Miami-Dade County

Securities fraud trial begins Friday as SEC takes on city of Miami


Speaking under oath in New Orleans to a Securities and Exchange Commission attorney four years ago, Michael Boudreaux tried to explain the financial morass he found when he was hired by the city of Miami.

Boudreaux, Miami’s former budget director, talked about realizing the city was going broke, scrambling to plug holes and discovering millions of misplaced dollars lying around like change beneath a couch cushion. Then, as the city’s outlook continued to worsen and questions surfaced about a series of money transfers, he said the colleagues who once worked alongside him pointed their fingers, leaked documents to the Miami Herald and made him a scapegoat.

“People started writing e-mails to cover themselves, and then the next thing you know, I’m out there exposed,” Boudreaux said during a 2012 deposition. “I’m the only really person that’s been, in my opinion, detrimentally affected by all of this, by losing their job, publicly and unable to get another job because of it.”

Now years later, out of all the Miami officials involved in the city’s questionable transfers in the late 2000s, he’s the only one on trial.

People started writing e-mails to cover themselves, and then the next thing you know, I’m out there exposed

Michael Boudreaux, former Miami budget director

On Friday, attorneys will begin selecting jurors to weigh civil securities fraud charges against the city and Boudreaux, beginning a two-week ordeal that will decide whether the 51-year-old orchestrated a city scheme to dupe ratings agencies and bond investors in 2009. City officials are adamant that they did nothing wrong, as is Boudreaux, who didn’t benefit financially from any of the decisions at question.

The case is important for the SEC and Miami, already under a cease-and-desist order stemming from securities violations in the 1990s. But Boudreaux, a self-described “peon” who once claimed in a whistle-blower suit he was fired for cooperating with the feds on the case, has the most on the line. Investigators say they found clear evidence he not only tricked investors and ratings agencies in order to secure lower interest rates on $153 million in bonds, but also manipulated city commissioners, his colleagues and his bosses — some of whom will be called as witnesses during the trial.

“Boudreaux was the architect of the scheme to defraud,” the SEC wrote in its 2013 complaint.

That Boudreaux is charged individually has forced municipal governments across the country to take notice. Typically, public employees are protected from civil charges stemming from actions taken in their official roles, a protection known as “qualified immunity.” But in a potentially precedent-setting issue that the U.S. Supreme Court ultimately declined to take up, the SEC successfully argued that Boudreaux was personally liable.

“It’s really a significant case and one that raises really difficult issues for local government,” said Chuck Thompson, executive director of the International Municipal Lawyers Association.

Boudreaux was the architect of the scheme to defraud

Securities and Exchange Commission

When Boudreaux was hired as an assistant budget director by the city of Miami in 2005, he came as an outsider with credentials from his time as the budget chief for New Orleans Public Schools. Within two years, Boudreaux, who’d grown up poor in New Orleans, was promoted to be the city’s $145,000 budget director.

Believing the city was going bankrupt, and suddenly asked to take charge of Miami’s capital projects budgets, Boudreaux said he quickly began to look at capital funds to find spare money. That led to the discovery of what he says were millions of unrestricted and “unused” dollars sitting idle in a capital projects “holding” account in early 2008 — the first of several such discoveries worth about $37.5 million.

Where the money came from, where it went, and why go to the heart of the SEC’s case.

$37.5 millionthe value of the transfers scrutinized by the SEC

Boudreaux, who declined interview requests through his attorney, said in legal proceedings the $13 million he initially found sitting around in early 2008 was taken from the general fund, a catch-all account without restrictions typically used to pay for employee salaries and general city services. And because the money originated in the general fund, Boudreaux said it could be transferred back to the account to help deal with budget losses. His bosses and city commissioners agreed.

The following year, he recommended another $24 million in various accounts be transferred back to the general fund.

“The fact that the general fund contributions were able to come back prevented a lot of unnecessary cuts that would have had to happen had these moneys not been brought back,” Boudreaux said in the 2012 deposition, made public this summer among thousands of pages of documents related to the trial.

But some of Boudreaux’s colleagues believed the transfers were only masking the city’s out-of-whack spending, postponing tough decisions by the City Commission and potentially rehashing the mistakes of the distant past. And ultimately, as property tax revenues plunged and employee expenses surged under generous union contracts, the shifting of funds contributed to the city’s second financial meltdown in as many decades, and a declaration of financial urgency.

For one, spending continued on capital projects that lost funding, including a police vehicle replacement account that burned through about $4 million more than expected. Then, after the city’s financial problems were exposed by a series of stories in 2009 by the Miami Herald, a scathing report by former auditor Victor Igwe alleged the city had illegally transferred restricted funds, and most of the money moved at Boudreaux’s recommendation was moved back to the original accounts.

Igwe, whose contract lapsed in 2011, is currently pursuing a whistle-blower case against the city before the Third District Court of Appeals. Bill Amlong, his attorney, expects the jury verdict in the SEC case to be a “ringing affirmation” of Igwe’s work with the city.

We are disappointed with the allegations the SEC has made and the aggressiveness in which they are pursuing the case

City Attorney Victoria Mendez

But in his deposition, Boudreaux argued that the city’s over-spending was the result of then-finance director Diana Gomez failing to cut off project spending in the city’s complicated financial system. He also said Igwe “has no ethics, no morals” and was out to get him after he cut the auditor general’s budget, and criticized the Miami Herald’s stories as inaccurate spin.

“I’m like, ‘Oh, man, I’ve got to deal with another reporter?’ ” he said, according to a transcript of his deposition. “I know what kind of bastards they are.”

But the SEC, whose Miami regional office declined to comment, contends in court documents that Boudreaux knew all along that the transfers were problematic. His purpose, investigators say, was to keep the city’s reserves at Miami’s legal minimum as officials prepared to sell bonds on the market. That minimum, created by a “financial integrity” law established after the city was slapped a first time by the SEC, is among the considerations ratings agencies make as they assign scores to the city’s bonds, and in turn help decide interest rates, which either raise or lower the cost of borrowing for the city.

Furthermore, the SEC says Boudreaux and the city knew about problems with the transfers in 2009 when they pursued three bond issues worth $153 million, but failed to inform the ratings agencies or potential investors. They say he also contributed false information to crucial year-end audits included in the city’s bond documents.

Attorneys for the city, which has now spent more than $2 million fighting the SEC, says the evidence actually shows that Miami’s financial staff fully disclosed the city’s money woes, and included a record of the transfers in the year-end audits attached to its bond materials. They say the SEC is trying to hold the city of Miami to a legal standard that doesn’t exist.

“We are disappointed with the allegations the SEC has made against the city and the aggressiveness in which they are pursuing the case,” City Attorney Victoria Mendez wrote in a statement.

To win the case, the SEC must prove a “preponderance of the evidence.” If that happens, the city could be hit with undetermined civil fines and an injunction barring the city from committing securities violations. Boudreaux, now the business manager for the Lafon Nursing Facility of the Holy Family in New Orleans, could face the same penalties.

As the case is tried, some of his former colleagues and bosses who helped transfer the money will be called as witnesses, including former city manager Pete Hernandez, former treasurer Pete Chircut, and possibly former CFO Larry Spring. Gomez and Igwe are also expected to testify.

In recent months, Boudreaux was been deposed again, and focused on his insistence that he did nothing wrong and vetted his recommendations with the city’s auditors. But four years ago, before he was charged by the SEC, Boudreaux said he was the victim.

“I came from a very poor neighborhood. I’ve worked hard to be where I’m at,” Boudreaux said in his 2012 deposition. “And these people just took it away from me.”