01/04/10
Federal agents are demanding details of Miami's most recent bond offering to investors -- a $65 million deal to bankroll sidewalk improvements
Just weeks after launching a probe into Miami's troubled finances, federal investigators are demanding the city turn over records of a $65 million November bond deal that came two days after Miami leaders were blasted for shoddy and misleading budget practices.
The U.S. Securities and Exchange Commission is asking for details of the bond offer as part of a sweeping investigation into questionable moves by the city -- including shifting millions of dollars -- to balance the books during the city's worst budget crisis in 15 years.
"They've requested all documents for the last bond issue, all the hard drives. We're taking it very seriously," said Mayor Tomás Regalado.
The agency is asking for all records relating to a Nov. 19 bond deal to raise money to pay for city sidewalk improvements -- an offering that followed a scathing city audit that said Miami leaders engaged in 'inaccurate and misleading" budget practices to fill budget holes.
The demand represents a growing effort by the SEC to examine nearly a quarter billion dollars in bond offers between 2006 and 2009 to determine whether the city misrepresented its financial condition to investors. Former SEC investigator David Chase, who spent 18 months probing Miami's finances in the 1990s, said the agency may be looking into whether city financial leaders ignored the warning signs.
"It may be the strongest case the SEC has because the city is clearly on notice by now that there may be problems," said Chase, a Fort Lauderdale attorney who now represents investors. "What did they know and when did they know it?"
The SEC wants e-mails and internal communications involving the bond issue from several high-ranking city leaders, including Chief Financial Officer Larry Spring, Budget Director Michael Boudreaux and City Manager Pete Hernandez, according to the Dec. 23 letter obtained by The Miami Herald.
WHAT THEY WANT
Included in the SEC request: documents of all city meetings focusing on the bond deal, opinions, reports, presentations, evaluations and calculations.
The SEC is also demanding records exchanged between Miami and financial advisor First Southwest Co. and underwriters RBC Capital Markets and Merrill Lynch, Pierce, Fenner & Smith.
When the bonds were sold in November, the city attached an addendum notifying potential purchasers that The Herald had reported Miami was under SEC investigation.
Since launching its investigation Dec. 10, the SEC has been focusing on $26.4 million in transfers that took place in 2007 and 2008 -- the money moved from capital improvements to help balance the general fund.
Also in the money transfers: $8.2 million in city impact fees -- money that's generated through building permits and designed to offset the costs associated with the projects -- but not to balance the budget.
Chase said he expects the SEC to try to determine if the city acknowledged any of its budget problems or issues raised by the auditor when it made the most recent bond offering.
"It puts the city as an issuer of the bonds with an added responsibility," Chase said.
Unlike the previous bonds under the SEC's microscope, the most recent $65 million issue -- intended for street and sidewalk improvements -- are backed not by the city's tax revenues, but by special gas taxes and parking fees, records show. However, the city also described its overall fiscal health in financial papers submitted when the bonds were issued.
Attorney Tom Tew, expected to be hired this month to represent Miami in its dealings with the SEC, said the city is asking the government for more time to gather the reams of information requested by the mid January deadline given by the SEC.
Tew, who noted the most recent bond sales would deal with the same financial statements the SEC has already asked for, added: "I don't know what, if anything, you can read into that."
A HISTORY
The SEC's investigation comes nearly a decade after the agency imposed a cease-and-desist order after it found that Miami leaders defrauded bondholders by failing to disclose the depth of the city's financial problems.
In a 2001 report, an SEC administrative judge said the city misled investors in 1995 by creating the appearance of a balanced budget by using money from separate accounts to fill gaps in the city's general fund.
Over a six-year period, the SEC found, city officials annually "borrowed money from capital funds" at the end of the year to keep the budget balanced. But these money transfers were not clearly disclosed to investors -- or the public.
Eventually it was discovered the city was $68 million in the red, and a state oversight board was set in place to oversee Miami's finances for five years.
Chase said the SEC will be reviewing the city's actions today in light of the earlier order.
If the federal agency finds that the city once again misled investors, it could impose steep fines, sanctions against individual leaders -- and go so far as to demand that oversight boards once again control Miami's finances.
BY CHARLES RABIN AND MICHAEL SALLAH
Miami Herald staff writer Scott Hiaasen contributed to this report.
