Failure To Update Budget Projections In Bond Offering Prompts The SEC To Charge The School District And The CFO With Misleading Investors

• Published date: 03 November 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Corporate and Company Law, Securities
• Law Firm: Butler Snow LLP
• Author: Mr Dalton L. Kelley

On September 16, 2021, the Securities and Exchange Commission (the 'SEC') charged Sweetwater Union High School District, a San Diego County School District (the 'District') and its former Chief Financial Officer (the 'CFO'), with misleading investors who purchased $28 million of the District's general obligation bonds.

Without admitting or denying the findings in the SEC's Order Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 (the 'Order'), the District agreed to settle with the SEC and to consent to the Order finding that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (the 'Securities Act').^* The CFO, without admitting or denying the allegations in the SEC's complaint, also agreed to settle with the SEC, to be enjoined from future violations of Section 17(a)(3) as well as from participating in any future municipal securities offerings, and to pay a $28,000 penalty.

FACTUAL FINDINGS

The basis of the SEC's complaint and the Order was the inclusion by the District of stale and misleading budget projections in its Preliminary Official Statement ('POS') and final Official Statement ('OS') relating to the District's April 2018 general obligation bond issue, as well as misleading and deceptive disclosures regarding the budget projections made to the underwriter and its counsel, bond counsel, disclosure counsel, the District's municipal advisor (the 'Deal Team') and the rating agency.

According to the Order, in June of 2017, the District's Board (the 'Board') approved a 3.75% salary raise for most District personnel at a meeting in which the CFO participated and assessed both the short-term and long-term financial impacts of the raises. Later that month, the CFO and District staff completed the proposed budget for the July 1, 2017, through June 30, 2018, fiscal year (the '2018 Fiscal Year'). The budget was then adopted by the Board, however, it did not accurately account for the salary increases. The budget included a less than 1% increase in salaries based on year-end estimates for the prior fiscal year and also projected that the District would end the year with an operating surplus and a general fund balance of over $22.2 million. By September 2017, the District had substantially completed its annual financial report for the fiscal year ending on June 30, 2017, which revealed that the District had incurred higher salary expenses than had been assumed for the 2018 Fiscal Year budget...