By Tim Dulaney, PhD and Tim Husson, PhD
Yesterday the Securities and Exchange Commission (SEC) announced that West Clark Community Schools -- and Indiana School District -- City Securities Corporation and Randy G. Ruhl have been charged with defrauding investors in connection with municipal bond offerings. The SEC order against the school district can be found here (PDF) and against the underwriter here (PDF).
The action stems from the fact that the school district was contractually obligated to disclose financial information on an annual basis. This "continuing disclosure" requirement is outlined on page 24 of the West Clark First Mortgage Refunding Bonds, Series 2005, official statement (PDF).
The SEC alleges that the school district "had not submitted any of the required annual reports or notices for a 2005 bond offering" and as a result failed to conduct adequate due diligence in connection to detect the false statement contained within the West Clark First Mortgage Refunding Bonds, Series 2007, official statement (PDF). In particular, the 2007 offering contains the following false statement (page 30): "[i]n the previous five years, the [school district] has never failed to comply [...] with any previous undertakings in a written contract or agreement that is entered into". Since the school district did not file annual reports in connection to the 2005 offering, this statement is materially false.
The SEC has fined the underwriting firm $300,000 as well as almost $280,000 in disgorgement and prejudgment interest. Ruhl, without admitting or denying the commission's findings, has agreed to pay nearly $40,000 in connection with this action as well as a permanent supervisory bar. The school district has six months to ensure disclosures are current and accurate, implement personnel training, and establish procedures for the efficient submission of required documents to the MSRB.
Yesterday's action comes on the heels of the SEC's charges against the cities of South Miami, Florida and Victorville, California, which we discussed just a couple months ago. Some commentators also suggest that the SEC will have a role to play in the current Detroit bankrupcy proceedings (it would not be the first time the SEC has investigated Detroit municipal officials). Whether the additional scrutiny by the SEC will lead to a prolonged decrease in municipal securities fraud is an open question, but hopefully these actions at least locally bolster investor protection.
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