and 2008 financial statements.

“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.”

But Mayor Tomas Regalado and his administration defended the city, denying that any fraud occurred and saying the current management team — known for its inability to keep top financial managers — steadfastly follows accounting rules.

“Today, we’re paying for the sins of the past,” Regalado said. “Now the city is very careful in segregating accounts.”

In the federal complaint, the SEC is seeking to prohibit the city from violating securities laws and to impose financial penalties of potentially hundreds of thousands of dollars on Miami and Boudreaux. It also seeks a court order directing the city to comply with the agency’s 2003 cease-and-desist mandate.

The city said it will fight the civil charges, calling the allegations “baseless.” Boudreaux’s lawyer said his client was being made a “scapegoat” for the city’s alleged failure to disclose its failing financial health to bond investors.

The SEC investigation, which began in 2009 after a Miami Herald report, revealed that Boudreaux transferred $37.5 million from the capital budget that pays for big-ticket construction items into the general fund to reduce gaping holes in the operating budget as the local economy crumbled. 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 or that the money had already been spent. The transfers enabled Miami to meet its own requirements for general fund reserves, which Boudreaux tried to inflate up to $100 million. 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.

The three 2009 bond offering were for street, sidewalk, neighborhood and security improvements, as well as refinancing of employee pension bonds.

The SEC’s complaint called Boudreaux “the architect of the scheme to defraud,” by misleading his bosses at City Hall, the City Commission and bond investors.

Investigators uncovered one smoking-gun email written in March 2009 by then-Finance Director Diana Gomez to Boudreaux, the city manager and other top administrators. The impact of Boudreaux’s budget transfers and “their obfuscation of the city’s failing finances were not lost” on Gomez or others in senior management, the complaint said.

“As originally stated at the [Feb. 26, 2009] meeting, I do not believe it is fiscally prudent or financially responsible to mask the loss in the General Fund for FY 2008 with these journals,” Gomez wrote.

Boudreaux’s attorney, Michael Pizzi, said his client is being blamed for budget recommendations 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.”

Late Friday, the city defended itself, releasing a statement saying it “did not violate any securities laws.” The budget transfers in question were “routine,” the statement said, and disclosed in the city’s 2007 and 2008 financial reports. They were approved by Miami’s outside auditing firm, according to the statement.

“The SEC’s lawsuit contains baseless allegations that the City misled the credit rating agencies about the transfers in advance of certain bond offerings conducted by the City in May 2009,” the statement said. “In truth, the City discussed the transfers with the rating agencies …”

The city’s statement did not point out, however, that the budget transfers the SEC alleges were improper were restored by the city after they were uncovered in a municipal audit.

Regalado said the city had been notified earlier in the week about the impending lawsuit.

The charges are likely to play a part in the mayor’s reelection campaign this fall. His main challenger, Commissioner Francis Suarez, said early Friday that the SEC’s action would not surprise 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 also looked at his colleagues who signed off on financial documents — Gomez, former Chief Financial Officer 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.

Another whistleblower lawsuit was filed by Victor Igwe, the city auditor at the time of the budget transfers who in a series of audits questioned the actions, calling them “illegal.” Commissioners let his contract expire in June 2011.

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 Little Havana ballpark. The feds have interviewed several Miami and Miami-Dade politicians in that probe, apparently honing in on whether city or county administrators misled elected officials who voted for the plan.

That investigation is ongoing.

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