The SEC charged a San Diego County school district, Sweetwater Union High School District, and its former Chief Financial Officer, Karen Michel, with misleading investors who purchased $28 million in municipal bonds.
According to the SEC’s complaint against Michel and its order against Sweetwater, in April 2018, Sweetwater and Michel provided investors with misleading budget projections that indicated the district could cover its costs and would end the fiscal year with a general fund balance of approximately $19.5 million, when in reality the district was engaged in significant deficit spending and on track to a negative $7.2 million ending fund balance. The order finds that Michel managed the bond offering for the district and was aware of reports showing that the projections were untenable and contradicted by known actual expenses. Nevertheless, as stated in the order, Sweetwater and Michel included the projections in the April 2018 bonds’ offering documents and also provided them to a credit rating agency that rated the district, while omitting that the projections were contradicted by internal reports and did not account for actual expenses. Additionally, the complaint alleges that Michel signed multiple certifications falsely attesting to the accuracy and completeness of the information included in the offering documents.
“As the order finds, Sweetwater and Michel presented stale and misleading financial information as current and accurate,” said LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit. “The SEC will continue to address deceptive conduct that prevents municipal bond investors from getting an accurate picture of the financial risks of their investments.”
The SEC’s complaint against Michel, filed in U.S. District Court for the Southern District of California, charges her with violating Section 17(a)(3) of the Securities Act of 1933. Without admitting or denying the allegations in the complaint, Michel agreed to settle with the SEC and to be enjoined from future violations of the charged provision as well as from participating in any future municipal securities offerings. She also agreed to pay a $28,000 penalty. The settlement is subject to court approval. Sweetwater also agreed to settle with the SEC and consented, without admitting or denying any findings, to the entry of an SEC order finding that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, and requiring it to engage an independent consultant to evaluate its policies and procedures related to its municipal securities disclosures.
For further information about the SEC’s enforcement actions involving fraud charges in connection with bond issuances by or on behalf of schools and colleges, see SEC v. Park View School, Inc. (D. Ariz. September 14, 2020), SEC v. Batchelor (N.D. Cal. April 27, 2020), SEC v. Rojas (C.D. Cal. September 19, 2019), and SEC v. Borge (S.D.N.Y. March 28, 2019). The SEC has also brought a number of recent enforcement actions against municipal advisors who provide services to school district issuers.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.