Indianapolis-based City Securities Corp. has agreed to pay nearly $580,000 to settle charges that it and a southern Indiana school district provided false information to bond investors.
The SEC says its investigation found that City and the West Clark Community Schools told investors in a $31 million offering in 2007 that the district had been providing annual financial information and notices required as part of prior bond offerings.
In fact, the district had not been providing the required notices for a 2005 bond offering, and City had not conducted due diligence to detect the false statement, the SEC alleged.
The SEC also charged that City Securities and Randy Ruhl, who headed the firm's public finance and municipal bond deparment, provided improper gifts to representatives of municipal bond issuers, and then wound up charging these and other expenses back to issuers under the guise of costs for “printing, preparation and distribution of official statements.”
City Securities CEO Mike Bosway told IBJ Monday afternoon that the the SEC uncovered the issues during a routine audit in 2010, and the company responded with “immediate and substantial” changes to prevent reoccurrence.
“We kind of viewed this as an opportunity to improve as a company and as industry professionals,” Bosway said. “Our cooperation in this matter has strengthened the company.”
Bosway said Ruhl, whose LinkedIn page Monday afternoon still listed him as a senior vice president, is no longer with City Securities.
Bosway said he could not discuss the SEC’s findings in detail but said no one else has left the company as a result of the investigation.
The SEC said Ruhl and West Clark Community Schools agreed to separate settlements. Ruhl's settlement requires him to pay $38,475, as well as accept a one-year ban from working in the securities industry and a permanent ban from working as a supervisor in the industry.
Ruhl, 56, had been with City Securities since joining the company as assistant vice president in 1988. From January 2007 to May 2010, he was responsible for supervising the public finance and municipal bond department, which has about 15 staff members spread between Indianapolis and Fort Wayne.
“This is the first time the SEC has charged a municipal issuer with falsely claiming in a bond offering’s official statement that it was fully compliant with the annual disclosure obligations it agreed to in prior offerings, and an underwriter and its principal for not doing the necessary research to attest to the truthfulness of that claim,” Andrew Ceresney, co-director of the SEC’s division of enforcement, said in an SEC statement.
Elaine Greenberg, chief of the enforcement for division’s municipal securities and public pension unit, added in the statement that: “City Securities abused its role” as municipal underwriter by using bond proceeds to reimburse itself for gifts.
In addition, the securities firm violated Municipal Securities Rulemaking Board rules by providing “valuable and excessive gifts,” such as multi-day golf trips and tickets to sporting events, Greenberg said.
The SEC's administrative complaint says that while City's compliance manual specifically cautioned employees that expenses reimbursed from bond proceeds must be reasonable and related to the municipal bond issuance, in practice the firm "fostered a long-standing and pervasive culture of lax supervision and loose internal controls as it related to expense reimbursement."
For example, the SEC says City was reimbursed for a $2,500 donation to a charity favored by an issuer, as well as for the cost of 12 Chicago White Sox tickets.