The Securities and Exchange Commission kicked off a long-awaited civil trial against the city of Miami Monday, arguing to a federal jury that city officials used illegal money transfers to hide gaping financial problems and sell $150 million in risky bonds to unwitting investors in the late 2000s.
Attorneys for the city and former budget director Michael Boudreaux shot back, saying the SEC is pushing a heavy-handed, far-fetched legal case based on cherry-picked information. The very documents and witnesses subpoenaed by the agency during its seven-year investigation will disprove its case, they said.
“There’s no secret here,” said Scott Cole, a private attorney representing the city of Miami. “Every transfer was out in the open.”
Monday’s opening statements mark the beginning of the end of an unprecedented financial drama that started in 2009, when the city of Miami’s budget was on the brink of imploding. Prompted by a series of Miami Herald articles and a critical internal audit, SEC investigators began probing some $37 million in money transfers to learn whether the city was playing “shell games” with its budget in order to secure lower interest rates on three upcoming bond issues in 2009.
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Every transfer was out in the open
Scott Cole, attorney for the city of Miami
Crucial to the SEC’s case was whether the city was moving money to keep Miami’s reserves at $100 million, a threshold set by law after the city — the only city to ever be charged twice by the SEC — had a financial meltdown in the 1990s. That case led to SEC charges and a 2003 cease-and-desist order.
In 2013, the SEC filed charges against the city again, seeking an injunction and civil penalties. The agency also charged Boudreaux, who it alleged bungled the city’s finances upon becoming budget director and then tricked his bosses into believing they could use restricted funds to pad their reserves in order to save his job. Some of the money, they said, was siphoned away from capital projects that kept on spending money after they were emptied, ultimately contributing to a budget crisis in 2010.
In court Monday, senior SEC trial counsel Amie Riggle Berlin said witness depositions, internal emails, memos and financial reports will all show that Boudreaux “orchestrated” the alleged scheme. And when city commissioners found out in April 2009, she said, they waited nearly a year, until after the city sold its bonds, to go public and transfer the money back to the proper accounts.
“They voted four times to delay the truth from coming out, to delay the public from learning the truth of how the city and Mr. Boudreaux inflated the general fund balance,” she said. “This allowed the city to keep the public in the dark.”
We are here today because history has repeated itself
Amie Riggle Berlin, SEC attorney
But Cole and attorney Ben Kuehne, representing Boudreaux, told jurors that all the city’s supposedly covert decisions were sanctioned by outside auditors, documented in public records and approved during televised meetings. Quoting from the city’s scrutinized Comprehensive Annual Financial Reports, Cole noted that the city disclosed that it transferred money back into its general fund. He also noted the ratings agencies mentioned the city’s money transfers and budget struggles.
Further, arguing that the SEC’s case strains belief, Cole said the time frame of the alleged scheme means it would have involved two mayors, two administrations, and newly elected city commissioners who won office in late 2009. And he said that while the SEC will quote from senior Miami officials who questioned the wisdom of what the city was doing with the transfers back, it will ignore statements from those same officials attesting to the legality of the moves.
The SEC has gotten it all wrong
Ben Kuehne, attorney for Michael Boudreaux
As for the empty capital accounts that kept on spending, Kuehne told jurors the problem was due to the city’s mishandling of a new financial computer database, called Oracle. Boudreaux, who had previously used the system in his job as budget chief with the New Orleans Schools system, said the de-funded projects kept spending when the finance department failed to correctly mark the changes in the computer system.
If anyone was guilty, Kuehne said, it was the SEC of “Monday morning quarterbacking.” He said Boudreaux, who didn’t benefit financially from any of the transfers at question, was a man of principle: a marathon runner and former member of the U.S. Navy.
“The SEC has gotten it all wrong,” he said, and was unwilling to admit it had made “a huge mistake in accusing Michael Boudreaux of fraud.”
The trial continues Tuesday, when witnesses are expected to begin testifying, possibly starting with former City Manager Pete Hernandez. Kuehne said it’s likely Boudreaux will testify.