Yesterday two city officials were criminally charged with securities fraud.  This is “the first ever municipal bond-related criminal securities fraud charges against public officials,” according to the U.S. Attorney’s Office for the Southern District of New York’s press release.  The office’s complaint charges the officials with 22 counts of securities fraud, wire fraud, and conspiracy in connection with municipal bonds issued by the City of Ramapo, New York and by the Ramapo Local Development Corporation.

The full complaint is available here.

The SEC also announced fraud charges against the City, its local development corporation, and four city officials “who allegedly hid a deteriorating financial situation from their municipal bond investors.”  

“The SEC alleges that Ramapo officials resorted to fraud to hide the strain in the town’s finances caused by the approximately $60 million cost to build a baseball stadium as well as the town’s declining sales and property tax revenues.  They cooked the books of the town’s primary operating fund to falsely depict positive balances between $1.4 million and $4.2 million during a six-year period when the town had actually accumulated balance deficits as high as nearly $14 million.  And because the stadium bonds issued by the Ramapo Local Development Corp. (RLDC) were guaranteed by the town, certain officials also masked an operating revenue shortfall at the RLDC and investors were unaware the town would likely need to subsidize those bond payments and further deplete its general fund.”

The SEC’s full complaint can be read here.

The civil charges by the SEC and criminal charges by the Department of Justice provide further evidence that federal agencies are paying close attention to the municipal bond market.   While the allegations in this situation describe particularly egregious actions, the proceedings serve as a reminder that issuers are speaking to the markets through their offering documents, and therefore need to devote the necessary time and effort in the preparation and review of bond documents and financial statements. 

Please contact Dorsey’s public finance attorneys with questions.