On March 16, 2022, the Securities and Exchange Commission (“SEC”) issued an order against a school district (Crosby Independent School District (the “District”), located in the suburbs of Houston, Texas) and against the auditor of the district (the “Auditor”) and accused the school district’s former chief financial officer (“CFO”) of misleading investors who purchased $20 million of District 2018 bonds (the “Bonds”) ).
In its actions, the SEC noted that the district, chief financial officer and auditor had included false and misleading audited financial statements in the official statement of obligations. Specifically, the financial statements for fiscal year 2017 understated construction liabilities (by $7.9 million) and payroll expenses (by $3.8 million), resulting in an overstated balance. from the general fund of $11.7 million. The district submitted fiscal year 2017 financial statements for use with the offering document, the district and chief financial officer reviewed the offering document prior to its use in bond marketing, and the school board chairperson signed the offer document. The District changed its year-end as part of a plan to address the District’s financial situation prior to offering the Bonds, and the change in year-end should have prompted an increased level of scrutiny from the part of the auditor. The SEC determined that the auditor’s audit procedures were deficient.
The neighborhood. The charges against the District were brought under the Securities Exchange Act of 1934 (“1934 Act”) Section 10(b) and Rule 10(b)(5) thereunder and the Securities Act of 1933 (“1933 Act”) Section 17(a)). Violations of the 1933 Act Section 17(a) does not require intentional wrongdoing on the part of the actor and can be established on the basis of negligence. The SEC order against the District found that it violated Section 10(b) of the 1934 Act and Rule 10b-5 thereunder and Section 17(a) of the 1933 Act. The District has been ordered to cease and desist from committing or causing violations and any future violations of Section 10(b) of the 1934 Act and Rule 10b-5 and of Section 17(a) of the 1933 Act.
The financial director. The SEC alleged that the CFO violated Section 17(a)(1) and (3) of the 1933 Act and Section 10(b) and Rule 10b-5 of the 1934 Act. financier agreed to settle with the SEC, including paying a $30,000 fine and not participating in any future municipal securities offerings. The settlement is pending court approval.
The verifier. SEC order against auditor found she engaged in improper professional conduct pursuant to Section 4C(2) of the 1934 Act and Rule 102(e)(1)(ii) ) SEC Rules of Practice. The SEC order took effect immediately and denied the auditor the privilege to appear or practice before the SEC as an accountant.
A similar recent case. This set of cases follows the September 2021 SEC actions involving a California school district and its chief financial officer, in which that California school district included misleading budget projections in its offering documents for its bonds due to the inability of the budget to reflect salary increases. Despite reports showing that actual expenses were higher than expected, the California school district used outdated information and the CFO attested to the accuracy of the information in the offering document. The SEC’s order against the California School District found that it violated Section 17(a)(2) and (3) of the 1933 Act by “making misleading statements and omissions to investors, as well as than to the bond credit rating agency and other municipal industries”. professionals on the transaction. The California School District has been ordered to cease and desist from violating Section 17(a)(2) and (3) of the 1933 Act, to implement various written policies and procedures, to provide training to staff, retain the services of an independent consultant to review policies and procedures, implement the recommendations of the independent consultant, disclose this policy in future bond offerings, and provide certifications of compliance to the SEC staff regarding these settlement terms. The SEC accused the former CFO of violating Section 17(a)(3) of the 1933 Act.