November 14, 2014

A Warning to Issuers: SEC Charges City and Two Officials with Fraud

Holland & Knight Alert
Michael L. Wiener | Allison S. Dyer

In a first-time use of the Dodd-Frank Act, the U.S. Securities and Exchange Commission (SEC) has charged Allen Park, Mich., its former mayor and its former city administrator with fraud in connection with $31 million in tax-exempt bonds issued by the city.

Details on SEC's Charges Against City and City Officials

In 2009, the city sold $28.3 million in tax-exempt general obligation bonds and an additional $2.7 million in 2010 to finance a movie studio project in the city. At a time when many other municipalities were facing similar circumstances, Allen Park's 2010 fiscal budget had a $2 million deficit. In addition, for various reasons, the public-private partnership with the movie producer who had planned to use the project fell apart, as did financing assistance from the county.

The SEC charged that, despite these issues and the city administrator's knowledge and involvement in both the project negotiations and city budget, the city's official statements showed a budget with no deficit and a studio project expected to generate more than $1.5 million annually in lease revenue. The SEC found these misleading statements to be a violation of federal antifraud provisions and, for the first time, used a provision of the Dodd-Frank Act that specifically permits the SEC to bring cases under Section 20(a) of the Securities Exchange Act of 1934. The SEC alleged that the mayor was liable as a "control person" under this provision based on his control of the city administrator and the city itself.

Both the mayor and the city administrator have settled with the SEC without admitting or denying the SEC's charges. The city administrator will be barred from participating in any municipal bond offerings and ordered to cease and desist from future violations. The mayor agreed to similar penalties in addition to paying a $10,000 penalty. The city agreed to cease and desist from future violations and to strengthen its disclosure policies and training. Read more from the full SEC online press release.

Lessons from Allen Park

Issuers should assume that, based on both the nature and number of these recent actions, the enforcement environment for issuers of municipal securities has radically changed. SEC representatives have publicly stated that the Allen Park settlement is not an outlier and that the "SEC will continue to look for opportunities to hold individuals (not just municipalities) personally
accountable for their roles in violations of federal securities laws." In addition, the SEC plans to increase its participation with law enforcement in cases where criminal charges are warranted.

Governmental issuers should be vigilant in reviewing their official statements to ensure the accuracy of the provided information. Elected officials and staff must understand the serious consequences that result from improper disclosure, including financial penalties against individuals. In addition, issuers should have formal ongoing compliance programs in place, including regular training as well as policies and procedures relating to disclosure.

Your Holland & Knight attorney can provide you with advice on how best to address your disclosure needs. Please contact us to assist with the preparation of an offering document or the establishment of a compliance policy.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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