In the first federal jury trial against a municipality for securities law violations, the U.S. Securities and Exchange Commission (SEC) on September 14, 2016 successfully obtained a verdict against the City of Miami and a former city official for violations of various anti-fraud provisions of  US securities laws.  The SEC is seeking injunctive relief and award of civil monetary penalties against the defendants.

The case in the U.S. District Court for the Southern District of Florida, Securities and Exchange Commission v. City of Miami, et al., 1:13-cv-22600, was brought by the SEC in July 2013 against the City and its then budget director as a result of various temporary inter-fund transfers of funds in the approximate amount of $37.5 million from restricted city accounts to the City’s General Fund during the period 2007-2009.  The SEC alleged that these transfers constituted a “shell game” intended to conceal from bond investors the deteriorating financial condition of the City and to maintain the financial reserves required by the City Commission.  The City was previously subject to a cease and desist order entered by the SEC in March 2003 as a result of alleged anti-fraud violations in connection with a 1995 bond issue, which the SEC claims has now been violated by the City.

Specifically, the SEC alleged, and the jury agreed, that the transferred monies, which were subsequently returned to the original capital funds, constituted restricted monies dedicated to specific city capital projects and, consequently, the transfers were illegal; the transfers to the General Fund did not comply with applicable government accounting standards; the transfers were not adequately disclosed in the offering documents for three series of bonds in excess of $150 million issued by the City during the period in question, to the rating agencies or in the City’s on-going financial reporting to existing bondholders; the budget director misled the City’s outside auditors regarding the transfers; and the transfers allowed the City to obtain more favorable bond ratings, and consequently financing terms, than would have been possible if the true financial condition of the City had been properly disclosed.

The former budget director had unsuccessfully argued, on interlocutory appeal to the Eleventh Circuit Court of Appeals, that he was immune from personal liability on the SEC claims by reason of the qualified immunity available to public officials.  The Eleventh Circuit, while recognizing the defense in cases where damages are sought in a private lawsuit, found that such immunity does not extend to public officials in governmental enforcement actions seeking punitive civil monetary penalties for wrongful actions.

A ruling by the Court on the specific injunctive relief and civil penalties to be imposed is pending further submissions by the SEC.