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SEC Serious About Misleading Municipal Bond Disclosure
Timothy A. Stratton

October 5, 2021 - A recent SEC enforcement action demonstrates how misleading information can result in major SEC violations of the Securities Act of 1933 (the "Act").

The SEC charged the Sweetwater Union High School District (the “District”), and its former CFO with making a series of material misstatements and omissions in connection with a recent $28 million school bond financing.

The SEC alleged they violated Sections 17(a)(2) and 17(a)(3) of the Act, which apply not only to the District but also to individuals who work on a municipal securities offering.

The SEC alleged numerous material misstatements and omissions including:
  1. The District's budget failed to properly include approved salary increases in excess of 3% over the prior year. Instead, it showed a 1% increase in salaries.
  2. The budget showed a projected surplus of over $22 million when the District ended the fiscal year more than $7.2 million in debt.
  3. The District failed to notify anyone that actual expenses were out of line with the budget and were significantly higher than the projections indicated.
  4. The District continued to use the misleading budget projections, even when the CFO and District were aware those projections were faulty.
  5. The District and the CFO provided the faulty information to the financing team members involved in the Bonds issuance.
  6. The District and the CFO failed to update the projections or advise the financing team of the changing finances of the District.

These actions by the District and its CFO resulted in faulty budget data being included in both the Preliminary and Final Official Statements. The faulty data painted a much better financial position when in fact the District was in poor financial health. The deviation was large enough to be considered material by the SEC.

The District settled the complaint with the SEC and entered into a consent decree admitting that, by its actions, it violated Sections 17(a)(2) and 17(a)(3) of the Act. The District also agreed to hire an independent consultant to evaluate its policies and procedures related to its municipal securities disclosures and agreed to cease and desist from additional violations.v
The CFO was personally fined $28,000 for her conduct and received a lifetime ban on participating in future municipal securities offerings.

The SEC will file against both issuers and staff where it can show that there have been material misstatements or omissions in documents or public statements involving budgets, operations, financial projects, feasibility reports, and other data pertaining to an issuance of municipal securities.

It is imperative that the financial data, along with any projections or forecasts be reviewed internally and be fresh data. Any material changes in any projections or data should be discussed among the issuer, financial advisor, disclosure counsel, bond counsel, and other members of the financing team prior to publishing the Preliminary Official Statement.

For more information or questions, please contact any of our Public Finance Law attorneys listed below.

Brandon A. Caywood
bcaywood@gustlaw.com
602.257.7679

James T. Giel
jgiel@gustlaw.com
602.257.7495

Andrew J. McGuire
amcguire@gustlaw.com
602.257.7664

Fred H. Rosenfeld
rosenfeld@gustlaw.com
602.257.7413

Timothy A. Stratton
tstratton@gustlaw.com
602.257.7465

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