Another SEC Enforcement Action Confirms Increased Focus On Municipalities And Municipal Securities

As described in our Legal Update of May 7, 2013 — the Securities and Exchange Commission's (SEC or Commission) scrutiny of disclosures by municipalities is intensifying and expected to increase. That update followed the SEC's report of investigation concerning, and administrative proceeding against, the city of Harrisburg, PA. The Harrisburg action is the first time the SEC found a municipality had committed securities fraud by making misleading statements outside securities disclosure documents.

Fewer than three weeks since the Harrisburg matter, the SEC has found that yet another municipality — this time the city of South Miami, FL — committed securities fraud in connection with municipal securities disclosures. The South Miami action confirms this growing trend and underscores the SEC's commitment to expand its municipal securities enforcement presence.

South Miami

On May 22, 2013, the SEC charged the city of South Miami, FL (South Miami or the City), with defrauding bond investors about the tax-exempt status of two municipal offerings. According to the Commission, South Miami sought to develop a public parking garage in its principal downtown commercial district. The project ultimately became a mixed-use retail and public parking structure that was to be developed by a for-profit developer (the Developer). Under the terms of the lease, the City was to be responsible for the cost to develop the parking garage (and was to retain full control over the operation and maintenance of the parking garage and all parking revenues) and the Developer was to be responsible for the cost to develop the retail space. This division of responsibilities and benefits was critical for the City to be eligible for tax-exempt financing.

In 2002, to finance the project, the City borrowed $6.5 million in a tax-exempt bond offering. The Tax Certificate executed in connection with the loan contained representations that the City would not use the funds for private use and that the project would be owned and operated in compliance with IRS regulations. The Certificate of Borrower and Loan Agreement contained similar representations. Notwithstanding these representations, South Miami undertook actions in direct contradiction to the representations and that jeopardized the tax-exempt status of the bonds. In particular, the City loaned the Developer $2.5 million of the bond proceeds and revised the lease in order to lease the parking garage to the Developer and to...