A federal jury has found that Miami city officials defrauded bond investors in 2009 by playing shell games with public money, making the municipality the only one in the country to have been caught twice committing securities violations.
After deliberating for less than four hours Wednesday on a civil case the Securities and Exchange Commission brought in 2013, jurors returned a unanimous verdict that found the city liable on two counts of violating the federal Securities Act and one count of the Exchange Act. The nine-member jury also found former Miami budget director Michael Boudreaux, the accused architect of the city’s scheme, liable on one count of violating the Securities Act and two counts of the Exchange Act, but not liable on a fourth count.
In issuing its verdict, the jury — the first in the country to decide a federal securities case against a municipality or its officers — declared that the city attempted to trick investors in 2009 into believing some $153 million in bonds were better investments than was actually true, and acted “knowingly” or with “severe recklessness” in making misrepresentations or material omissions in crucial bond documents.
“We will continue to hold municipalities and their officers accountable, including through trials, if they engage in financial fraud or other conduct that violates the federal securities laws,” Andrew Ceresney, director of the SEC’s division of enforcement, said in a statement.
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Miami taxpayers could now be on the hook for civil penalties, although SEC lawyers have not yet said how much they will seek.
The SEC has been scrutinizing the city since 2009, after the Miami Herald and a scathing city audit raised questions about a series of financial transfers that moved money out of capital projects and restricted accounts in the late 2000s in order to shift millions into the city’s depleted general fund. The transfers — akin to a person moving money from a home improvement fund into a main checking account — were recommended by Boudreaux and approved by Miami commissioners.
But SEC investigators determined that Miami officials moved the money in order to pad the city’s reserves and make the city seem financially healthy as they prepared to take three bond issues to the market. They said the city’s budget projections showed Miami was going bankrupt, and the transfers were equivalent to cooking the books, since many of the raided accounts were either filled with highly restricted dollars, money already spent, or dollars that were still needed to pay for ongoing expenses.
Ultimately, the transfers contributed to a financial meltdown that forced the city to raise taxes and slash employees’ pay and benefits.
“I found out from [then-CFO] Larry Spring that spending was still going on in some projects and what I told Mr. Spring at the time was that it could not be true,” former city manager Pete Hernandez testified during the trial, which lasted longer than two weeks. “If we had known at the time that those projects continued to spend, we never would have recommended [the transfers] at all.”
For the city, which spent more than $2 million in legal fees while defending itself and its employees, Wednesday’s verdict is a blow to its credibility. Miami, which Ceresney referred to Wednesday as a “recidivist violator of the federal securities laws,” was caught defrauding bond investors in the 1990s and slapped in 2003 with a cease-and-desist order. Ceresney said the SEC expects Judge Cecilia Altonaga to find that the city violated the prior SEC order.
The verdict could also be damaging to the city’s taxpayers, who might be on the hook for steep civil penalties. The SEC has until Sept. 28 to file a motion for an injunction barring the city and Boudreaux from committing further violations of securities laws, and seeking civil penalties.
“We have to live with the sins of the past,” said Mayor Tomás Regalado, whose administration returned millions of transferred dollars to their sources in 2010 after he was elected mayor in late 2009. “But what I really hope doesn’t happen is the residents of the city have to pay for the sins of the past.”
Miami City Attorney Victoria Méndez said in a text message that her staff is considering its options. She did not respond to a question about whether the city made a mistake by declining to settle the case before it went to trial.
“While we respect the jury and the judicial process, we are disappointed in the jury’s verdict,” she said. “We are reviewing the record to determine how to proceed at this point.”
As for Boudreaux, jurors found he used a “device, scheme or artifice to defraud” in violating the Exchange Act. But his attorney, Ben Kuehne, said it was crucial to note that the jury also found the SEC did not prove the first of the four counts brought against the former budget director, since he was found to not have engaged in a scheme to defraud in violation of the Securities Act. Kuehne indicated his client was considering an appeal.
“That the jury found Mr. Boudreaux didn’t engage in a fraud raises significant questions as to the validity of the entire verdict,” Kuehne said.
Boudreaux, who was fired by the city in 2010 amid the SEC’s investigation, bowed his head as he listened to Altonaga read the verdict. The former budget director contended in court that he handled all his recommendations with transparency, and blamed problems that cropped up later on mistakes associated with a new citywide accounting program.
Kuehne said during the trial that his client, currently a business manager for a nursing home in New Orleans, hopes to one day return to government work. Afterward, Boudreaux said, “I’m just very disappointed by all of this.”